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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 theoretic 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 Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 053.

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Date of creation: 2010
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Handle: RePEc:oxf:oxcrwp:053

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Keywords: Natural resources; political institutions; financial development;

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Cited by:
  1. Sambit Bhattacharyya & Paul Collier, 2012. "Public Capital in Resource Rich Economies: Is there a curse?," OxCarre Working Papers 065, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
  2. Stolbov, Mikhail, 2013. "The finance-growth nexus revisited: From origins to a modern theoretical landscape," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 7(2), pages 1-22.
  3. Sambit Bhattacharyya, 2011. "Political Origins of Financial Structure," Economics Series Working Papers WPS/2011-20, University of Oxford, Department of Economics.
  4. Libman, Alexander, 2013. "Natural resources and sub-national economic performance: Does sub-national democracy matter?," Energy Economics, Elsevier, vol. 37(C), pages 82-99.

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