Natural resource rents and financial development in Sub-Saharan African countries: is there an inverted U-shaped curve?
Nicholas M. OdhiamboPurpose
This paper examines the impact of natural resources on financial development using data from 32 Sub-Saharan African (SSA) countries from 1992 to 2021. The study also examines the existence of an inverted U-shaped relationship between natural resource rents and financial development in these countries.
Design/methodology/approach
The study uses quantile regression analysis and Driscoll–Kraay estimators within a quadratic setting to examine this linkage. The study also divides SSA into three groups: All SSA, low-income SSA and middle-income SSA. In addition, the study uses five proxies of financial development in a stepwise fashion, thereby estimating multiple model specifications for each technique and each SSA income group.
Findings
Overall, the study found a distinct inverted U-shaped relationship between natural resource rents and financial development to exist only in middle-income countries and only when financial development is measured by the Financial Development Index (FINDI). In the remaining specifications, the results indicate a predominantly U-shaped rather than inverted U-shaped relationship in all instances where a non-linear pattern is observed. This suggests that natural resource rents may hinder financial development (i.e. act as a curse) in some SSA countries, particularly low-income countries, during the early stages of development. However, once a certain threshold is reached, natural resource rents may ultimately promote financial development.
Originality/value
The study provides new insights into the nexus between natural resource rents and financial development in sub-Saharan Africa (SSA), while taking into account the income heterogeneity across SSA countries and the inherent cross-sectional dependence among the studied countries.