Comparative advantage and pathways to financial development: evidence from Japan’s silk-reeling industry

Mathias Hoffmann and Toshihiro Okubo

No 387, ECON - Working Papers from Department of Economics - University of Zurich

Abstract: We exploit the natural experiment of Japan’s opening to international trade to examine how comparative advantage can shape a country’s long-run path towards financial development. In the late 19th century, many of Japan’s prefectures had a natural comparative advantage in silk reeling. Producing silk for export required access to finance. At the same time, for technological reasons, borrower-quality in the silk reeling industry was notoriously hard to assess. Silk exporters overcame these frictions by forming local cooperative banks. We show that in the ancient silk prefectures, local cooperative banks continued to dominate local banking markets for over a century while bigger, country-wide banks came to dominate in other regions. By the late 20th century, the silk prefectures are indistinguishable from other regions in terms of their general level of financial development. However, our results suggest that they were effectively less financially integrated with the rest of the country. Hence, comparative advantage in silk favored the emergence of a banking-system dominated by small relationship lenders. But due to the local nature of these lenders, it also caused long-term geographical segmentation in banking markets.

Keywords: Comparative advantage; financial development; financial integration; Japan; banking history; trade credit; export finance; silk industry; relationship lending (search for similar items in EconPapers)
JEL-codes: F15 F30 F40 G01 N15 N25 O16 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-ban, nep-fdg, nep-his and nep-int
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Working Paper: Comparative advantage and pathways to financial development: evidence from Japan’s silk-reeling industry (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zur:econwp:387

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