IDEAS home Printed from https://ideas.repec.org/p/eab/tradew/22790.html
   My bibliography  Save this paper

Are Trade Openness and Financial Development Complementary?

Author

Listed:
  • Ram Upendra Das

    (Research and Information System for Developing Countries)

  • Meenakshi Rishi

Abstract

Trade liberalization and financial deepening have assumed greater significance for a countrys economic growth performance in recent times. Several theoretical and empirical studies have devoted considerable attention to the association between economic performance and trade liberalization as well as to the connections between financial market development and economic growth. However, literature is sparse in terms of the direct linkages between trade openness and financial sector development. This paper finds that trade openness and financial development are complementary and econometrically tests this hypothesis for India over a period of time. However, two important policy implications of the analysis presented in this paper deserve attention. First, although financial deepening has emerged as an important aspect of the economic growth strategy in the Indian context, since the sources of such a deepening may be both domestic as well as external; the importance of a judicious policy mix cannot be neglected, especially in the wake of the current global financial meltdown. Second, as documented in the econometric analysis, the complementarities between trade openness and financial deepening appear to be less pronounced. However, this should be interpreted with some caution. While the Indian data suggest that trade and financial liberalization policies may possibly be pursued independent of each other, this by no means suggests that there are no reinforcing linkages between the two.

Suggested Citation

  • Ram Upendra Das & Meenakshi Rishi, 2010. "Are Trade Openness and Financial Development Complementary?," Trade Working Papers 22790, East Asian Bureau of Economic Research.
    • Handle: RePEc:eab:tradew:22790
    as

