The precious bane

Are natural resources harmful to growth? We address this question using a two-sector, endogenous growth model in which human capital is the engine of growth. Hy increasing the rewards to unskilled labor, natural resources make schooling more expensive. As long as the intertemporal elasticity of consumption substitution is not too high, this slows down human capital accumulation and growth. The presence of production spillovers from human capital, however, implies that a planner could react to a resource boom by increasing human capital accumulation even though the decentralized solution yields the exact opposite. The paper also shows that as the production complementarity between natural resources and unskilled labor declines, the growth effects of natural resources become increasingly sensitive to whether or not there is free trade in goods. The empirical evidence lends support to the main channel - natural resources to human capital to growth - that is suggested in the paper. (C) 1999 Elsevier Science B.V. All rights reserved.