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than Denmark and Sweden on that combination of large public employment over the working-age population and high values of human capital per capita. Accordingly, it is not surprising that Norway clearly appears to be an outlier among RR countries (figure 12.10, panel b). When Norway is removed from the sample of RR countries, a much weaker positive nonmonotonic correlation is found between the size of the public sector and the level of human capital per capita over 2004–14 compared with non-RR countries (figure 12.10, panel d). In line with Stefanski (2015), and with the notable exception of Norway, these findings suggest that revenues from extractive resources would contribute to finance-inefficient administrations and bureaucracies, especially in RR countries where the public sector is generally larger than in non-RR countries for a given level of economic development (figure 12.7).
Policies to Mitigate Human Capital Distortions Arising from Nonrenewable Natural Resource Wealth The previous section highlighted three potential distortions in RR countries that potentially undermine the level and accumulation of human capital: distortions in the form of (1) Dutch disease, (2) inequalities in the distribution of human capital between men and women, and (3) the public sector. This section proposes policy pathways to enhance the accumulation of human capital in RR countries. It considers how the CWON wealth accounts might help guide policy makers.
How to Mitigate the Dutch Disease As emphasized in chapter 11, improving institutional quality may be an important pathway to facilitate greater economic diversification. However, additional actions by government may be required to mitigate risks of Dutch disease during the period of resource dependence. The underlying question when studying the Dutch disease is how an appreciation of the real exchange rate from resource revenues might be managed and mitigated by the government. The conventional permanent income hypothesis is that a sustained increase in consumption can be supported by interest on accumulated foreign assets through foreign exchange reserves or a sovereign wealth fund, as recommended by the International Monetary Fund,14 or the more restrictive formulation of this approach called the bird-in-hand strategy (Barnett and Ossowski 2003).15 These approaches side-step the issue of a loss of domestic competitiveness caused by Dutch disease. However, as analyzed by van der Ploeg and Venables (2011), these approaches are not optimal for all RR countries and especially for lowerincome RR countries, which are generally capital-scarce.16 According to van der Ploeg and Venables (2011), capital scarcity implies a low capitallabor ratio, little public infrastructure, low wages and income, and a high domestic interest rate. As only 9 of the 64 RR countries in our analysis are high-income economies,17 the case of capital-scarce RR countries is considered as the reference.
