Upload
phamkhuong
View
216
Download
0
Embed Size (px)
Citation preview
n. 542 September 2014
ISSN: 0870-8541
Financial Development and Economic Growth in a
Natural Resource Based Economy: Evidence from
Angola
Yuri Quixina1
Álvaro Almeida1,2
1 FEP-UP, School of Economics and Management, University of Porto2 CEF.UP, Research Center in Economics and Finance, University of Porto
FINANCIAL DEVELOPMENT AND ECONOMIC GROWTH IN A NATURAL
RESOURCE BASED ECONOMY: EVIDENCE FROM ANGOLA
Yuri Quixina
Faculdade de Economia, Universidade do Porto
Álvaro Almeida
CEF.UP and Faculdade de Economia, Universidade do Porto †
September 8, 2014
† Email: [email protected] - Address: Rua Dr. Roberto Frias, 4200-464 Porto. CEF.UP, Centre for
Economics and Finance at University of Porto is supported by the Foundation for Science and
Technology (FCT), Portugal.
ABSTRACT
This paper analyzes the relationship between financial development and economic growth in
Angola, an economy heavily dependent on natural resources. We extend existing literature by
treating separately the oil and non-oil sectors of the economy. We test for Granger causality
between three variables – oil revenues, non-oil GDP and financial development – for the
Angolan economy for the period 1995-2012. The results show that the oil sector has been the
great engine of Angolan economic growth, since we identified Granger causality from oil
revenues to the other two variables, but none of these variables Granger causes oil revenues.
On the other hand, financial development does not seem to have a significant role in economic
growth in Angola: it does not Granger-cause either oil revenues or non-oil GDP, even though
it is Granger-caused by both variables.
Keywords: Financial Development, Economic Growth, Natural Resources, Angola
JEL Classification: E44, O16, O43, Q32
1. INTRODUCTION
The existence (and the direction) of causality between financial development and economic
growth has long been a subject of debate. The basic arguments point to the fact that financial
development may promote economic growth through improved resource allocation efficiency,
but economic growth also leads to increased demand for credit that should support the
development of the financial sector.
Despite numerous studies, the question of cause and effect remains the subject of debate in the
literature (see next section for references). However, most of this literature is based on cross-
section or panel data that mixes information from different countries, with different economic
structures, a feature that could be at the origin of the mixed results.
In particular, the financial sector / economic growth causality is likely to be different in natural
resource-based economies than in non-resource based economies. In an economy largely
dependent on natural resources (for example, oil), it is very unlikely that financial sector
development has a significant influence on overall growth. The growth of the oil sector (and
thus, the growth of the overall economy, if the economy is oil dependent) is mostly determined
by the evolution of external markets for that commodity, and, as such, it is unlikely that the
development of the domestic financial sector has a significant effect on overall growth.
But what about the relation between financial development and the rest of the economy (the
sectors not directly related to oil production)? Does causality from financial development to the
growth of the non-oil sector (or vice-versa) exist? The answer to this question may have
important development policy implications. The growth of the non-oil economy may have a
small impact on the (current) growth of the overall economy due to its small relative size, but
it is the most important from a development perspective, especially in economies based on non-
renewable resources (like oil), since future growth will depend more and more on the non-oil
sector.
The main contribution of this paper is to provide an innovative approach to the financial
development / economic growth debate, using evidence from the Angolan economy. The
majority of the previous work is based mainly on two-variable models, looking at the
relationship between financial development and economic growth. We use a three-variable
model by separating the oil and non-oil sectors of the economy and analyzing the causality
between these two sectors and the financial sector. Specifically, we test for Granger causality
between three variables – oil revenues, non-oil GDP and financial development – for the
Angolan economy for the period 1995-2012. The separation of the oil and non-oil economy
allows for a more complex relationship between financial development and economic growth,
allowing for different causalities between financial development and the oil and non-oil sectors,
and allowing for the identification of the role of the oil economy as an economic driver in
Angola.
The rest of the paper is organized as follows. In section 2 we provide some context on the
Angolan economy and on the literature on the relationship between financial development and
economic growth. In section 3 we present the methodology we used. Section 4 presents the
main results from the estimation of our model, while section 5 is dedicated to the discussion of
these main findings. Section 6 concludes.
