Trade and Financial Development

Trade and Financial Development

The differences in financial development between advanced and developing countries are pronounced. It has been observed, both theoretically and empirically, that these differences in countries' financial systems are a source of comparative adv...

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Bibliographic Details
Main Authors:	Do, Quy-Toan, Levchenko, Andrei A.
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, D.C. 2013
Subjects:	TRADE INTERNATIONAL TRADE FINANCIAL DEVELOPMENT ENDOGENOUS DEVELOPMENT NEW INTERNATIONAL ECONOMIC ORDER FINANCIAL SYSTEMS FINANCIAL INFRASTRUCTURE ORGANIZATION FOR ECONOMIC COOPERATION & DEVELOPMENT ENTREPRENEURS BUSINESS ENTERPRISES AGGREGATE OUTPUT AGGREGATE SUPPLY AGGREGATE TRADE ARBITRAGE CLOSED ECONOMY COMPARATIVE ADVANTAGE COUNTRY CHARACTERISTICS COUNTRY DUMMIES CREDIT MARKET DATA SET DEBT DEVELOPED COUNTRIES DEVELOPING COUNTRIES DIFFERENTIAL IMPACT ECONOMIC CONDITIONS EMERGING MARKETS EMPIRICAL EVIDENCE EMPIRICAL SUPPORT EMPIRICAL WORK EQUILIBRIUM EQUILIBRIUM VALUE EXPORTS EXTERNAL FINANCE EXTERNAL FINANCING EXTERNALITIES EXTERNALITY FINAL GOODS FINANCIAL DEPTH FINANCIAL MARKETS FINANCIAL SECTOR FINANCIAL SYSTEM GDP GRAVITY MODEL HUMAN CAPITAL IMPACT OF TRADE IMPORTS INCOME INCOME DISTRIBUTION INCOME VARIABILITY INCREASING GROWTH INCREASING RETURNS INCREASING RETURNS TO SCALE INSURANCE INTEREST RATE INTEREST RATES INTERMEDIATE GOODS INVESTOR PROTECTION LEGAL SYSTEM LIQUID LIABILITIES LIQUIDITY LONG-RUN GROWTH M2 MARKET CAPITALIZATION MARKET SIZE MEASURE OF TRADE NEGATIVE EFFECT NON-OECD COUNTRIES OPPORTUNITY COST OUTPUT VOLATILITY PER CAPITA INCOME PER CAPITA INCOMES POOR COUNTRIES POOR COUNTRY POSITIVE EFFECT POSITIVE EXTERNALITY PRODUCTION FUNCTION PRODUCTIVITY PROFIT MAXIMIZATION PROPERTY RIGHTS REAL OUTPUT RESEARCH AGENDA SIGNIFICANCE LEVEL SIGNIFICANT DIFFERENCES SPECIALIZATION TOTAL OUTPUT TRADE OPENING TRADE OPENNESS TRADE PATTERNS UNIT OF LABOR WEALTH
Online Access:	http://documents.worldbank.org/curated/en/2004/06/4964018/trade-financial-development http://hdl.handle.net/10986/14062

Description
Summary:	The differences in financial development between advanced and developing countries are pronounced. It has been observed, both theoretically and empirically, that these differences in countries' financial systems are a source of comparative advantage and trade. This paper points out that to the extent a country's financial development is endogenous, it will in turn be influenced by trade. The paper builds a model in which a country's financial development is an equilibrium outcome of the economy's productive structure: in countries with large financially intensive sectors financial systems are more developed. When a wealthy and a poor country open to trade, the financially dependent sectors grow in the wealthy country, and so does the financial system. By contrast, as the financially intensive sectors shrink in the poor country, demand for external finance decreases and the domestic financial system deteriorates. This paper describes the authors' test model using data on financial development for a sample of 77 countries. The authors find that the main predictions of the model are borne out in the data: trade openness is associated with faster financial development in wealthier countries, and with slower financial development in poorer ones.

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