Finance: Research, Policy and Anecdotes

The natural resource curse has many different aspects to it but in general it refers to a crowding out mechanism where natural resource abundance in a country results in less competitiveness of the non-resource sectors, lower investment in human capital and contractual institutions.  Given the dependence of the financial sector on contractual institutions and property right protection, more generally, it is not surprising that resource-abundant countries have less developed financial systems, as I have documented in earlier work.  But it is not clear that correlation implies causality; there could be demand-side factors (resource-abundant countries demanding fewer financial services) or third factors driving both.

In a just released working paper with Steven Poelhekke we address the identification challenge by looking at the effect of exogenous windfall gains in natural resource rents, as measured by price shocks (which can be assumed to the exogenous for individual countries), on financial intermediation.  We find a relative decline in the volume of financial sector deposits in countries that experience an unexpected natural resource windfall. Moreover, we find a similar relative decline in lending, which is mostly due to the decrease in deposits. The smaller role for the financial sector in intermediating resource booms is accompanied by a stronger role of governments in channeling resources into the economy, mostly through higher government consumption.  Overall, this is consistent with the idea that natural resource windfalls are not being intermediated through the financial system, at the expense of long-term economic development of these countries.

A non-technical summary in the form of a Vox column here 

Overview