2. CONTEXT
In the first decade of the twenty-first century, GDP growth in Angola has been one of the highest
in the world. The main driver of growth in Angola has been the oil sector, which represents
more than 50% of the Angolan economy, fostered by the increase in oil prices during that period
(CEIC, 2013). Furthermore, the importance of oil for the Angolan economy is larger than its
direct value added contribution to GDP, because over 50% of public investments are financed
by oil revenues (CEIC, 2013). During the same period, the financial sector in Angola
transformed from virtually non-existent to one of the largest in Africa, with 6 of the 23 Angolan
banks in the Top 100 of Africa’s largest banks in 2011 (KPMG Angola, 2013).
The importance of natural resources (especially oil, but also diamonds) in the Angolan economy
is widely recognized (see, for instance, International Monetary Fund 2014), but the effects of
abundant natural resources on economic development are not necessarily positive. There may
be a “resource curse”, i.e. a negative correlation between resource abundance and economic
growth, especially in the absence of strong domestic institutions (see, for instance, Frankel
2010, Boyce and Emery 2011, Atkinson and Hamilton 2003). On the other hand,
Brunnschweiler (2008) found a positive direct empirical relationship between natural resource
abundance and economic growth. Agnani and Iza (2011) showed that in oil-dependent
Venezuela economic growth was largely due to the development of non-oil GDP, and the
behavior of the non-oil sector can largely be explained by the evolution of total factor
productivity, which in turn could be influenced by the development of the oil sector. Thus, the
existing literature suggests that economic growth in countries with abundant natural resources
depends on how the effects of the resource-based sectors are transmitted to the non-resource
based sectors.
The financial sector may play an important role linking the resource-based sectors to the non-
resource based sectors, namely by efficiently allocating the surpluses generated in the former
sector to projects in the later sector. The positive effects of financial sector development on
economic and productivity growth have been identified by many authors, such as King and
Levine (1993), Pagano (1993), Levine (1997), Levine et al. (2000), Beck et al. (2000) and
Deidda (2006). Other authors have identified bidirectional causality between financial sector
development and economic growth (Demetriades and Hussein, 1996; Calderón and Liu, 2003;
Fowowe, 2010; Raz, 2013; Rufael, 2009; Ang, 2008; Ang and McKibbin, 2007; Yang and Yi,
2008; Zhang et al., 2012; Ma and Jalil, 2008).
On the other hand, some authors have questioned the existence of causal relationship from
financial development to economic growth (Disbudak, 2010; Ho, 2002; Loayza and Rancière,
2006; Odhiambo, 2008; Odhiambo, 2010). Others found no causality in the short term, but
identified a long run causality between financial deepening and economic growth
(Christopoulos and Tsionas, 2004; Bangake and Eggoh, 2011). Hassan et al. (2011) found
bidirectional causality between financial development and economic growth in most regions,
but found no causality from financial development to economic growth in sub-Saharan Africa.
Overall, the review of existing literature indicates that the debate regarding the importance of
financial sector development for economic growth is still open. This mixed evidence could be
the result of financial factors having a smaller role in economic growth than some economists
expect, as Lucas (1988) considered. Or it could be the result of our limited understanding of
how and why financial development brings about changes in the behavior of agents and the
economic factors that ultimately leads to economic growth (Yang and Yi, 2008; Wachtel,
2003). Odhiambo (2008) claims that previous studies have shown that causality between the
variables may differ from country to country and from time to time, and that, in addition to the
methodology used to examine the link between financial development and economic growth,
the direction of causality is quite sensitive to the choice of variables, and in particular, to the
potential omission of an important third variable that affects both economic growth and
financial development.
In this paper we explore the possibility that the relationship between financial intermediation
and economic growth is more complex than a simple bivariate model can capture, and that it
depends on the specific conditions of each country. In particular, we explore the role of the oil
sector in the Angolan economy in a three variable model that allows for different relations
between the financial sector and the oil and non-oil sector.
3. METHODOLOGY
In order to analyze the relation between financial development and economic growth in Angola,
during the period 1995-2012, we test for Granger causality between three variables: financial
development, oil revenues and non-oil GDP.
Financial development is measured by the ratio of monetary aggregate M2 to GDP, following
Outreville (1999) that considers this the most adequate measure of financial development and
deepening. The growth of the oil sector is measured by oil rents per capita, while the growth of
the non-oil economy is measured by the variable real non-oil GDP per capita, defined as the
difference between total GDP and oil rents. All variables are in constant 2005 US dollars, and
data were obtained from the World Bank: World Development Indicators database.
