Resource rents and productive investment in Africa: How financial institutions condition the resource curse

Whether natural resource wealth finances productive investment or feeds the resource curse may depend on the strength of the financial system. This study tests that proposition for 34 African economies over 1996-2024, estimating an augmented investment function in which gross fixed capital formation depends on resource rents, financial-institution development, and their interaction, with standard macroeconomic controls. Estimation uses fixed effects with Driscoll-Kraay standard errors, robust to heteroskedasticity, serial correlation, and cross-sectional dependence. Resource rents exert a negative direct effect on productive investment, consistent with the resource curse, but this effect is conditional on financial development: the interaction between resource rents and financial institutions is positive and significant, and the net marginal effect turns positive once financial development surpasses an estimated threshold of about 0.18 on the financial-institution index. Below this threshold, rents are associated with weaker capital formation. Decomposing the index shows that the moderating effect operates mainly through financial depth and access rather than efficiency, and the results are robust to an alternative investment measure and to random-effects estimation. The findings identify financial-sector development, particularly its depth and inclusiveness, as a key channel through which resource-rich African economies can convert resource wealth into long-term productive capacity, and suggest that building financial depth should precede or accompany efforts to scale resource-financed investment.