Mining Is Not the Basis for Long-Term Prosperity

Moneybox
A blog about business and economics.
Oct. 11 2012 12:59 PM

Mining Is Not the Basis for Long-Term Prosperity

There is no quicker way to obtain prosperity than for a community to discover that the land it sits on is much more valuable than previously realized due to containing some valuable natural resources. But Ed Glaeser, Sari Pekkala Kerr, and William R. Kerr find that historically speaking in the United States proximity to valuable coal deposits has been a mixed blessing. After the initial surge in mining prosperity you seem to get a long-term lack of entrepreneurship and economic dynamism (emphasis added):

Measures of entrepreneurship, such as average establishment size and the prevalence of start-ups, correlate strongly with employment growth across and within metropolitan areas, but the endogeneity of these measures bedevils interpretation. Chinitz (1961) hypothesized that coal mines near Pittsburgh led that city to specialization in industries, like steel, with significant scale economies and that those big firms led to a dearth of entrepreneurial human capital across several generations. We test this idea by looking at the spatial location of past mines across the United States: proximity to historical mining deposits is associated with bigger firms and fewer start-ups in the middle of the 20th century. We use mines as an instrument for our entrepreneurship measures and find a persistent link between entrepreneurship and city employment growth; this connection works primarily through lower employment growth of start-ups in cities that are closer to mines. These effects hold in cold and warm regions alike and in industries that are not directly related to mining, such as trade, finance and services. We use quantile instrumental variable regression techniques and identify mostly homogeneous effects throughout the conditional city growth distribution.

On a long enough timeline, the survival rate for any firm or industry drops to zero. So to prosper over the long term, a city needs not just some large successful companies but a dynamic environment in which new firms can grow and thrive (economic gardening, so to speak). Mining towns seem to grow a few big firms that choke out the sunlight and ultimately leave the city less entrepreneurial and with slower employment growth.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.