Abstract
PurposeThe purpose of this study is to investigate long-run and short-run relationships between trade diversification, financial system development, capital formation and economic growth.Design/methodology/approachARDL estimation approach is applied to analyze long-run and short-run relationships between the financial system development, capital formation, economic growth and trade diversification in case of the Sultanate of Oman over the period 39 years starting from 1979 till 2017.FindingsThe results show that financial system development and economic growth has a positive impact on trade diversification in the short-run and long-run. However, capital formation has a negative impact on trade diversification in the short run and long run. The negative relationship between trade diversification and capital formation implies that over the period of study, the investment in capital goods was made to enhance the production capacity of the oil sector to maximize revenue.Research limitations/implicationsThis research is limited to analyze long-run and short-run relationship between the financial system development, capital formation and economic growth and trade diversification in case of Sultanate of Oman.Practical implicationsTo achieve the diversification goal, the policymakers need to formulate policies to strengthen the financial system and invest in infrastructure development to promote the non-oil sector. The research findings of this study will provide insights to the policymakers to formulate an effective diversification policy.Originality/valueThis research contributes to the existing literature by providing empirical evidence of the short-run and long-run analysis of the selected variables in the context of an oil-dependent country.
Highlights
Endogenous growth theory has gradually dominated the classical theory of specialization and comparative advantage
We investigated the dynamic relationship between trade diversification and carefully selected macro-economic variables
The results indicate that over the period of study, the average fixed capital formation remained 22.58% of GDP, credit to the private sector as an indicator of Financial System Development remained 33.32% of the GDP and per capita income remained 16,192.18 constant US dollars over the period of study
Summary
Endogenous growth theory has gradually dominated the classical theory of specialization and comparative advantage. Endogenous growth theory emphasizes diversification by human capital development and the development of new technologies for sustainable economic growth. The proponents of endogenous growth theory argue that dependence on Journal of Economics and Development Vol 23 No 3, 2021 pp. Diversification is considered one of the most effective solutions to many challenges faced by commodity-dependent countries. They struggle to wean themselves off the revenues generated through the trade of concentrated commodities (Hassan et al, 2018). Through structural changes in policy and institutional networks, this endowed money can be used for infrastructure development, human capital development, and financial sector development which is pre-requisites for economic diversification. If a multipronged economic policy is formulated, economic freewheel can be spun with money from endowed resources to start the diversified and sustainable economic growth
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