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Making Abundant Natural Resources Work for Developing Economies

Making Abundant Natural Resources Work for Developing Economies

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Tsionas, 2004; Darrat, 1999) that the causality from financial development toeconomic growth is confined to the long run. Furthermore, financial development canimpact on economic growth via its function of resource allocation, thus raising capitalaccumulation. The implication is that financial development is one policy that can beused to promote capital accumulation with the potential to abate the natural resourcecurse.The results from the paper also illustrate that the choice of financial indicator matters.There<strong>for</strong>e, it is important <strong>for</strong> researchers to determine the role of the financial systemthat is captured by each different indicator (Denizer et al., 2002). For instance, in thecase of bank credit, there is a unidirectional causality from output to financialdevelopment (i.e. the direction of causality is reversed in this case). An interestingresult is that investment still plays an important role in an economy by directlycausing output and indirectly through financial development. For natural resourceabundant economies financial institutions need to be able to promote the flow ofcredit to private investors. Hence the use of domestic credit to the private sector <strong>for</strong>our analysis.33

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