Researchers postulate that state economies predominately based on natural resources and agriculture are less likely to invest in postsecondary education. International data has shown that nations with these economies do not invest in human capital. This excerpt of the study presents data to update findings and recommendations on these factors. A link to the full article is available for further review.

This study is a continuation of an analysis paper written in 2012, entitled Pass the Books. Hold the Oil: An Investigation into the Link between Statewide Natural Resources and Education (Saleh & Purcell, 2012). The 2012 paper was inspired by an Organization for Economic Cooperation and Development (OECD) study (Freidman, 2012), which found that countries with economic dependence on oil, natural gas, and coal invested less in education and their populations exhibited less educational attainment than countries without natural resources. Using bivariate correlation, chi-square test statistics, and multiple regression, the 2012 cross-state analysis similarly discovered a significant inverse relationship between states with economies highly dependent on oil, natural gas, and coal and the educational attainment of individuals (Saleh & Purcell, 2012).

This paper (1) expands the definition of natural resources to include agriculture, forestry, fishing, and hunting; (2) explores the link between natural resource dependency and higher education funding; (3) explores the link between natural resource dependency and higher education attainment; and (4) investigates whether human capital development, vis-à-vis higher education attainment, may offset established negative effects of natural resource dependency, such as anemic economic growth. Recommendations based on the paper’s findings are also made for public policy.

Conceptual Framework: The Curse of Easy Riches and Human Capital as the Anecdote

The economic theory identified as Dutch Disease was coined by the magazine The Economist (1977) to describe the decline of the manufacturing sector in the Netherlands following the discovery and exploitation of a large gas field. Today Dutch Disease is used as an economic term for negative consequences that can occur from a spike in a nation’s currency value, usually associated with discovery or misuse of valuable natural resources. Dutch Disease has been theoretically and empirically studied by many and occurs when revenue from natural resources creates perverse incentives that thwart economic diversification and investment in human capital (Corden & Neary, 1982; Bruno & Sachs, 1982; de Mecedo, 1982; Corden, 1984; Neary & Van Wijnbergen,1986; Edwards, 1986; van der Ploeg, 2011; Mien & Goujon, 2021; Mueller, 2022). Sachs and Warner (1995) found that economies with a high ratio of natural resource exports to Gross Domestic Product (GDP) tended to grow slowly, alluding to the notion that there is a “curse to easy riches” (p.3). According to Corden & Neary (1982), economic diversification is prevented because short-term profit is more prevalent in the natural resources industry than in other sectors of the economy. Capital is invested in the development of the natural resource while the natural resource exists, and investment in less profitable economic sectors that require greater human capital are reduced.

Human Capital Accumulation

Becker (1962), asserted that investments in employees’ knowledge and skills can result in productivity gains both internal and external to the firm in which the employee gains such skills and knowledge. Citizens incur the costs of education only if they see the economic benefit (Sachs and Warner, 1995). A virtuous cycle of human capital accumulation results from this expectation as the education process generates not only more skillful workers but also more skillful educators in the following generation, leading to higher proficiency levels than preceding generations (Sachs and Warner, 1995). Equally, according to Sachs and Warner (1995), an economy dependent on natural resources can become stagnant if following generations elect to refrain from any education.

Uzawa (1965), Lucas (1988), and Temple (2001) concluded that continuous economic growth is ultimately only possible if human capital can increase without limitations. According to Gylfason (2004), “this linkage reinforces the case for investment in education and training as an engine of growth” as “more and better education tends to shift comparative advantage away from primary production towards manufacturing and services” (pp.18-19). In fact, Bravo-Ortega et al (2005) concluded a high level of human capital may offset the negative economic effects of natural resource dependency under certain circumstances. Unfortunately, the perverse incentives created by quick profits in natural resource sectors of the economy hamper investment in education and training. Gelb (1988) stressed that governments collecting a disproportionate share of their revenue from natural resource exploitation will be less inclined to invest in an education system.