    Download full text from publisher

    File URL: http://www.eaber.org/node/22790
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jith Jayaratne & Philip E. Strahan, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(3), pages 639-670.
    2. Harrison, Ann, 1996. "Openness and growth: A time-series, cross-country analysis for developing countries," Journal of Development Economics, Elsevier, vol. 48(2), pages 419-447, March.
    3. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    4. Lane, Philip R, 2001. "International Trade and Economic Convergence: The Credit Channel," Oxford Economic Papers, Oxford University Press, vol. 53(2), pages 221-240, April.
    5. Stiglitz, Joseph & Ocampo, Jose Antonio & Spiegel, Shari & Ffrench-Davis, Ricardo & Nayyar, Deepak, 2006. "Stability with Growth: Macroeconomics, Liberalization and Development," OUP Catalogue, Oxford University Press, number 9780199288144.
    6. Fisher, Eric O'N., 1995. "Growth, trade, and international transfers," Journal of International Economics, Elsevier, vol. 39(1-2), pages 143-158, August.
    7. Bose, Niloy & Cothren, Richard, 1996. "Equilibrium loan contracts and endogenous growth in the presence of asymmetric information," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 363-376, October.
    8. Roubini, N. & Sala-I-Martin, X., 1991. "Financial development , the Trade Regime and Economic Growth," Papers 646, Yale - Economic Growth Center.
    9. Kristin J. Forbes & Menzie D. Chinn, 2004. "A Decomposition of Global Linkages in Financial Markets Over Time," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 705-722, August.
    10. Ben-David, Dan, 2001. "Trade liberalization and income convergence: a comment," Journal of International Economics, Elsevier, vol. 55(1), pages 229-234, October.
    11. Boyd, John H. & Smith, Bruce D., 1997. "Capital Market Imperfections, International Credit Markets, and Nonconvergence," Journal of Economic Theory, Elsevier, vol. 73(2), pages 335-364, April.
    12. Adam, Christopher, 1995. "Fiscal adjustment, financial liberalization, and the dynamics of inflation: Some evidence from Zambia," World Development, Elsevier, vol. 23(5), pages 735-750, May.
    13. Luintel, Kul B. & Khan, Mosahid, 1999. "A quantitative reassessment of the finance-growth nexus: evidence from a multivariate VAR," Journal of Development Economics, Elsevier, vol. 60(2), pages 381-405, December.
    14. Sebastian Edwards, 1990. "The Sequencing of Economic Reform: Analytical Issues and Lessons from Latin American Experiences," The World Economy, Wiley Blackwell, vol. 13(1), pages 1-14, March.
    15. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, December.
    16. Mukul Majumdar & Tapan Mitra, 1995. "Patterns Of Trade And Growth Under Increasing Returns: Escape From The Poverty Trap," The Japanese Economic Review, Japanese Economic Association, vol. 46(3), pages 207-223, September.
    17. Falvey, Rod & Kim, Cha Dong, 1992. "Timing and Sequencing Issues in Trade Liberalisation," Economic Journal, Royal Economic Society, vol. 102(413), pages 908-924, July.
    18. Dan Ben-David, 1993. "Equalizing Exchange: Trade Liberalization and Income Convergence," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(3), pages 653-679.
    19. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Nahed Zghidi & Zouheir Abida, 2014. "Financial Development, Trade Openness and Economic Growth in North African Countries," Romanian Economic Journal, Department of International Business and Economics from the Academy of Economic Studies Bucharest, vol. 17(53), pages 91-120, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sergio Ginebri & Giacomo Pietroli & Laura Sabani, 2001. "Financial Deepening, Trade Openness and Growth:a Multivariate Cointegrated Analysis of the Complementary Effects," Working Papers 62, Sapienza University of Rome, CIDEI.
    2. Samargandi, Nahla & Fidrmuc, Jan & Ghosh, Sugata, 2015. "Is the Relationship Between Financial Development and Economic Growth Monotonic? Evidence from a Sample of Middle-Income Countries," World Development, Elsevier, vol. 68(C), pages 66-81.
    3. Capolupo, Rosa, 2009. "The New Growth Theories and Their Empirics after Twenty Years," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-72.
    4. Long, N.V. & Wong, K.Y., 1996. "Endogenous Growth and International Trade: A Survey," Working Papers 96-07, University of Washington, Department of Economics.
    5. Lee, Jong-Wha, 1995. "Capital goods imports and long-run growth," Journal of Development Economics, Elsevier, vol. 48(1), pages 91-110, October.
    6. Tarlok Singh, 2010. "Does International Trade Cause Economic Growth? A Survey," The World Economy, Wiley Blackwell, vol. 33(11), pages 1517-1564, November.
    7. TRABELSI, Mohammed, 2002. "Finance and Growth : Empirical Evidence from Developing Countries, 1960-1990," Cahiers de recherche 2002-13, Universite de Montreal, Departement de sciences economiques.
    8. Gries, Thomas & Kraft, Manfred & Meierrieks, Daniel, 2009. "Linkages Between Financial Deepening, Trade Openness, and Economic Development: Causality Evidence from Sub-Saharan Africa," World Development, Elsevier, vol. 37(12), pages 1849-1860, December.
    9. Laurent Cavenaile & Christian Gengenbach & Franz Palm, 2014. "Stock Markets, Banks and Long Run Economic Growth: A Panel Cointegration-Based Analysis," De Economist, Springer, vol. 162(1), pages 19-40, March.
    10. Herrerias, M.J. & Orts, Vicente, 2013. "Capital goods imports and long-run growth: Is the Chinese experience relevant to developing countries?," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 781-797.
    11. Leonid Azarnert, 2014. "Agricultural Exports, Tariffs and Growth," Open Economies Review, Springer, vol. 25(4), pages 797-807, September.
    12. James B. Ang, 2008. "A Survey Of Recent Developments In The Literature Of Finance And Growth," Journal of Economic Surveys, Wiley Blackwell, vol. 22(3), pages 536-576, July.
    13. Durlauf, Steven N. & Quah, Danny T., 1999. "The new empirics of economic growth," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 4, pages 235-308, Elsevier.
    14. Ben-David, Dan & Loewy, Michael B, 1995. "Free Trade and Long-Run Growth," CEPR Discussion Papers 1183, C.E.P.R. Discussion Papers.
    15. Polat, Ali & Shahbaz, Muhammad & Ur Rehman, Ijaz & Satti, Saqlain Latif, 2013. "Revisiting Linkages between Financial Development, Trade Openness and Economic Growth in South Africa: Fresh Evidence from Combined Cointegration Test," MPRA Paper 51724, University Library of Munich, Germany, revised 25 Nov 2013.
    16. Celal Kucuker, 2003. "Türkiye Ýktisat Kongresi Büyüme Stratejileri Çalýþma Grubu," Working Papers 2003/5, Turkish Economic Association.
    17. Mohammad Sharif Karimi & Andrzej Cieslik, 2017. "Foreign Knowledge Spillovers and Total Factor Productivity Growth: Evidence from Four ASEAN Countries," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 21(2), pages 267-299, Spring.
    18. Taylor, Alan M., 1999. "Sources of convergence in the late nineteenth century," European Economic Review, Elsevier, vol. 43(9), pages 1621-1645, October.
    19. Rosa Capolupo, 2005. "THE NEW GROWTH THEORIES AND THEIR EMPIRICS, Discussion Paper in Economics, University of Glasgow, N. 2005-04 (http://www.gla.ac.uk/Acad/Economics," GE, Growth, Math methods 0506003, University Library of Munich, Germany.
    20. Levine, Ross, 2005. "Finance and Growth: Theory and Evidence," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 12, pages 865-934, Elsevier.

    More about this item

    Keywords

    trade openess; financial liberalisation; India;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eab:tradew:22790. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Shiro Armstrong (email available below). General contact details of provider: https://edirc.repec.org/data/eaberau.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.