The natural resource drag: natural resource dependence, financial system development, and economic growth

This study investigates whether natural resource dependence can indirectly impede per capita economic growth by stifling the development of the financial system – a potential channel that has been largely overlooked in the resource curse literature. We propose and test the ‘Natural Resource Drag’ hypothesis, which posits that heavy reliance on natural resources exerts a negative indirect effect on growth by obstructing financial system development. We empirically examine this mechanism using a panel dataset of 58 developing countries from 1996 to 2014, with domestic credit to the private sector serving as the proxy for financial system development. The analysis reveals a significant negative association between the interaction of natural resource dependence and financial development and subsequent per capita growth. In other words, as resource dependence increases, the growth contribution of financial development diminishes. These findings provide compelling evidence of an indirect resource-driven drag on growth operating through the financial sector – a mechanism we term the ‘Natural Resource Drag’. Our research contributes to the resource economics literature by identifying a novel financial channel for the resource curse. It also underscores a critical policy implication: resource-dependent economies need to implement financial sector reforms and diversification strategies to counteract this drag and support sustainable economic growth.