Oil rents, trade environment and financial development: An international evidence

Abstract

Given the important role that the trade environment and natural resource endowment play in the economy, this study aims to examine the interrelationship between trade environment and oil rents and how both interact to influence financial development. We test our argument on a sample of 189 economies over the 2004–2020 period, using a two-step System Generalized Method of Moments, with collapsed instruments and Windmeijer robust standard errors. We find that FDI and ease of doing business tend to increase oil rents based on the resource blessing hypothesis. However, our findings suggest that, trade openness in oil producing countries is not a possible avenue to reduce the resource curse, as it dampens oil rents. Again, we find that, oil rents reduce financial development. Our results show that trade environment (foreign direct investment, trade openness and global ease of doing business index) tend to have a resource blessing for financial development. We find that oil rents and trade environment have a substitutability effect rather than a complementarity effect on financial development. We find evidence to support that oil rents further reduce financial sector development when the levels of trade indicators increase. Based on the marginal effect, we conclude that at an increasing level of trade, the negative impacts of oil rents on financial development is further reduced in countries with strong institutional environment compared to those in weak institutional environment.