Following Odhiambo (2008) and Raz (2013), we used the following three variable model to
test for Granger causality between financial development and economic growth in Angola:
(1) 𝐺𝐷𝑃𝐶𝑛𝑝𝑡 = 𝛿0 + ∑ 𝛿1𝑖
𝑛
𝑖=1
𝐺𝐷𝑃𝐶𝑛𝑝𝑡−𝑖 + ∑ 𝛿2𝑖𝑀2
𝑛
𝑖=1
/𝐺𝐷𝑃𝑡−𝑖 + ∑ 𝛿3𝑖𝑂𝑅𝑡−𝑖
𝑛
𝑖=1
+ 𝜇𝑡
(2) 𝑀2/𝐺𝐷𝑃𝑡 = 𝛽0 + ∑ 𝛽1𝑖
𝑛
𝑖=1
𝐺𝐷𝑃𝐶𝑛𝑝𝑡−𝑖 + ∑ 𝛽2𝑖𝑀2
𝑛
𝑖=1
/𝐺𝐷𝑃𝑡−𝑖 + ∑ 𝛽3𝑖𝑂𝑅𝑡−𝑖
𝑛
𝑖=1
+ 휀𝑡
(3) 𝑂𝑅𝑡 = 𝛾0 + ∑ 𝛾1𝑖
𝑛
𝑖=1
𝐺𝐷𝑃𝐶𝑛𝑝𝑡−𝑖 + ∑ 𝛾2𝑖𝑀2
𝑛
𝑖=1
/𝑃𝐼𝐵𝑡−𝑖 + ∑ 𝛾3𝑖𝑂𝑅𝑡−𝑖
𝑛
𝑖=1
+ 𝜈𝑡
Where:
𝑀2/𝐺𝐷𝑃𝑡 = Ratio of monetary aggregate M2 to GDP in year t.
𝐺𝐷𝑃𝐶𝑛𝑝𝑡 = Non-oil GDP per capita in year t.
𝑂𝑅𝑡= Oil rents in year t.
𝜇𝑡, 휀𝑡 and 𝜈𝑡 = mutually uncorrelated white noise residuals.
Before performing the causality test, we examine the stationarity of each time series testing for
the presence of a unit root, using the augmented Dickey-Fuller (ADF) test, with a significance
level of 5%, following MacKinnon (1996).
4. RESULTS
Table 1 presents the results of the ADF tests. The null hypothesis of existence of a unit root is
not rejected for the three variables, implying that the time series of each variable is non-
stationary in levels. However, the null hypothesis of an unit root is rejected for the variables in
first differences, meaning that all variables are I(1), integrated of order one.
Table 1: Results of the ADF test
Variables Levels First differences
M2/GDP -2.6146 -4.3436 *
GDPCnp -2.2791 -5.2634 *
OR -2.5691 -4.9237 *
Notes: The table presents value of the ADF test statistic for each variable. The number of
lags was selected using the Schwarz Information Criterion. The critical value at a 5%
level is -3.7105 for the variables in levels and -3.7332 for the variables in first differences.
* indicates that the null hypothesis is rejected.
Table 2: Granger causality test results
Causality F- Statistic Probability
M2/GDP→ GDPCnp 2.4644 0.1305
GDPC np→ M2/GDP 7.0541 0.0107
M2/GDP → OR 0.5333 0.6011
OR → M2/GDP 13.5568 0.0011
GDPC np→ OR 3.7159 0.0585
OR → GDPCnp 5.7979 0.0191
Table 2 presents the results of the Granger causality for the variables in first differences. Using
a 5% significance level, one can reject the null hypotheses that oil revenues (OR) does not
Granger cause both non-oil GDP (GDPCnp) or M2/GDP and that non-oil GDP Granger causes
M2/GDP. However, we cannot reject the null hypotheses that M2/GDP does not Granger cause
both non-oil GDP or oil revenues and that non-oil GDP Granger causes OR.
5. DISCUSSION
The results of the Granger causality tests confirm that the oil sector has been the great engine
of Angolan economic growth, since we identified Granger causality from oil revenues to the
other two variables, but none of these variables Granger-causes oil revenues. On the other hand,
financial development does not seem to have a significant role in economic growth in Angola.
