A Survey of the Impact of Financial Development on the Relationship between Natural Resource Rents and Augmented Trust in Iran

اقتصاد پولی مالی

Article 6, Volume 26, Issue 17, September 2019, Pages 137-166   

Document Type: پژوهشی

DOI: 10.22067/pm.v26i18.80387

Author

Mohammad Ali Aboutorabi

Abstract

Introduction:
While the literature on the role of the financial development on economic growth and development is still expanding, there seems to be a definite consensus among economists regarding its positive impact on economic growth (Beck et al., 2000). This positive impact has led to the formation of researches in this field that have focused on the central role of financial development in the economies of countries.
The importance of financial development is particularly important in countries that try to get benefits from the sale of natural resources, as they have failed to get advantages from the benefits of managing these resources in order to achieve sustainable economic growth. According International Monetary Fund (2010), if natural resourcerich developing countries develop their financial systems they will be successful in managing these windfalls. So, they can increase the economy’s absorption capacity of natural resources revenues and stay away from any potential negative effects.
Theoretical Framework:
The process of Economic growth in natural resource-rich countries focuses on the development of the financial system through four basic ways, namely the transforming of natural capital into four forms of capital, whether tangible (including foreign capital and physical capital) and intangible (including human capital and social capital). Given the particular importance of intangible capital to sustainable economic growth (World Bank, 2012), this article focuses on generalized trust (as an indicator of social capital).
In fact, trust between individuals or between individuals and institutions is manifested by sharing information and social norms, and its higher levels are associated with more productive individuals and consequently higher economic growth (Elkhuizen, 2016: 6). Algan and Cahuc (2010) state that trust is one of the key determinants of economic development in all countries. They argue that generalized trust is the main factor to success in achieving economic development (Algan and Cahuc, 2010: 2060). Numerous empirical studies in the field of political science have focused mainly on the pivotal role of trust as an indicator of social capital in economic growth and development (Banfield, 1985; Arrow, 1972; Gambetta, 1988; Coleman, 1990; Greif, 1993; Fukuyama, 1995; and Putnam, 2000).
Given the key role of financial system development in achieving sustainable economic growth in resource-rich countries, and on the other hand, the high importance that public confidence plays in achieving the above objective, an important question arises: "Can financial development leads to getting benefits from natural resources revenues in the way of increasing augmented trust in the economy? ". In fact, what is referred to in the literature to the curse of natural resources is related to the negative impact of resources rents on the formation of various forms of capital. So, in countries that have been able to manage these revenues through financial development, the negative impact of natural resources have not been seen (Van der Ploege, 2010). Thus the existence of some natural resource-rich countries that through their developed financial systems have been able to properly manage the sources and inflows of their natural resource revenues and achieve significant economic growth (such as Norway, Australia and The Netherlands), can lead to proposing as an operational model for many resource-rich developing countries, including Iran.
Methodology:
Overall, from a policy perspective, it is important to understand the impacts of natural resource rents on augmented trust and whether this (positive or negative) effects will be improved through a well-developed financial institutions? In the present paper, in order to answer the basic question of this study, first, macroeconomic indicators that affect augmented trust are identified and then to study the impact of financial system development (in the banking sector) on how these rent affect augmented trust, the rolling regression technique (with fixed windows) based on the ARDL method is applied during the period 1970-2014 in Iran.
Results & Discussion:
The results of the model estimation show that the multidimensional development of the financial system in the banking sector has the potential to improve the impact of natural resource rent on public confidence in Iran. Therefore, the development of the financial system as a key structural policy is recommended for positive utilization of natural resources in Iran.
Conclusions & Suggestions:
From a policy perspective, it can be said that given the potential of the financial banking system for getting positive utilization of the rents from natural resources in order to increase augmented trust, special attention should be paid to the factors driving the financial development in Iran. Of course, regard to the flaws in the system, such as the existence of financial repression, the existence of suboptimal controls, and the lack of competitive space among financial intermediaries, we could say that if the obstacles against financial development are eliminated, it can be seen its improving effects on converting natural resources income into social capital accumulation and achieving sustainable growth and development. In this regard, policymakers should pay particular attention to the main channels of financial development in order to enhance the role of it on how resources rents affect generalized trust.
 

Keywords

Natural Resource Rent; Augmented Trust; Financial development; Rolling Regression

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