COMMENT: Education central to innovation

A RECENT article in Project Syndicate by Professor Joseph Stiglitz drew our attention yet again to a phenomenon known as the "natural resource curse".

It refers to the curious paradox that many nations with excellent endowment of resources seem to suffer from greater poverty and are at greater chance of conflict than countries with more diversified economies.

One of the features of contemporary economic life is that resource-poor countries, on the whole, tend to outperform resource-rich counties in terms of economic growth. Some theorists have cited the nature of global capitalism as a cause. However, the resource curse does warrant attention in itself.

Jeffrey D. Sachs and Andrew M. Warner argue that "almost without exception, the resource-abundant countries have stagnated in economic growth since the early 1970s, inspiring the term, 'curse of natural resources'. Empirical studies have shown that this curse is a reasonably solid fact (see National Resources and Economic Development: The Curse of Natural resources, European Economic Review, 45, 2001, page 837)".

Stiglitz, a Nobel laureate in Economics, explains some of the reasons for the "dismal performance" of resource-rich countries by the following three characteristics: rent-seeking behaviour, exposure to the boom and bust of commodity prices, and the crowding out of other economic sectors by the dominance of the salience of the specific resource (see The Resource Curse Revisited, www.project-syndicate.org/commentary/the-resource-curse-revisited).

The "curse of natural resources" is a phenomenon that has vexed economists and challenged our common sense notions of why countries ought to be rich and poor.

Understanding how nations with good endowments of natural resources can escape the "resource curse" is one of the critical issues in development and economic theory.

Some of the consequences of the "resource curse" can be a radically uneven distribution of wealth in nations between those who own the natural resources and those who do not, the development of corruption and rent-seeking referred to by Stiglitz above, and potential political instability as a result of these two factors.

Interestingly, some important work in economic theory has suggested ways to address the problem of the "curse".

One concept that merits attention is the concept of dynamic comparative advantage.

In comparative advantage theory, competitive advantage is understood as a situation where a country or firm can produce something at a lower opportunity cost than their competitors.

Comparative advantage does not necessarily mean that the country or firm in question necessarily produces a better product than its competitors, but that they can produce or supply the product at a lower cost, a lower opportunity cost.

In many resource-rich countries, their comparative advantage is static. They do not value add or develop their resource in any fundamental way and therefore they are exposed to all the problems of boom bust, corruption and the crowding out of other products or activities.

The "natural resource curse" can mean that you can grow and create wealth in the Gross Domestic Product of a country at the same time as experiencing overall poverty and severe inequality for the majority of people in that country.

As Stiglitz points out historically, "abundant natural wealth often creates rich countries with poor people (see, ibid. The Resource Curse Revisited)".

Dynamic comparative advantage, on the other hand, is "comparative advantage in the long run which can be shaped" and developed through the application of long-term use of technology, innovation and creative long-term thinking (see Joseph E. Stiglitz, From Resource Curse to Blessing, available at www.project-syndicate.org/commentary/from-resource-curse-to-blessing-by-joseph-e--stiglitz)".

Putting in place institutions and infrastructure to ensure that wealth is shared -- and the opportunities that stem from a good resource base are allocated and developed properly -- is one important strategy to develop dynamic comparative advantage.

Focusing on the importance of learning is also critical.

Engaging in education and learning -- whether at the national level or at the level of the firm -- is an important way to develop dynamic comparative advantage.

Countries with a developed "learning advantage" have the capacity to apply Science, the Arts and other intellectual abilities and approaches to the productive process.

They can improve products through better engineering or improved scientific technique or the application of new ways to market products through cultural and historical knowledge.

Countries that have long-term thinking and commitment to education can bring these to bear on their products and production processes.

Such nations can develop and integrate learning and knowledge into their products and gain dynamic comparative advantage. This can be contrasted with countries or firms that do not apply learning to their products and processes and therefore have "static" comparative advantage.

As Roger W. Klein argues, by "formalising" and understanding "learning activity" as an important contributor, indeed driver of comparative advantage we can ensure that our advantage becomes and remains "dynamic" (see Roger W. Klein, A Dynamic Theory of Comparative Advantage, The American Economic Review, March 1973, page 173)". The core argument that Klein offers us is that "the dynamics of comparative advantage are due to learning (ibid. page 183)".

If we understand the centrality of learning to innovation then we can see how developing a learning culture is critical to long-term dynamic comparative advantage and economic growth.

Addressing corruption and gross inequality are also important aspects of the issue.

In the end, avoiding the "natural resource curse" lies in looking closely at how comparative advantage can be made more dynamic.

Addressing corruption, resolving gross inequalities and advancing learning throughout the society and economy are the key steps for a dynamic and growth oriented economy.

Achieving these three things is an "advantage" to everyone.