Financial Development in the Shadow of the Resource Curse: The Role of Political Stability and Fiscal Decentralization in the European Union Countries

Öz

This study investigates the impact of political stability and the natural resource curse on financial development in the ten European economies with the highest fiscal decentralization rates from 2002 to 2020. To analyze the short and long-term relationships, panel data methods were used. Panel VAR and VECM models were applied for panel causality analyses, and AMG and CCE estimators were used for cointegration. In the short run, only natural resource revenues significantly affect financial development. However, in the long run, a collective causality from per capita income, political stability, fiscal decentralization, and natural resource revenues to financial development is observed. Parameter estimates reveal that fiscal decentralization and political stability significantly influence financial development, though the effect varies across countries. In Austria and Latvia, fiscal decentralization appears to mitigate the natural resource curse’s effects, whereas in other countries, the negative impacts of institutional weakness and natural resource revenue volatility are evident. The study demonstrates a long-run interaction between fiscal decentralization, natural resource revenues, political stability, and financial development, with governance structure as the primary mediating variable. Empirical findings suggest that policies aimed at mitigating the negative effects of the natural resource curse should focus on strengthening institutional reforms alongside fiscal decentralization.

Anahtar Kelimeler

• Political stability
• Fiscal decentralization
• Resources curse
• Financial development

Etik Beyan

Scientific, ethical, and citation guidelines were adhered to during the writing of the study, “Financial Development in the Shadow of the Resource Curse: The Role of Political Stability and Fiscal Decentralization in the European Union Countries” No data was falsified, and the study was not submitted to any other academic publication environment for review. Ethics Committee Permission is not required

Kaynak Lanetinin Gölgesinde Finansal Gelişme: Avrupa Birliği Ülkelerinde Siyasal İstikrar ve Mali Merkezsizleşmenin Rolü

Öz

Bu çalışma, 2002-2020 yılları arasında en yüksek mali adem-i merkeziyet oranlarına sahip on Avrupa ekonomisinde siyasal istikrarın ve doğal kaynak lanetinin finansal gelişme üzerindeki etkisini araştırmaktadır. Değişkenler arasındaki kısa ve uzun dönemli ilişkileri analiz edebilmek amacıyla panel veri ekonometrisine dayalı ampirik yöntemler kullanılmıştır. Panel nedensellik analizleri için Panel VAR ve VECM modelleri uygulanmış, uzun dönemli eşbütünleşme ilişkilerini ve heterojenliği dikkate almak üzere AMG ve CCE tahmincilerine başvurulmuştur. Kısa vadede, finansal gelişmeyi yalnızca doğal kaynak gelirleri önemli ölçüde etkilemektedir. Ancak uzun vadede, kişi başına düşen gelir, siyasal istikrar, mali adem-i merkeziyetçilik ve doğal kaynak gelirlerinden finansal gelişmeye doğru bütünsel bir nedensellik gözlemlenmektedir. Parametre tahminleri, mali adem-i merkeziyetçilik ve siyasal istikrarın finansal gelişmeyi önemli ölçüde etkilediğini, ancak bu etkinin ülkeler arasında farklılık gösterdiğini ortaya koymaktadır. Avusturya ve Letonya'da mali adem-i merkeziyetçilik doğal kaynak lanetinin etkilerini hafifletiyor görünürken, diğer ülkelerde kurumsal zayıflığın ve doğal kaynak geliri oynaklığının olumsuz etkileri belirgindir. Çalışma, mali adem-i merkeziyetçilik, doğal kaynak gelirleri, siyasal istikrar ve finansal gelişme arasında uzun vadeli bir etkileşim olduğunu ve yönetişim yapısının bu etkileşimi sağlayan başlıca aracı değişken olduğunu göstermektedir. Ampirik bulgular, doğal kaynak lanetinin olumsuz etkilerini azaltmayı amaçlayan politikaların, mali adem-i merkeziyetçiliğin yanı sıra kurumsal reformları güçlendirmeye odaklanması gerektiğini göstermektedir.

