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Do Natural Resource Revenues Hinder Financial Development? The Role of Political Institutions

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  • Sambit Bhattacharyya
  • Roland Hodler

Abstract

We theoretically and empirically examine the relationship between natural resource revenues and financial development. In the theoretical part, we present a politico-economic model in which contract enforcement is low and decreasing in resource revenues when political institutions are poor, but high otherwise. As poor contract enforcement leads to low financial development, the model predicts that resource revenues hinder financial development in countries with poor political institutions, but not in countries with comparatively better political institutions. We test our theoretical predictions systematically using panel data covering the period 1970 to 2005 and 133 countries. Our estimates confirm our theoretical predictions. Our main results hold when we control country fixed effects, time varying common shocks, income and various additional covariates. They are also robust to alternative estimation techniques, various alternative measures of financial development and political institutions, as well as across different samples and data frequencies. We present further evidence using panel data covering the period 1870 to 1940 and 31 countries.

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Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2010-40.

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Date of creation: 2010
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Handle: RePEc:csa:wpaper:2010-40

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Keywords: Natural resources; political institutions; financial development;

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Cited by:
  1. Libman, Alexander, 2013. "Natural resources and sub-national economic performance: Does sub-national democracy matter?," Energy Economics, Elsevier, Elsevier, vol. 37(C), pages 82-99.
  2. Sambit Bhattacharyya, 2011. "Political Origins of Financial Structure," Economics Series Working Papers, University of Oxford, Department of Economics WPS/2011-20, University of Oxford, Department of Economics.
  3. Sambit Bhattacharyya & Paul Collier, 2011. "Public Capital in Resource Rich Economies: Is there a Curse?," CSAE Working Paper Series, Centre for the Study of African Economies, University of Oxford 2011-14, Centre for the Study of African Economies, University of Oxford.
  4. Stolbov, Mikhail, 2012. "The finance-growth nexus revisited: From origins to a modern theoretical landscape," Economics Discussion Papers, Kiel Institute for the World Economy 2012-45, Kiel Institute for the World Economy.

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