M2/GDP does not Granger-cause either oil revenues or non-oil GDP, even though M2/GDP is
Granger-caused by both variables. The relationship between financial development and oil
revenues was expected, since the oil sector dynamics are mostly exogenously determined, and
should have a strong impact on the demand for financial services. However, given the evidence
reviewed on section 2 on the positive effects of financial sector development on economic
growth, one might expect to find Granger-causality from financial development to non-oil
growth, which we did not find (although we did find strong causality in the opposite direction).
The results indicate that the development of the banking sector in Angola was demand-
following instead of supply-leading, in the terminology of Patrick (1966). The creation of new
banks and the growth of existing institutions were a response to increased demand for these
services by investors and savers in the real economy, i.e. economic growth caused the
development of financial intermediation (demand following). It seems that the supply-leading
effect, when the creation of financial institutions and the provision of its services creates
opportunities for savers and investors and thereby boosts economic growth, was not significant
in Angola.
This result is in line with Hassan et al. (2011), who found that in sub-Saharan countries with
low savings and underdeveloped financial systems, financial development does not cause
economic growth, but the reverse causality is strong, to the extent that countries are highly
specialized in the export of raw materials.
In short, the performance of the oil sector was the key to a strong economic growth of the
Angolan economy in the period and this in turn greatly stimulated the development of the
banking system.
6. CONCLUSION
In this paper, we revisited the relationship between financial development and economic growth
by allowing for differences in the relationship of the financial sector with the oil sector and the
non-oil sector. We tested for Granger-causality in a three variable model including the ratio of
M2 to GDP, oil revenues and non-oil GDP per capita, using data for Angola for the period
1995-2012.
Our results show that in the Granger sense, the development of the banking system did not
cause economic growth in Angola, both for the oil and non-oil sectors. However, economic
growth (both oil and non-oil) caused the development of the banking system. These results
suggest that any argument that financial development unambiguously leads to economic growth
should be treated with extreme caution.
The lack of impact of financial development on the non-oil sector is surprising, given the
positive effects found in other countries. This result suggests that Angola’s financial sector may
be underdeveloped, and that the implementation of policies that foster the efficiency of the
financial sector could provide a boost to growth in the non-oil sector.
REFERENCES
Agnani, B. and Iza, A. (2011), “Growth in an oil abundant economy: the case of Venezuela”,
Journal of Applied Economics. Vol. XIV (1), pp. 61-79.
Ang, J. (2008), “What are the mechanisms linking financial development and economic growth
in Malaysia?” Economic Modelling 25, pp. 38–53.
Ang, J. and McKibbin, W. (2007), “Financial liberalization, financial sector development and
growth: Evidence from Malaysia”, Journal of Development Economics 84, pp. 215–233.
Atkinson, G. and Hamilton, K. (2003), “Savings, growth and the resource curse hypothesis”,
World Development, Vol. 31 (11), pp. 1793–1807.
Bangake, C. and Eggoh, J. (2011), “Further evidence on finance-growth causality: A panel data
analysis”, Economic Systems 35 (2), pp. 176-188.
Beck, T., Levine, R. and Loayza, N. (2000), “Finance and the Sources of Growth”, Journal of
Financial Economics 58, pp. 261-300.
Boyce, J. and Emery, J.C. (2011). “Is a negative correlation between resource abundance and
growth sufficient evidence that there is a‘‘resource curse’’?”, Resources Policy 36, pp. 1–13.
Brunnschweiler, C. N. (2008), “Cursing the Blessings? Natural Resource Abundance,
Institutions, and Economic Growth”, World Development 36 (3), pp. 399–419.
Calderón, C. and Liu, L. (2003), “The direction of causality between financial development and
economic growth”, Journal of Development Economics 72(1), pp. 321-334.
CEIC/UCAN (2013), Relatório Económico de Angola 2012, Universidade Católica de Angola.
Christopoulos, D. and Tsionas, E. (2004), “Financial development and economic growth:
evidence from panel unit root and cointegration tests”, Journal of Development Economics 73,
pp. 55 – 74.
Deidda, L. (2006), “Interaction between economic and financial development”, Journal of
Monetary Economics 53, pp. 233–248.
Demetriades, P. and Hussein, K. (1996), “Does financial development cause economic growth?
