Making Abundant Natural Resources Work for Developing Economies: The Role of Financial Institutions

Malebogo Bakwena (), Philip Bodman and Sandy Suardi
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Malebogo Bakwena: MRG - School of Economics, The University of Queensland

No 2108, MRG Discussion Paper Series from School of Economics, University of Queensland, Australia

Abstract: Can financial development play a role in abating the natural resource curse? What are the channels via which financial development may negate the potential detrimental effects of natural resources on economic growth? To attempt to answer these questions, the paper employs panel unit root, cointegration and error correction models to fourteen natural resource abundant economies. The empirical results suggest a long run cointegrating relationship between finance, growth and ancillary variables. A fully modified OLS (FMOLS) is then used to estimate the long run relationship. A panel error correction model favors a unidirectional long run causal relationship from financial development to growth. The results do indeed imply that development of financial institutions may help in abating the natural resource curse.

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