Innovation, uncertainty and the curse of financial resources: reassessing fragile economies using a wavelet quantile-based approach

The literature on the financial resource curse (FRC) has yet to reach a clear consensus on whether natural resource wealth supports financial development (FD). While some existing empirical findings suggest that natural resources (NR) weaken financial deepening, others support the resource endowment approach. The primary objective of this study is to retest the FRC hypothesis by taking into account the roles of economic policy uncertainty (EPU) and technological innovation (TEC). Accordingly, the study examines the relationship between NR and FD for the Fragile Five countries, which were characterised by high levels of EPU during the 1991–2021 period, using the wave quantile regression (WQR) method. The analysis was conducted in two stages. First, the FRC hypothesis was tested based on the relationship between NR and FD. Second, the effects of EPU, TEC, economic growth (GDP) and trade openness (TO) on FD were assessed at short, medium and long-term frequencies. The findings indicate that the FRC hypothesis holds true in the fragile five countries over the long term. The results also reveal that the effect of EPU on FD is heterogeneous in the short and medium term, but generally positive in the long term (except in Indonesia); whereas TEC supports FD across all time horizons. These results are further supported by Quantile Regression (QR) and Wavelet Quantile Granger Causality (WQGC) approaches conducted for robustness testing. These findings suggest that NR is not being effectively channelled into the financial system. The study, therefore, argues that institutional and macroeconomic policies that direct NR towards productive financial channels, enhance innovation capacity and reduce policy uncertainty need to be strengthened.