N-11 countries: Are the new victims of resource-curse?

The presence of a robust financial system is a basic prerequisite for channelizing revenues towards investments optimally and putting a country on the path of development. This need becomes crucial if the revenues are being generated from the assets the country is endowed with, i.e., natural resources. This study is an attempt to explore the effect of natural resources on financial development to ascertain the validity of a resource curse or resource blessing hypothesis. The novelty of this research, however, is the inclusion of human capital and technological innovation in the model as these two variables are believed to have impacted the above-mentioned relationship, and they have been largely ignored in previous studies. The sample is based on N-11 countries for the data from 1990 to 2017. This study uses newly developed indices for financial development and human capital to measure the multidimensional effect on financial development. The chosen human capital index is useful to estimate not only the adjusted returns to education but also incorporate information from the labor markets. Second-generation econometric techniques have been employed to manage cross-section dependency and heterogeneity issues in a panel setting. The results of the cointegration test indicate the presence of a long-run relationship among variables under consideration. Although the outcomes of Augmented Mean Group and Mean Group estimates suggest a positive relationship of technological innovation and human capital with financial development, they also confirmed the presence of resource curse hypothesis indicated by the negative impact of natural resources on financial development. Our study suggests more investment in human capital and technological advancement for the turn of resource curse into resource blessings.