A study by Professor Aliya Isiksal from World Peace University in Northern Cyprus looked into the impact of natural resource (NR) wealth on the financial expansion of resource-rich Central Asia. This article summarizes the findings of the study.
Availability of NR can be either a blessing or a curse for a country’s economic development. The “resource curse” is a phenomenon when a state with abundant NR is less developed economically compared to a state with little or no NR. In general, efficient natural capital utilization and strong financial systems can help to mitigate the effects and avoid the curse. However, in countries with weak institutions, resource abundance can further consolidate authoritarian institutions, with revenues from NR exports used to protect these groups.
Each of the Central Asian countries has one or several minerals or fossil fuels. Turkmenistan has oil, natural gas, sulfur, lead, and iodine reserves. In 1996-2020, the share of natural resources in Turkmenistan’s GDP was consistently the highest in Central Asia with as high as 80% in 2000 and around 40% as of 2020. Turkmenistan’s financial expansion index (used to assess the development of banking services, stock markets, financial inclusion, regulatory environment, etc.) has been one of the worst in the region (see figure below).
Figure 1. NR rents and financial expansion index. Source: Isiksal, A. (2023).
Findings
- The study found that economic expansion has a positive effect on financial expansion. This happens because increased economic activity increases the demand for financial services, which stimulates financial growth. The demand for financial services such as debt financing can increase the number of companies, which increases employment, exports, and financial services demand, thus leading to financial expansion.
- Institutional quality has a positive impact on economic growth by decreasing corruption, imposing contracts, ensuring political stability, and enhancing democracy. Institutional quality is essential for efficient exploitation of natural resources and further economic growth.
- Human development has a positive impact on financial expansion. Education, long life, high living standards are important for financial expansion. Educated and talented adults in Central Asia can facilitate financial expansion of their economies and turn a “resource curse” into a “resource blessing”.
- The study found that a relationship between NR rents and financial expansion has an inverted U-shape. This means that NR has a positive impact only when NR rents are moderate. Too little or too excessive revenues can turn these resources into a “resource curse”. In the case of Central Asia, there is no financial expansion, and the region is currently trapped in a “resource curse”. The economies are heavily dominated by natural resource extraction and the private sector is very weak.
Actions to take
Governments of Central Asian countries should take the following measures:
- Income from natural resource exports should be invested effectively and financial services diversified.
- The quality and effectiveness of financial institutions should be enhanced.
- Governments should increase the quality of their institutions and invest into human development.
- Financial education and literacy programs should be provided.
- Stable and effective institutions are needed to transition from a natural resource-dependent economy to a more expansive economy with a larger role of the private sector.
- Green incentives and international collaborations must be prioritized.
