Natural resources, financial development and institutional quality in Africa: Is there a resource curse?

Abstract

We examine the resource curse hypothesis in the relationship between natural resources, financial development (FD) and institutional quality of 38 African countries from 2000 to 2012. We use the Arellano-Bond Generalized Method of Moments (GMM) estimator in our estimations. Our findings reveal that 32% of African countries are dependent on resource rents ranging from a low of 12.5% (in Zambia) to 52.6% (in Angola) share of GDP. We further find that in Africa, the impact of natural resource rents (Rents) on financial development is ambiguous. It largely depends on the FD indicator used. The resource curse is seen when a Z-score is used as FD indicator. Particularly, we find that the resource curse in FD is seen in Sub-Saharan Africa, Low Income Countries and Middle Income countries but not in the North African region. The impact of Rents on credit however is positive in all regions. In these relationships the quality of institutions can reduce the negative impact of Rents on FD. Our findings are robust to the use of different indicators of FD and institutional quality.