This chapter examines the relationship between labour productivity,
capital formation, and natural resource extraction in countries with
natural resource reserves. We develop a theoretical two-sector model for
a closed economy that maximises consumption over time, and examine how
the control variables - natural resource extraction and the savings rate
- determine fixed capital investment. We find that in a closed economy,
the overall labour productivity is a positive function of capital
investment per labour. That is in turn related to the externally given
natural resource price, natural resource reserves and the resource
extraction ratio. High natural resource prices and extraction rates
provide opportunities to increase the overall investment in fixed
capital and thus boost the labour productivity.
We empirically test this model for oil as a natural resource. The data covers 36 years from 1980 to 2015 and includes 149 countries. 85 of these countries possessed commercially recoverable oil reserves in at least a part of the time period covered. We are able to exploit the panel and carry out the estimation using two-way fixed effects. We observe that oil price has an overall positive impact on labour productivity growth in the modern sector. The savings rate and schooling are positively correlated to labour productivity growth as well as fixed capital formation per capita. We find that the oil sector variables - oil reserves and oil extraction ratio - do not contribute to labour productivity growth directly, rather through increased capital formation per capita.
Keywords: structural change, natural resource curse, GCC, theoretical modelling, empirical application, capital formation
JEL Classification: E21, E24, O13, O47, Q32