Financial Development and International Trade: Is There a Link?

41 Pages Posted: 20 Apr 2016

See all articles by Thorsten Beck

Thorsten Beck

City University London - Sir John Cass Business School; Tilburg University - European Banking Center, CentER

Date Written: May 2001

Abstract

Economies with better developed financial sectors have a comparative advantage in manufacturing industries. A two-sector model shows the sector with large scale economies profiting more than the other from a well-developed financial sector. In countries with higher levels of financial development, manufactured exports represent a higher share of GDP and of merchandise exports - and those countries have a higher trade balance in manufactured goods.

Beck explores a possible link between financial development and trade in manufactures. His theoretical model focuses on the role of financial intermediaries in facilitating large-scale, high-return projects. Results show that economies with better developed financial sectors have a comparative advantage in manufacturing industries.

He provides evidence for this hypothesis, first proposed by Kletzer and Bardhan (1987), using a 30-year panel of data for 65 countries. Controlling for country-specific effects and possible reverse causality, he shows that financial development exerts a large causal impact on the level of both exports and the trade balance of manufactured goods.

This paper - a product of Finance, Development Research Group - is part of a larger effort in the group to understand the link between financial development and economic growth. The author may be contacted at tbeck@worldbank.org.

Suggested Citation

Beck, Thorsten, Financial Development and International Trade: Is There a Link? (May 2001). World Bank Policy Research Working Paper No. 2608. Available at SSRN: https://ssrn.com/abstract=632677

Thorsten Beck (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Tilburg University - European Banking Center, CentER ( email )

PO Box 90153
Tilburg, 5000 LE
Netherlands

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