The value of the financial structure to economic performance in oil‐producing countries

• Author: Oro Ufuo Oro,Akpan H. Ekpo
• Date: 01 March 2020
• DOI: http://doi.org/10.1111/opec.12169
• Published date: 01 March 2020

The value of the financial structure

to economic performance in oil-producing

countries

Oro Ufuo Oro* and Akpan H. Ekpo**

*Doctor, Faculty of Humanities, Universityof the Witwatersrand, 1 Jan Smuts Avenue, Johannesburg 2050,

South Africa. Email: ufuo.oro@wits.ac.za

**Professor, Department of Economics, University of Uyo, Uyo , Nigeria. Email: ahekpo@uniuyo.edu.ng

Abstract

Is financial structure (FS) valuable to economic performance (EP) of countries? To answer this

question, we investigated 23 oil-producing and 18 non-oil-producing countries over the course of

ten years (2006–2015). We found an increase in bank-based FS decreases economic growth (EG)

and amplifies growth volatility (GV) in the oil- and non-oil-producing economies. An increase in

market-based FS increases EG in the two samples but amplifies GV in the oil-producing

economies while dampening GV in the non-oil-producing countries. The uniqueness in our results

is that between the oil- and non-oil-producing countries, where the relationship between FS and EP

is negative, the negative effect is more in the oil-producing countries. Where the relationship is

positive in the two samples, the positive effect is smaller in the oil-producing countries. We,

therefore, recommend that any policy reforms in the oil-producing economies should be context-

specific because oil-producing economies appear to differ from the other economies.

1. Introduction

The current stream of research leaves a gap in how the structure of financial systems in

the oil-producing countries affects their economic performance. Financial structure will

add value if it eases growth and dampens growth volatility. Countries’financial

architecture and its relationship with economic growth had been a crucial long-standing

debate in corporate finance. There are varied opinions about these relationships. Many

researchers report no relationship between the variables. Others claim banks and capital

market are not the right way to conceptualise financial systems for analysis. Many others

found relationships between countries’financial structure and the rate of their economic

growth. An appreciable number of empirical evidences support the financial structure–

growth relationship.

A further extension of this debate is the relationship between financial structure and

growth volatility. Does the structure of a country’sfinancial systems explain the rate of

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economic growth volatility? Researchers, including William Easterly and Joseph

Stiglitz, report not only the relationship but also the channels through which the

variables relate. According to these authors, the financial structure that smoothens

consumptions and investment (especially in the period of shocks) is likely to reduce

growth volatility (Easterly et al., 2001). This assertion shows the value of the structure of

countries’financial systems in influencing growth volatility for policy consideration.

In these debates, researchers pay limited attention to the oil-producing countries as a

distinct economic context. However, in recent studies, the authors (Beck, 2010; Oro and

Alagidede, 2018; Anyanwu et al., 2018) have found economic variables interacting

differently in the oil-dependent and the non-oil-dependent countries. Beck (2010)

discovers that researchers often look away from the importance of financial interme-

diation in oil-producing countries. According to Beck, researchers believe that the oil-

producing countries are self-sufficient in the capital for economic development. The

existing evidence is to the contrary. The oil-producing countries have the same needs for

investment capital as other countries. Without examining the relationship between the

variables in the oil-producing countries, economists will have incomplete knowledge of

how these variables behave in different contexts. This study aims to fill this research gap.

Our object is to show the uniqueness of oil-producing countries as a distinct

economic context where responses to changes in economic forces are different from

those of non-oil-producing countries. This fact is relevant to policymakers in oil-

producing economies in designing and implementing policy reforms. However, the

recent financial reforms driven by the World Bank and IMF in developing countries did

not appear to account for the uniqueness of the oil-producing countries as a distinct

context.

This study intends to answer two basic questions to achieve the above goal. Firstly,

what is the relationship between financial structure and economic growth and between

financial structure and growth volatility in oil-producing countries? Secondly, are these

relationships comparable to similar relationships in non-oil-producing countries? To

answer the questions, we investigate a panel of 30 oil-producing and 31 non-oil-

producing countries for ten years (2006–2015). The sample includes developed and

developing countries. The paucity of data influences the period of the study.

This study contributes to research in two crucial respects. Firstly, it highlights that

the difference between any two economies goes beyond the differences in the quality of

their institutions. Secondly, a country being an oil- or a non-oil-producing one explains

the difference in how financial structure contributes to economic growth and stability.

The World Bank and IMF financial reforms in the developing countries erroneously

prioritised the development of the capital market over banks. We encourage a context-

specific policy design as one-size-fits-all policy recommendation is limited in its results.

Additionally, we argue that the current indices of institutions do not capture some

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44 Oro Ufuo Oro and Akpan H. Ekpo