Policies to Mitigate Human Capital Distortions Arising from Nonrenewable Natural Resource Wealth

than Denmark and Sweden on that combination of large public employment over the working-age population and high values of human capital per capita. Accordingly, it is not surprising that Norway clearly appears to be an outlier among RR countries (figure 12.10, panel b). When Norway is removed from the sample of RR countries, a much weaker positive nonmonotonic correlation is found between the size of the public sector and the level of human capital per capita over 2004–14 compared with non-RR countries (figure 12.10, panel d). In line with Stefanski (2015), and with the notable exception of Norway, these findings suggest that revenues from extractive resources would contribute to finance-inefficient administrations and bureaucracies, especially in RR countries where the public sector is generally larger than in non-RR countries for a given level of economic development (figure 12.7).

The previous section highlighted three potential distortions in RR countries that potentially undermine the level and accumulation of human capital: distortions in the form of (1) Dutch disease, (2) inequalities in the distribution of human capital between men and women, and (3) the public sector. This section proposes policy pathways to enhance the accumulation of human capital in RR countries. It considers how the CWON wealth accounts might help guide policy makers.

How to Mitigate the Dutch Disease

As emphasized in chapter 11, improving institutional quality may be an important pathway to facilitate greater economic diversification. However, additional actions by government may be required to mitigate risks of Dutch disease during the period of resource dependence. The underlying question when studying the Dutch disease is how an appreciation of the real exchange rate from resource revenues might be managed and mitigated by the government. The conventional permanent income hypothesis is that a sustained increase in consumption can be supported by interest on accumulated foreign assets through foreign exchange reserves or a sovereign wealth fund, as recommended by the International Monetary Fund,14 or the more restrictive formulation of this approach called the bird-in-hand strategy (Barnett and Ossowski 2003).15 These approaches side-step the issue of a loss of domestic competitiveness caused by Dutch disease. However, as analyzed by van der Ploeg and Venables (2011), these approaches are not optimal for all RR countries and especially for lowerincome RR countries, which are generally capital-scarce.16 According to van der Ploeg and Venables (2011), capital scarcity implies a low capitallabor ratio, little public infrastructure, low wages and income, and a high domestic interest rate. As only 9 of the 64 RR countries in our analysis are high-income economies,17 the case of capital-scarce RR countries is considered as the reference.

In capital-scarce RR countries, a temporary influx of foreign exchange, consecutive to a commodity price boom, a massive resource discovery, or increasing resource production, should typically be spent and invested domestically, not spent to accumulate foreign assets. This allows for incremental increases in consumption for present generations as well as the use of savings for a combination of foreign debt reduction and the accumulation of domestic capital. First, it is argued, consumption should be skewed toward the present generation, because of the relative poverty of the present generation compared with those in the far future. Second, savings should take the form of a domestic capital accumulation to compensate for relative capital scarcity. This use of public spending is expected to boost private investment and accelerate growth of the nonresource sectors through (1) improving public infrastructure and the provision of public services such as electricity or internet (domestic public investment), (2) lower interest rates (foreign debt reduction), and (3) via a process of “investing in investing.” This is where capital-scarce RR countries can use public investment and related policies strategically to raise the overall absorptive capacity of the economy, by flattening supply curves, and thus mitigate Dutch disease effects on the nontraded sectors.

How to Mitigate Gender Distortions

Fortunately, most actions to mitigate the traditional Dutch disease can also help dampen gender distortions in the distribution and the accumulation of human capital. As is noted by Anker (1997), labor markets are typically segmented by gender: men work in some occupations and women in others, even when their qualifications are similar (see box 12.1). Mitigating the Dutch disease could help to reduce imbalances in strongly segmented labor markets and rebalance economic opportunities and even civic responsibilities to women.18

Implementing measures for achieving higher levels of female education can also help mitigate gender distortions in RR countries. For example, de la Brière et al. (2017) highlight that gender inequalities are abnormally large in RR countries. Focusing on the Sub-Saharan Africa region, they find that the average difference between boys and girls in school participation of children ages 6–14 years is 21 percentage points in non-RR Sub-Saharan Africa countries, compared with 31 percentage points in fossil-fuel-rich Sub-Saharan Africa countries and 26 percentage points in mineral-rich Sub-Saharan Africa countries. The differences are starker for grade 6 completion (access to junior high schools and secondary schooling) because gender gaps tend to widen at higher levels of schooling. For example, the male-female gap is 33 percentage points in non-RR Sub-Saharan Africa countries but 47 percentage points in fossil-fuel-rich Sub-Saharan Africa countries. In an extensive literature review, Duflo (2012) summarizes the main effective factors that can lead to women achieving higher levels of schooling. These factors include (1) compulsory junior secondary schooling, (2) deworming programs, (3) quotas of women in local committees or school committees