Natural Resource Rent and Financial Development Nexuses in Bangladesh: The Role of Institutional Quality

Abstract

This paper examines the relationship between the development of the financial sector of the economy and natural rents. The financial sector of the economy is currently an important driver of economic growth. The study was conducted through the prism of addressing two key issues: determining the nature of the impact of natural rents on the financial development of Bangladesh; study of the role of the quality of institutional mechanisms in the relationship between natural rent and financial development of Bangladesh. The study period includes 35 years, from 1984 to 2019. The calculations were performed using an autoregressive model with a distributed lag, based on the order of integration and stationary properties of the variables of this study. The article presents the results of an empirical analysis, which showed a significant negative impact of the lease of natural resources on the financial development of Bangladesh. It is empirically confirmed that the quality of institutional mechanisms for the functioning of economic entities has a positive effect on the relationship between natural rents and the financial development of Bangladesh. The results of the study empirically confirm the hypothesis of insufficient natural resources in Bangladesh. The article emphasizes that the positive moderating role of the quality of the institutional base indicates that due to the strengthening of the institutional base, insufficient resources can become a benefit for the financial sector. The results of the study can be useful for representatives of the Government of Bangladesh from the standpoint of improving the quality of institutional infrastructure in order to ensure financial development, in which there will be positive effects from the implementation of natural resource lease processes. In the future, a study is planned to expand potential sources for the proper use of natural resource leases in Bangladesh. Keywords: natural resource rent, financial development, institutional quality, Pakistan.

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