Troubling aspirations

"On second thought, I think I'll keep the ring and become a lawyer."

“On second thought, I think I’ll keep the ring and become a lawyer.”

From a new paper in the Journal of Development Economics:

This paper sheds light on the relationship between oil rent and the allocation of talent, toward rent-seeking versus more productive activities, conditional on the quality of institutions. Using a sample of 69 developing countries, we demonstrate that oil resources orient university students toward specializations that provide better future access to rents when institutions are weak. The results are robust to various specifications, datasets on governance quality and estimation methods. Oil affects the demand for each profession through a technological effect, indicating complementarity between oil and engineering, manufacturing and construction; however, it also increases the ‘size of the cake’. Therefore, when institutions are weak, oil increases the incentive to opt for professions with better access to rents (law, business, and the social sciences), rather than careers in engineering, creating a deviation from the optimal allocation between the two types of specialization.

In plain speak, the authors posit that when there are large windfalls from natural resources, people will choose careers (and the necessary education) which will allow them to reap the benefits from those windfalls. Normally this involves choosing careers associated with oil extraction, like engineering. However, in weak states where it’s possible to gain access to oil rents in a less-than-legitimate manner, people choose to go into careers which better allow them to get access to those rents, like law or business. Hence talent is `misallocated’ in developing countries with weak institutions and oil booms, as the possibility of getting access to oil rents sends people into careers which they are less fit for.

I would not despair so quickly – the empirical results in the paper are more suggestive than definitive, dependent on a handful of mainly cross-country regressions. Still, the results are disconcerting – the authors do not investigate further, but the prospect of societies re-orienting themselves into a structure better suited for rent-seeking likely means that true institutional reform becomes all the more difficult.

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