Reuters

What the New York Times columnist got wrong in his recent look at the relationship between natural resources and knowledge-based development.

Last weekend, Thomas Friedman wrote a provocative column in The New York Times about the relationship between a country's natural resources and its education level.

Friedman draws upon a major new study by Organization for Economic Cooperation and Development which examines the connection between student performance in math, science, and reading (based on their Program for International Student Assessment exam scores), and natural resource-related earnings as a percent of economic output.  

The study finds a negative and statistically significant relationship (-.433) between the percent of economic output that comes from natural resources and the knowledge and skills of their people. As Friedman puts it: "Oil and PISA don't mix."

The results are neatly summarized in the above scatter-graph. (We know it's tough to read: For a better view, click here and zoom in.)

Friedman builds much of his column around the example of Taiwan.

Taiwan has mined its 23 million people, their talent, energy and intelligence - men and women. I always tell my friends in Taiwan: “You’re the luckiest people in the world. How did you get so lucky? You have no oil, no iron ore, no forests, no diamonds, no gold, just a few small deposits of coal and natural gas - and because of that you developed the habits and culture of honing your people’s skills, which turns out to be the most valuable and only truly renewable resource in the world today. How did you get so lucky?

The argument is fine as far as it goes, and I agree with it in principle. When it comes to economic prosperity, in most cases, ideas trump oil. 

But there are exceptions, and those exceptions suggest that oil can sometimes facilitate ideas and knowledge-based development. Take the case of Norway, one of the largest oil and gas exporters in the world. It also ranks quite highly on virtually every measure of human capital, not to mention overall human development and happiness and well-being.

Australia is another, and Canada a third. All three countries combine large endowments of natural resources with high levels of economic development and cutting edge knowledge and creative economies. All three have done good jobs navigating the economic crisis as well.

While the conventional wisdom may be that these nations have distinct city-regions devoted to ideas versus natural resources, that is only partly true. Calgary is one of the most naturally endowed places on the planet, but it has made substantial investments in knowledge and idea generation and has a tech-based and creative economy that can rival just about anywhere else. It is more affluent on a per capita basis than Silicon Valley, New York, or Washington, D.C.

Then there's the case of the United States itself. It's perhaps the world's best example of the combined power of natural resources and ideas. Houston is not only a center of oil production and refining, it's home to one of the largest clusters of IT workers and software engineers in the world, who work on technology related to oil production and processing. The state of Texas is a veritable case study of how to use natural resources as a lever to invest in innovation and human capital. Its state university system was built in large measure by funds coming from its natural resources.

The real issue is not oil versus ideas, but how nations manage and harness their natural and human assets. This turns on their institutions, and even more so on their attitudes toward personal freedom, self-expression, and openness. My own simple model for economic development draws attention to technology, talent, and tolerance. In this model, tolerance is not an add-on but a key factor in a nation or city's capacity to develop and harness their natural and human assets.

detailed study of the economic performance of Middle Eastern nations by economists Marcus Noland and Howard Pack of the Peterson Institute of International Economics sheds light on this. The study finds that comparisons to Taiwan or South Korea are unfair given their very different economic development trajectories. Instead, it puts the burden of explaining economic performance on social and cultural norms and attitudes. Their research finds the factor that most holds back economic development in these countries is not oil per se, but close-minded attitudes toward globalization and homosexuality. This holds for both oil-dependent and non-oil-dependent countries in the region. 

Oil and ideas can go together, as long as leaders harness their resources to promote create open institutions that harness and channel human capabilities.

Top image: Reuters/Todd Korol

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