Does financial risk and fiscal decentralization curb resources curse hypothesis in China? Analyzing the role of globalization

Abstract

On the role of natural resources, extensive studies are available, especially in a country's financial development. However, earlier studies ignored the role of fiscal decentralization and improvement in financial risk index in interaction with natural resources rent. Therefore, this study attempts to investigate whether fiscal decentralization and improvement in financial risk index curb the resources curse hypothesis for China or not. For this purpose, quarterly data from 2005Q1-2016Q4 is employed using advanced time series econometric approaches that deal with multiple structural breaks. This study uses an updated indicator that covers the efficiency, depth, and accessibility of financial institutions and markets for financial development. The findings confirm China's resource curse hypothesis; however, increasing fiscal decentralization and financial risk index improvement avoid the resource curse hypothesis. Moreover, globalization, gross domestic product, fiscal decentralization, and financial risk index improvement positively affect financial development. The policy implications focus on increasing fiscal decentralization to effectively utilize natural resources and improve the financial risk index to avoid the resource curse hypothesis.