Data Collection of Natural Resource Dependency, Higher Education, and GDP Growth

The collection of state-level natural resource dependency and higher education variables required the use of three public data sources. The Bureau of Economic Analysis (BEA) Regional Data Database was utilized to collect the percentage of GDP derived from and the percentage of employment in all North American Industry Classification System (NAICS) codes (at the two-digit level) in 2012 and in 2021 for all 50 states. The State Higher Education Executive Officer’s (SHEEO) State Higher Education Finance (SHEF) Report was utilized to collect higher education funding per capita for 2021 for all 50 states. The U.S. Census Bureau was used to collect educational attainment data (the percentage of the population aged 25 and older with an associate degree, a bachelor’s degree, and a bachelor’s degree or higher) for all 50 states from the 2021 census. In addition, the relationship between natural resource dependency and higher education attainment was explored, and it was hypothesized that an inverse relationship would exist.

Some economists have argued that a high level of human capital may offset the negative effects of natural resource dependency, namely anemic economic growth (Bravo-Ortega, et al, 2005). To the extent that natural resource dependency hampers economic growth and higher education results in a greater amount of human capital (vis-à-vis educated citizens), the authors hypothesized a natural resource dependency would have a significant, negative relationship with GDP growth and higher education attainment would have a significant, positive relationship with GDP growth.

Findings and Policy Considerations

In the 2012 iteration of the report, the data clearly yielded an inverse relationship, while the 2024 report revealed that states with natural resource economies were choosing to invest in higher education at significant levels. The hard-knocks economic lessons learned from the 2008 recession seemed to have compelled states to understand more vividly the frailty of economies that over rely on one economic sector and this need to invest in the future. It was also a time in this country when technology was beginning to provide greater efficiency and profitability in other economic sectors.

A significant positive relationship was found between the percentage of GDP derived from natural resources and higher education funding. The chi-square analysis supports this possibility as it revealed no significant difference between natural resource-dependent and non-natural-resource-dependent states in terms of higher education funding. It is noteworthy that the study only analyzed a single year of GDP and higher education funding data. A historical analysis of the relationship between natural resource dependency and higher education funding may reveal a more robust relationship.

The percentage of employment within the natural resource sector was not found to contribute significantly to predicting educational attainment. However, a robust model utilizing other sectors of employment as independent variables was attained. This lends some weight to the argument that the overall employment market does influence educational attainment, either inducing individuals to invest, or not invest, in postsecondary education, or attracting or repelling educated individuals through in- or out-migration. It should be noted that this study analyzed the NAICS codes at the two-digit level. Expanding the study beyond the two-digit level may yield more nuanced findings.

Last, the study did confirm a significant negative relationship between natural resource dependency and GDP growth, which lends credibility to the idea that easy profits from natural resources tend to minimize overall GDP growth. Furthermore, proof of an education’s value in an economy was found. A significant positive relationship was found between the percentage of the population aged 25 and older with a bachelor’s degree and GDP growth. These two findings lend credibility to the argument that while natural resource dependency can lead to Dutch Disease, human capital accumulation may serve as the anecdote, stabilizing economies during their downturns and supporting economic growth.

1. Whereas human capital accumulation can increase economic growth, states should utilize revenue derived from the exploitation of finite natural resources to either invest in education and training and/or attract industries that will require higher levels of employment for their employees.
    
2. Local nuance matters greatly when assessing the impact of natural resources on educational attainment and economic growth. Policy makers are often influenced by the successes of other states without understanding the nuances. For example, Colorado is moderately dependent upon natural resources and below average in higher education funding, but it is one of the most highly educated states in America and has a thriving economy. Rather than investing in the education of its citizenry, Colorado benefits from its national parks and waterways, which attracts an educated populace. Likewise, New Jersey capitalizes upon its proximity to New York and attracts highly educated New Yorkers with a lower cost of living. Policy makers should therefore consider their own states’ competitive advantages and utilize those to induce human capital accumulation and economic growth.
    
3. This study focused upon the U.S., which is a democracy. While Dutch Disease may occur within state economies, its effects will likely not be as pronounced as seen in oligarchies or dictatorships. In democratic societies, no single regime stands to benefit disproportionately from natural resource exploitation. In addition, democratic societies invest in education to not only induce economic growth but also ensure educated citizenry that needed to maintain the democracy itself.

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