Anahtar Kelimeler

• Siyasal istikrar
• Mali adem-i merkeziyetçilik
• Doğal kaynak laneti
• Finansal gelişme

Etik Beyan

“Kaynak Lanetinin Gölgesinde Finansal Gelişme: Avrupa Birliği Ülkelerinde Siyasal İstikrar ve Mali Merkezsizleşmenin Rolü” başlıklı çalışmanın yazım sürecinde bilimsel kurallara, etik ve alıntı kurallarına uyulmuş; toplanan veriler üzerinde herhangi bir tahrifat yapılmamış ve bu çalışma herhangi başka bir akademik yayın ortamına değerlendirme için gönderilmemiştir.Bu araştırma doküman incelemesine dayalı olarak yapıldığından etik kurul kararı zorunluluğu bulunmamaktadır.

Kaynakça

1. Acemoglu, D., & Robinson, J. A. (2012). Why nations fail: The origins of power, prosperity, and poverty. Crown Business.
2. Ahmad, M., & Satrovic, E. (2023). Relating fiscal decentralization and financial inclusion to environmental sustainability: Criticality of natural resources. Journal of Environmental Management, 325, 116633. https://doi.org/10.1016/j.jenvman.2022.116633
3. Alfada, A. (2019). Does fiscal decentralization encourage corruption in local governments? Evidence from Indonesia. Journal of Risk and Financial Management, 12(3), 118. https://doi.org/10.3390/jrfm12030118
4. Altunbaş, Y., & Thornton, J. (2011). Fiscal decentralization and governance. Public Finance Review, 40(1), 66. https://doi.org/10.1177/1091142111424276
5. Andrade, S., & Morales, J. (2007). The role of the natural resource curse in preventing development in politically unstable countries: Case studies of Angola and Bolivia. Institute for Advanced Development Studies, Development Research Working Paper Series, No. 11/2007.
6. Arezki, R., Ramey, V. A, Sheng, L. (2017). News shocks in open economies: Evidence from giant oil discoveries, The Quarterly Journal of Economics, 132(1), 103-155, https://doi.org/10.1093/qje/qjw030
7. Armawaddin, M., Rumbia, W. A., & Ahmad, A. (2022). The effect of fiscal decentralization on economic development performance in Indonesia. Jurnal Ekonomi & Studi Pembangunan, 14(2), 171-181. https://doi.org/10.17977/um002v14i22022p171
8. Asif, M., Khan, K. B., Anser, M. K., Nassani, A. A., Abro, M. M. Q., & Zaman, K. (2020). Dynamic interaction between financial development and natural resources: Evaluating the ‘resource curse’ hypothesis. Resources Policy, 65, 101566. https://doi.org/10.1016/j.resourpol.2019.101566

