Natural resource abundance and financial development: A case study of emerging seven (E-7) economies

Abstract

The effect of natural resources on financial development has been tested extensively. However, this study uses a new proxy for financial development to measure its depth, accessibility, and efficiency of financial markets and institutions. As the conventional measures for financial development and human development ignored these dimensions. Unlike previous studies, a new index for human capital is used as a covariate that covers labor market information and provides adjusted estimated returns to education for each country. The sampled area for this study is emerging seven (E -7) economies, and the time period is ranging from 1990-2017. The results found an adverse effect of natural resources rent on financial development, which verifies the existence of a resource curse hypothesis for emerging seven (E-7) economies. In contrast, financial development is positively affected by the rise in human capital through the level of education. Similarly, the openness of trade is found to help promote financial development for the emerging seven economies (E-7). This study suggests the provision of greater financial accessibility and efficiency to better use the available natural resources in the financial sector. More focus should be devoted to the financial sector in comparison with the non-financial sector for effectively using natural resources. Human capital should be focused in order to effectively utilize the abundance of natural resources for speeding up the pace of financial development.