Time–series evidence from 16 countries”, Journal of Development Economic 51, pp. 387-411.
Disbudak, C. (2010), “Analyzing the bank credit-economic growth nexus in Turkey”, European
Journal of Economics, Finance and Administrative Sciences, (23), pp. 34-48.
Fowowe, B. (2010), “The finance-growth nexus in Sub-Saharan Africa: panel cointegration and
causality tests”, Journal of International Development, 23, pp. 220–239.
Frankel, J. (2010) “The Natural Resource curse: A survey”. NBER Working Paper No. 15836.
(http://www.hks.harvard.edu/fs/jfrankel/NatResCurseNBERwp15836.pdf), accessed on April
20, 2014.
Hassan, M., Sanchez, B. and Yu, J. (2011) “Financial development and economic growth: New
evidence from panel data”, The Quarterly Review of Economics and Finance, 51(1), pp.88-104.
Ho, N.W. (2002), “Financial development and economic growth in Macau”, AMCM Quarterly
Bulletin, 3, pp. 15-30.
International Monetary Fund (2014), “Angola: Second Post-Program Monitoring”, IMF
Country Report No. 14/81, March 2014.
King, R. and Levine, R. (1993), “Finance and Growth: Schumpeter Might be Right”, Quarterly
Journal of Economics, 108(3), pp. 717-737.
KPMG Angola (2013), “Análise ao sector bancário Angolano” (available at
http://www.kpmg.com/pt/en/kpmgangola/pages/default.aspx, accessed on October 3, 2013).
Levine, R. (1997), “Financial development and economic growth: views and agenda”, Journal
of Economic Literature, 35(2), pp. 688-726.
Levine, R., Loayza, N., e Beck, T. (2000), “Financial intermediation and growth: Causality and
causes”, Journal of Monetary Economics, 46(1), 31-77.
Loayza, N., and Ranciere, R. (2006), “Financial development, financial fragility, and growth”,
Journal of Money, Credit and Banking, 38(4), pp.1051-1076.
Lucas Jr., R. E. (1988), “On the mechanics of economic development”, Journal of Monetary
Economics, 22, pp. 3-42.
Ma, Y., and Jalil, A. (2008), “Financial Development, Economic Growth and Adaptive
Efficiency: A Comparison between China and Pakistan”, China & World Economy / 97 – 111,
Vol. 16, No. 6, 2008.
MacKinnon, J. G. (1996). Numerical distribution functions for unit root and cointegration tests.
Journal of Applied Econometrics, 11(6), 601-618.
Odhiambo, M. (2008), “Finance depth, savings and economic growth in Kenya: A dynamic
causal linkage”, Economic Modelling 25, pp. 704-713.
Odhiambo, M. (2010), “Finance-investment-growth nexus in South Africa: an ARDL-bounds
testing procedure”, Econ Change Restruct, 43, pp.205–219.
Outreville, J. François (1999), Financial Development, Human Capital and Political Stability,
United Nations Conference on Development (UNCTAD), Palais des Nations, CH-1211 Geneva
10, Switzerland, No 142.
Pagano, M. (1993), “Financial markets and growth: An overview”, European Economic
Review, 37, pp. 613-622.
Patrick, Hugh. T. (1966) "Financial Development and Economic Growth in Underdeveloped
Countries". Economic Development and Cultural Change, vol. 14, n° 2, pp. 174-177.
Raz, A. (2013), “The nexus between bank credit development and economic growth in
Indonesia”, DLSU Business & Economics Review 23, pp. 93-104.
Rufael, Y. (2009), “Re-examining the financial development and economic growth nexus in
Kenya”, Economic Modelling 26, pp. 1140–1146.
Wachtel, P. (2003), How much do we really know about growth and finance? Federal Reserve
Bank of Atlanta Economic Review, 33–47.
Yang, Y. and Yi, M. (2008), “Does financial development cause economic growth? Implication
for policy in Korea”, Journal of Policy Modeling 30, pp. 827–840.
Zhang, J., Wang, L., and Wang, S. (2012), “Financial development and economic growth:
Recent evidence from China”, Journal of Comparative Economics 40, pp. 393–412.
Editorial Board ([email protected])Download available at: http://wps.fep.up.pt/wplist.php
also in http://ideas.repec.org/PaperSeries.html
15