9. Aslanidis, N., & Fountas, S. (2014). Is real GDP stationary? Evidence from a panel unit root test with cross-sectional dependence and historical data. Empirical Economics, 46(1), 101-108. https://doi.org/10.1007/s00181-012-0668-z
10. Asteriou, D., & Spanos, K. (2019). The relationship between financial development and economic growth during the recent crisis: Evidence from the EU. Finance Research Letters, 28, 238-245. https://doi.org/10.1016/j.frl.2018.05.011
11. Bahl, R. (2008). The pillars of fiscal decentralization. CAF Working Paper No. 2008/07.
12. Banerjee, A., Marcellino, M., & Osbat, C. (2004). Some cautions on the use of panel methods for integrated series of macroeconomic data. Econometrics Journal, 7(2), 322-340.
13. Beck, T., Levine, R., & Levkov, A. (2010). Big bad banks? The winners and losers from bank deregulation in the United States. The Journal of Finance, 65(5), 1637-1667. https://doi.org/10.1111/j.1540-6261.2010.01589.x
14. Besley, T., & Persson, T. (2011). Pillars of prosperity: The political economics of development clusters. Princeton University Press.
15. Bjornland, H. C. & Thorsrud, L. A. (2016). Commodity prices and fiscal policy design: Procyclical despite a rule, CAMA working papers 2016-27, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
16. Breusch, T. S., & Pagan, A. R. (1980). The Lagrange multiplier test and its applications to model specification in econometrics. The Review of Economic Studies, 47(1), 239-253. https://doi.org/10.2307/2297111
17. Chen, X., Zhang, L., & Cheng, X. (2024). Fiscal decentralization and the development of the digital economy: Evidence from China. Journal of Economic Policy Reform, 27(3), 276-292 https://doi.org/10.1080/17487870.2023.2293978
18. Chletsos, M., & Sintos, A. (2024). Political stability and financial development: An empirical investigation. The Quarterly Review of Economics and Finance, 94, 252-266. https://doi.org/10.1016/j.qref.2024.02.003
19. Čižo, E., Lavrinenko, O., & Ignatjeva, S. (2020). Determinants of financial development of the EU countries in the period 1995-2017. Insights into Regional Development, 2(2), 505. https://doi.org/10.9770/ird.2020.2.2(1)
20. Corovei, E. A., & Socol, A. (2019). The impact of political stability on economic growth in European Union. Ovidius University Annals, Economic Sciences Series, (1), 8-14.
21. Cui, W., Yang, Y. & Dai, J. (2023). Evaluating the resource curse hypothesis and the interplay of financial development, human development, and political stability in seven emerging economies. Environmental Science and Pollution Research, 30, 109559-109570. https://doi.org/10.1007/s11356-023-29907-6
22. Çalışkan, Z. D. (2019). Political stability and financial development: Evidence from Turkey. Fiscaoeconomia, 3(3), 72-79. https://doi.org/10.25295/fsecon.2019.03.005
23. Ditzen, J. (2018). Estimating dynamic common correlated effects in Stata. The Stata Journal, 18(3), 585-617.
24. Eberhardt, M. (2012). Estimating panel time-series models with heterogeneous slopes. The Stata Journal, 12(1), 61-71.
25. Eberhardt, M., & Bond, S. (2009). Cross-section dependence in nonstationary panel models: A novel estimator. MPRA Paper 17692, University Library of Munich, Germany. https://mpra.ub.uni-muenchen.de/17692/
26. Ehigiamusoe, K. U., Guptan, V., & Narayanan, S. (2021). Rethinking the impact of GDP on financial development: Evidence from heterogeneous panels. African Development Review, 33(1), 1-13. https://doi.org/10.1111/1467-8268.12469
27. Formánek, T. (2019). GDP per capita in selected EU countries: Economic growth factors and spatio-temporal interactions examined at the NUTS2 level. Journal of International Studies, 12(1), 119-133. https://doi.org/10.14254/2071-8330.2019/12-1/8
28. Gennaioli, N., Martin, A., & Rossi, S. (2014). Sovereign default, domestic banks, and financial institutions. The Journal of Finance, 69(2), 819- 866. https://doi.org/10.1111/jofi.12124
29. Gylfason, T. (2011). Natural resource endowment: A mixed blessing?, CESifo Working Paper Series 3353, CESifo.
30. Hassan, A. S., Meyer, D., & Kot, S. (2019). Effect of institutional quality and wealth from oil revenue on economic growth in oil-exporting developing countries. Sustainability, 11(13), 3635. https://doi.org/10.3390/su11133635
