Financial development and economic growth in an oil-rich economy: The case of Saudi Arabia

Abstract

We investigate the effect of financial development on economic growth in the context of an oil-rich economy. In doing so, we allow for the effect of financial development to be different for the oil and non-oil sectors of the economy in the long-run. Using the Autoregressive Distributed Lag (ARDL) bounds test technique; we find that financial development has a positive impact on the growth of the non-oil sector in Saudi Arabia. In contrast, its impact on total GDP growth is negative but insignificant.

The Impact of Financial Development on Economic Growth in Nigeria: An ARDL Analysis

“…The rate of investment and size of the public sector are all found to be insignificant. [13]) observed for Libya, Angola and Saudi Arabia respectively, confirming the insignificant effect of financial intermediary development on economic growth in oil-dependent economies as documented by Nili and Rastad (2007 [15]), Beck (2011 [16]) and Barajas, et al (2013 [17]). The results therefore highlight the specific feature of oil-exporting economies.…”

“…A 1% increase in oil price increases the growth of the economy by over 0.40% in the long-run. Given that oil price is significantly determined in the international oil market and not by domestic activities and performance (Quixina and Almeida, 2014 [12]; Samargandi et al, 2014 [13]), a fall in crude oil price would adversely affect the performance of the economy. Specifically, a 1% decrease in crude oil price would cause the level of economic growth to decline by over 0.40%.…”

“…The results therefore highlight the specific feature of oil-exporting economies. Economic activities are driven by oil price determined in the international oil market and not by domestic economic activities (Samargandi et al, 2014 [13]); creating economic conditions in oil-dependent economies that adversely affect the ability of financial intermediaries to allocate resources efficiently. Nili and Rastad (2007 [15]) identified these economic conditions to include the general inefficiency of financial institutions, the dominant role of public sector in resource allocation and the weakness of private sector, while Beck (2011 [16]) shows that rent-seeking associated with the high revenue from the oil sector drives resources away from institutions that could encourage economic activities in the private sector to the inefficient public sector.…”

“…However, results of recent time series studies on financial sector development and economic growth nexus in oil-exporting countries suggest weak or even negative relationship (see Cevik and Rahmati, 2013 [11]; Quixina and Almeida, 2014 [12]; Samargandi et al, 2014 [13]; Adeniyi et al, 2015 [14]; Nwani and Bassey Orie, 2016 [15] among others). The argument has been that most oil-exporting countries depend significantly on oil revenue and are unable to develop competitive financial sector that could stimulate economic activities in the private sector.…”

The impact of free cash flow, equity concentration and agency costs on firm’s profitability

“…The agency theory concludes that block holders can mitigate the agency costs by their control on the corporate board and the selection of top management (Brickley et al, 1994;Chen and Yur-Austin, 2007). The Middle East firms are historically characterized by the concentration of family control and they remain less explored compared to the firms in developed stock markets in research areas such as agency costs and equity concentration and their influence on firm's performance (Samargandi et al, 2014).…”