Understanding the dynamics of resource curse in G7 countries: The role of natural resource rents and the three facets of financial development

Abstract

In this study, we aim to reinvestigate the resource curse hypothesis with a special emphasis on the institutional failure hypothesis. Our sample is based on G7 countries, known to have a high degree of institutional strength, for four decades from 1980 to 2018. We first evaluate the presence or absence of resource curse by exploring the linkages between natural resources rents and financial development in G7 countries and then look at the two channels of this resource curse, i.e., Financial Markets or Financial Institutions, by utilizing the financial development index and its sub-indices proposed by (Svirydzenka, 2016). Our results refute the presence of resource curse in the long run for G7 economies; however, we clearly identify that this blessing is routed only through the development of Financial markets. There is strong evidence of hemorrhaging in financial institutions led by the abundance and utilization of natural resources. Our findings offer new insights on the linkages of the institutional failure hypothesis with the resource curse hypothesis and help countries develop short-term and long-term strategies to utilize their natural resources endowment optimally.