The Relationship Between Natural Resource Dependence, Financial Sector Development And Sectoral Growth: The Case Of Republic Of Yemen

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Date
2016-07
Authors
Badeeb, Ramez Abubakr
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Abstract
This study aims to empirically examine the impact of natural resource dependence on the financial development in Yemen, as well as on the relationship between financial development and sectoral growth. Using time series data over the period 1980-2012, along with the Autoregressive Distributed Lag (ARDL) approach; the study finds that natural resource dependence hampers the level of financial sector development in Yemen. Additionally, the study reveals that the natural resource dependence weakens the relationship between financial development and growth. This effect is transmitted through the quantitative channel rather than the qualitative channel. Moreover, natural resource dependence has a significant negative impact on the growth of the agriculture and manufacturing sectors. These findings are a clear manifestation that the natural resource curse in Yemen works through the Dutch disease mechanism. Therefore, one can assert that the resource curse hypothesis is valid in the context of Yemen because this curse can not only be transmitted directly to the real domestic economic sectors, but can also have an expansionary indirect impact through financial development. Hence, the country needs to rebalance its economy away from the natural resource sector to reduce the level of natural resource dependence. Accelerating the pace and efficiency of the financial sector will be fruitful in this regard. The government should proactively encourage lending to enable the financial sector to play a more efficient intermediary role in mobilizing domestic savings, and channelling them to productive investments across economic sectors. Finally, any future boom of natural resource revenues in Yemen needs to be harnessed to finance efficient public investment and build a financial system to adequately fund private investment. This will help accumulate permanent productive wealth to compensate for any decline in natural resource production.
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The impact of natural resource dependence on , the financial development in Yemen,
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