31. Hassan, M. K., Sanchez, B., & Yu, J. S. (2011). Financial development and economic growth: New evidence from panel data. The Quarterly Review of Economics and Finance, 51(1), 88-104. https://doi.org/10.1016/j.qref.2010.09.001
32. Hayewa, S., & Olateju, A. O. (2024). Political stability, corruption, and economic development: Evidence from WAMZ countries. International Journal of Business and Management Practices, 2(2), 263-272. https://doi.org/10.59890/ijbmp.v2i2.1665
33. Hou, K., Qammar, R., Zhu, C., Usman, M., & Abbas, S. (2023). Testing the resources curse hypothesis: Unleashing the role of national governance and financial development in OPEC countries. Resources Policy, 86, 104242. https://doi.org/10.1016/j.resourpol.2023.104242
34. Hussain, M., Ye, Z., Bashir, A., Chaudhry, N. I., & Zhao, Y. (2021). A nexus of natural resource rents, institutional quality, human capital, and financial development in resource-rich high-income economies. Resources Policy, 74, 102259. https://doi.org/10.1016/j.resourpol.2021.102259
35. Ibrahim, R. L., & Ajide, K. B. (2021). The dynamic heterogeneous impacts of nonrenewable energy, trade openness, total natural resource rents, financial development and regulatory quality on environmental quality: Evidence from BRICS economies. Resources Policy, 74, 102251. https://doi.org/10.1016/j.resourpol.2021.102251
36. Joshia, L., Singh, R., Goshunova, A. V., Choriev, R., Sattarova, E., & Kholmurodov, S. (2024). From resource curse to resource wealth: Energy and economic transformation for sustainable development. E3S Web of Conferences, 574, 01002. https://doi.org/10.1051/e3sconf/202457401002
37. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47(2), 263-292. https://doi.org/10.2307/1914185
38. Khalid, U., & Shafiullah, M. (2021). Financial development and governance: A panel data analysis incorporating cross-sectional dependence. Economic Systems, 45(2), 100855. https://doi.org/10.1016/j.ecosys.2021.100855
39. Khan, H., Khan, S., & Fan, Z. (2020). Institutional quality and financial development: Evidence from developing and emerging economies. Global Business Review, 23(4), 971. https://doi.org/10.1177/0972150919892366
40. Khan, M. A., Alhumoudi, H. A., & Haddad, H. (2023). Natural resource rents and access to finance. Journal of Multinational Financial Management, 70, 100821. https://doi.org/10.1016/j.mulfin.2023.100821
41. King, R. G., & Rebelo, S. (1990). Public policy and economic growth: Developing neoclassical implications. Journal of Political Economy, 98(5, Part 2), 126-150. https://www.jstor.org/stable/2937634
42. Li, H., Usman, N., Coulibay, M. H., Phiri, R., & Tang, X. (2022). Does the resources curse hypothesis exist in China? What is the dynamic role of fiscal decentralization, economic policy uncertainty, and technology innovation for sustainable financial development?. Resources Policy, 79, 103002. https://doi.org/10.1016/j.resourpol.2022.103002
43. Li, K., Wang, D., Xu, T., & Zhang, Y. (2024). Financial development and resource-curse hypothesis: Moderating role of internal and external conflict in the MENA region. Resources Policy, 90, 104745. https://doi.org/10.1016/j.resourpol.2024.104745
44. Lompo, A. V. (2024). Effects of political instability on financial development in the West African Economic and Monetary Union region. Journal of Applied Economic Sciences, 19(3-85), 277-290. https://doi.org/10.57017/jaes.v19.3(85).04
45. Lujala, P., Rustad, S. A., & Le Billon, P. (2010). Chapter six: Valuable natural resources in conflict-affected states. Adelphi Series, 50(412-413), 121-136. https://doi.org/10.1080/19445571.2010.515152
46. Masi, F., Rizzo, A., & Regelsberger, M. (2018). The role of constructed wetlands in a new circular economy, resource oriented, and ecosystem services paradigm. Journal of environmental management, 216, 275-284.
47. Mehlum, H., Moene, K., & Torvik, R. (2006). Institutions and the resource curse. The Economic Journal, 116(508), 1-20.
48. Ni, X., Wang, Z., Akbar, A., & Ali, S. (2022). Natural resources volatility, renewable energy, R&D resources and environment: Evidence from selected developed countries. Resources Policy. 77, https://doi.org/10.1016/j.resourpol.2022.102655.
