Oil revenues and economic growth in oil-producing countries: The role of domestic financial markets

Abstract

The study estimates the effects of oil revenues on economic growth through financial markets development channel. Using a Panel VAR framework, we determine the proportional contribution of government oil revenue investment and private oil revenue investment among a sample of 83 oil-producing countries during the period, 1990–2015. Also, a two-step system GMM is used to estimate the effect of oil revenues on economic growth conditional on financial markets development. We find that government investment of oil revenues positively affects economic growth conditional on banking sector development but has no effect in the case of the stock market development except via turnover ratio. The findings further indicate that private investment of oil rev enues negatively impacts economic growth conditional on banking sector development. In the case of stock market development, in general, we find no effect. The policy recommendation is that oil-producing countries should pay more attention to share of the oil rent that goes to the government and the development of their banking sector since this can have a positive spill over effect on the development of the economy by government investment of oil revenue.