The Interaction of Oil Revenue with the Governance Index on the Formation of Physical Capital

Increasing investment and achieving higher economic growth rates is the primary goal of the economic systems. Potentially, the natural resources, especially oil, can be very beneficial in economic development and creating resources for investment. But, on the other hand, the impact of natural resources abundance on the investment depends on the specific institutional and political characteristics of each country. Therefore, the present study addresses the interaction of the Governance Index with the abundance of natural resources on the formation of physical capital in the net fuel export countries during the period of 2002-2016 using PMG model. The results of the study show that the interaction of oil revenue with the indicators of the right to comment and accountability, political stability, government effectiveness, rule of law, quality of laws and regulations and control of corruption on the formation of physical capital has a positive and significant effect in long-term and insignificant in the short-term. Also, based on the results of the long-term estimation, gross domestic product per capita (GDP) and degree of economic freedom have a positive and significant effect and the effect of real interest rates on the formation of physical capital is negative and significant. In the short-term, in one hand real interest rate found to be ineffective and on the other hand GDP and degree of economic freedom found to have a positive and significant impact on the capital formation.