Resource Rents, Institutional Quality, and Credit Market Depth

Abstract

The purpose of this paper is to examine if institutional quality moderates the relationship between hydrocarbon resource dependence and financial market development, which is at the crossroads of energy economics and financial intermediation theory. Using combined oil and natural gas rents as a percentage of GDP and the World Bank measure of institutional quality (the Rule of Law index), the paper examines their interactions with two measures of financial market development (stock market capitalization and bank credit to the private sector) in a cross-section of 64 countries. A significant interaction effect is not obtained for the stock market capitalization measure, but does exist for bank credit to the private sector, where rule of law is a very strong direct predictor of credit depth (p < .001), and where the interaction effect is also significant and positively signed (p = .013, R² = .541, N = 35), suggesting that, controlling for resource level, economies with more robust rule of law institutions experience measurably deeper bank credit markets than those with less robust rule of law institutions. The paper explains the contrast between the two financial development outcomes in the sample by invoking the literature on the bank-based versus market-based financial structure, pointing out that, for this sample, the conditional resource curse works primarily through the credit channel rather than public equity markets, and considers implications for economies that would like to harness their resource wealth for long-term financial development.