49. North, D. C. (1990). Institutions, institutional change and economic performance. Cambridge University Press.
50. Oplotnik, Ž. J., & Brezovnik, B. (2004). Financing local government in Slovenia. Post-Communist Economies, 16(4), 483. https://doi.org/10.1080/1463137042000309575
51. Pasichnyi, Mykola and Kaneva, Tetiana and Ruban, Maksym and Nepytaliuk, Anton. (2019). The impact of fiscal decentralization on economic development (July 11, 2019). Investment Management and Financial Innovations, 16(3), Available at SSRN: https://ssrn.com/abstract=3430955
52. Peipei, W., Eyvazov, E., Giyasova, Z., & Kazimova, A. (2023). The nexus between natural resource rents and financial wealth on economic recovery: Evidence from European Union economies. Resources Policy, 82, 103412. https://doi.org/10.1016/j.resourpol.2023.103412
53. Pesaran, M. H. (2004). General diagnostic tests for cross section dependence in panels. IZA Discussion Paper No. 1240
54. Pesaran, M. H. (2006). Estimation and inference in large heterogeneous panels with a multifactor error structure. Econometrica, 74(4), 967-1012. https://doi.org/10.1111/j.1468-0262.2006.00692.x
55. Pesaran, M. H., & Tosetti, E. (2011). Large panels with common factors and spatial correlation. Journal of Econometrics, 161(2), 182-202. https://doi.org/10.1016/j.jeconom.2010.12.003
56. Pesaran, M. H., Shin, Y., & Smith, R. P. (1999). Pooled mean group estimation of dynamic heterogeneous panels. Journal of the American Statistical Association, 94(446), 621-634.
57. Pesaran, M. H., Ullah, A., & Yamagata, T. (2008). A bias-adjusted LM test of error cross-section independence. The Econometrics Journal, 11(1), 105-127. https://doi.org/10.1111/j.1368-423x.2007.00227.x
58. Pietrzykowski, M. (2019). Convergence in GDP per capita across the EU regions-spatial effects. Economics and Business Review, 5(2), 64- 85. https://doi.org/10.18559/ebr.2019.2.4
59. Rehman, A., Batool, Z., Ain, Q. U., & Ma, H. (2024). The renewable energy challenge in developing economies: An investigation of environmental taxation, financial development, and political stability. Natural Resources Forum, 49(1), 699-724. https://doi.org/10.1111/1477-8947.12418
60. Reingewertz, Y. (2014). Fiscal decentralization-a survey of the empirical literature. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.2523335
61. Reza, R., & Zahra, K. T. (2008). Evaluation of the income convergence hypothesis in ten new members of the European Union: A panel unit root approach. Panoeconomicus, 55(2), 157-166. https://doi.org/10.2298/pan0802157r
62. Robinson, J. A., Torvik, R., & Verdier, T. (2006). Political foundations of the resource curse. Journal of Development Economics, 79(2), 447- 468. http://doi.org/10.1016/j.jdeveco.2006.01.008
63. Salo, I., & Allwood, C. M. (2020). Perceived barriers to decision quality in three Swedish public authorities. International Journal of Public Administration, 44(7), 537. https://doi.org/10.1080/01900692.2020.1737445
64. Simionescu, M. (2017). The GDP per capita convergence in the European Union. Academic Journal of Economic Studies, 3(1), 81-87.
65. Slavinskaite, N., Lapinskiene, G., Hlawiczka, R., & Vasa, L. (2022). Financial innovation management: Impact of fiscal decentralization on economic growth of the Baltic countries. Marketing and Management of Innovations, 1, 257-271. https://doi.org/10.21272/mmi.2022.1-19
66. Smith, L. V., Leybourne, S., Kim, T., & Newbold, P. (2004). More powerful panel data unit root tests with an application to the mean reversion in real exchange rates. Journal of Applied Econometrics, 19(2), 147-170.
67. Song, X., & Hou, W. (2024). Mineral resources and growth nexus in ASEAN countries: What role do trade diversification, ICT, and financial inclusion play in the resource curse spectrum? Resources Policy, 91, 104847. https://doi.org/10.1016/j.resourpol.2024.104847
68. Stoilova, D., & Patonov, N. (2012). Fiscal decentralization: Is it a good choice for the small new member states of the EU?. Scientific Annals of Economics and Business, 59 (1), 125-137.
