Natural Resource Abundance (Black Gold) and Investment in Human Capital in the Context of Saudi Arabia

Abstract

A number of studies have suggested that an abundance of natural resource gives rise to what is known as ‘Dutch disease’, and also distorts the quality of institutions. In contrast, this paper examines whether plenty of natural resource crowds out human capital in the context of Saudi Arabia using the VECM model. The study investigates this relationship at the country level rather than through panel or cross-section data as is the case in most other studies. The results show that natural resources have a positive effect on human capital. The presence of natural resources and their rents enable investment in education. This, in turn, facilitates the building of human capital. The link between education and human capital accumulation is complex and more investment in education does not automatically lead to more human capital accumulation. To conclude, it is incorrect to assume the harmful effect of resources on human capital in all resource-rich economies, without a detailed examination of country specific historical data.

Keywords: natural resource curse, transmission channels of curse, human capital, growth, education, Dutch disease, Saudi economy, unit root and cointegration tests, VAR model.

DOI: 10.7176/JESD/10-22-10

Publication date: November 30^th 2019