Working Paper

Natural Resources and Global Misallocation

Abstract: We explore the efficiency in the allocation of physical capital and human capital across countries. The observed marginal products can differ across countries because of differences in technology (i.e. production functions) and in distortions (i.e. differences in use of factors) across countries. To identify differences in technology, we use new data and propose a simple method to estimate output shares of natural resources, and thus adjust the estimated marginal products of physical and human capital. With a sample of 79 countries from 1970 to 2005, we find that the world has decidedly moved in the direction of efficiency in the allocation of physical capital, from global output losses around 7% in the 1970s to a still substantial 2% by 2005. This trend is accounted for by domestic capital accumulation, as external flows have had little impact. There is also a large degree of heterogeneity in the net gains across countries. For example, we find larger gains for countries with more interventionist policies. With respect to human capital, we uncover much larger global losses from its misallocation. Indeed, contrary to physical capital, we find that the human capital allocation had worsened over time.

Keywords: Natural Resources; Factor Shares; Misallocation; Investment; Capital Flows; Human Capital;

JEL Classification: O11; O16; O41;

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Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2015-07-07

Number: 2015-13

Pages: 42 pages