69. Storonyanska, I., Hrynchyshyn, I., Dub, A., & Horga, I. (2019). Fiscal decentralization in Europe in the context of social protection development. Economic Annals-XXI, 175(1-2), 24-28. https://doi.org/10.21003/ea.V175-04
70. Tchouassi, G., & Dzou, P. P. (2020). The financial decentralization policy for local development in Cameroon: An econometric analysis. Journal of Empirical Studies, 7(1), 52-60. https://doi.org/10.18488/journal.66.2020.71.52.60
71. Tselios, V., & Rodríguez-Pose, A. (2020). Did decentralisation affect citizens’ perception of the European Union? The impact during the height of decentralisation in Europe. Economies, 8(2), 38. https://doi.org/10.3390/economies8020038
72. Ullah, W., Zubir, A. S. M., & Ariff, A. M. (2024). The impact of political instability on financial development, economic growth, economic growth volatility and financial stability in developing countries. Theoretical and Practical Research in Economic Fields, 15(2-30), 453- 470. https://doi.org/10.14505/tpref.v15.2(30).22
73. Vasvári, T. (2020). Hardening the budget constraint: Institutional reform in the financial management of Hungarian local governments. Acta Oeconomica, 70(4), 571. https://doi.org/10.1556/032.2020.00037
74. Wang, D.-Y., Zhang, E., & Liao, H.-N. (2022). Does fiscal decentralization affect regional high-quality development by changing peoples’ livelihood expenditure preferences: Provincial evidence from China. Land, 11(9), 1407. https://doi.org/10.3390/land11091407
75. Wang, K. H., Liu, L., Adebayo, T. S., Lobonț, O. R., & Claudia, M. N. (2021). Fiscal decentralization, political stability and resources curse hypothesis: A case of fiscal decentralized economies. Resources Policy, 72, 102071. https://doi.org/10.1016/j.resourpol.2021.102071
76. Wesiah, S., & Onyekwere, S. C. (2021). The relationship between financial development and economic growth in the United Kingdom: A granger causality approach. Quantitative Economics and Management Studies, 2(1), 47-71. https://doi.org/10.35877/454RI.qems258
77. Westerlund, J. (2007). Testing for error correction in panel data. Oxford Bulletin of Economics and Statistics, 69(6), 709-748. https://doi.org/10.1111/j.1468-0084.2007.00477.x
78. Westerlund, J. (2008). Panel cointegration tests of the Fisher effect. Journal of Applied Econometrics, 23(2), 193-233. https://doi.org/10.1002/jae.967
79. Westerlund, J., & Edgerton, D. L. (2008). A simple test for cointegration in dependent panels with structural breaks. Oxford Bulletin of Economics and Statistics, 70(5), 665-704. https://doi.org/10.1111/j.1468-0084.2008.00513.x
80. Wooldridge, J. (2010), Econometric Analysis of Cross Section and Panel Data. Mit Press.
81. Worthington, A. C., & Higgs, H. (2010). Assessing financial integration in the European Union equity markets: Panel unit root and multivariate cointegration and causality evidence. Journal of Economic Integration, 25(3), 457-479. https://doi.org/10.11130/jei.2010.25.3.457
82. Wu, J. L., Hou, H., & Cheng, S. Y. (2010). The dynamic impacts of financial institutions on economic growth: Evidence from the European Union. Journal of Macroeconomics, 32(3), 879-891.
83. Xu, S., Zhang, X., & Lee, K.-J. (2024). Channelizing the importance of natural resources and renewable energy for financial development: Resources curse perspective for high growth countries. Resources Policy, 89, 104503. https://doi.org/10.1016/j.resourpol.2023.104503
84. Yadav, S. K., Samadhiya, A., Kumar, A., Luthra, S., & Pandey, K. K. (2024). Nexus between fintech, green finance and natural resources management: Transition of BRICS nation industries from resource curse to resource blessed sustainable economies. Resources Policy, 92, 104903. https://doi.org/10.1016/j.resourpol.2024.104903
85. Yan, H. (2024). Financial development, violence, and resource curse: How mineral resources are contributing towards growth of resource-rich countries. Resources Policy, 89, 104546. https://doi.org/10.1016/j.resourpol.2023.104546
86. Yıldırım, H., & Akdağ, İ. (2023). Politik istikrar ve demokrasi finansal gelişme üzerinde etkili mi? Sahra-Altı Afrika ülkelerinden kanıtlar. Ekonomi Politika ve Finans Araştırmaları Dergisi, 8(3), 578-596. https://doi.org/10.30784/epfad.1331138