Can financial development help alleviate the resource curse? Evidence from 286 cities in China

The resource curse adversely affects the sustainability of economic growth. A sound financial system helps improve capital rational allocation, which may be an effective path for alleviating the resource curse. Thus, from both theoretical and empirical perspectives, using Chinese 286 cities panel data from 2003 to 2018, this study examines the effects and potential mechanisms of financial development on the resource curse. For this purpose, a two–sector endogenous growth model is first constructed for the theoretical analysis, while panel vector autoregression, Hansen's threshold regression, and dynamic panel models are used for further empirical investigation. The results show that the resource curse is widespread across Chinese cities. Financial development can alleviate such a curse when it passes the threshold value; however, most cities have not passed this value yet. Foreign direct investment, education, and technology have a positive mediating effect on financial development and its impact on the resource curse.