How China is mitigating resource curse through infrastructural development?

Abstract

With the aim to stimulate economic activities, an effective and stable financial system is indispensable in each country, and meanwhile, natural resources should help to promote economic and financial development in that country. Motivated by this, we examine the effect of natural resources on financial development with the cointegration method, the cointegration regression (namely FMOLS and DOLS), and wavelet coherence approach in China. Mainly, we take the effect of transportation infrastructure into account and utilize economic growth as a control variable. The cointegration test indicates a long-run cointegration equation among natural resources, transportation infrastructure, economic growth, and financial development. Natural resources have a negative impact on financial development, which means the resource curse hypothesis exists, while transportation infrastructure and economic growth play a positive role in enhancing financial development in China. Furthermore, the results of a wavelet coherence analysis show that transportation infrastructure, natural resources, and financial development are all vulnerable at distinct frequencies. The results of FMOLS and DOLS are also supported by wavelet coherence. Our results have significant policy recommendations, indicating that efficient use of natural resources is required to promote sustainable and sound financial development.