Does trade cause capital to flow? Evidence from historical rainfall

Sebnem Kalemli-Özcan, Nikolsko–Rzhevskyy, Alex and Jun Hee Kwak ()
Authors registered in the RePEc Author Service: Alex Nikolsko-Rzhevskyy

Journal of Development Economics, 2020, vol. 147, issue C

Abstract: We use a historical quasi-experiment to estimate the causal effect of trade on capital flows. We argue that fluctuations in regional rainfall within the Ottoman Empire capture the exogenous variation in exports from the Empire to Germany, France, and the U.K., during the period of 1859–1913. The identification is based on the following historical facts: First, only surplus production was allowed to be exported from the Empire (provisionistic policy). Second, different products grown in different regions were subject to variation in regional rainfall. Third, different bundles of products were exported to Germany, France, and the U.K. by the Empire. Using the export-bundle-weighted regional rainfall as an instrument for Ottoman exports to each country, our instrumental variable regression suggests the following: When a given region of the Empire received more rainfall than others, the resulting surplus production was exported more to countries that historically imported more of those products, and this leads to higher foreign investment by those countries in the Empire. Our findings support theories predicting complementarity between trade and finance, in which causality runs from trade to capital flows.

Keywords: FDI; Exports; Default; Empire; Rainfall (search for similar items in EconPapers)
JEL-codes: F10 F30 F40 N10 N20 N70 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Does Trade Cause Capital to Flow? Evidence from Historical Rainfalls (2011)
Working Paper: Does Trade Cause Capital to Flow? Evidence from Historical Rainfall (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:deveco:v:147:y:2020:i:c:s0304387820301127

DOI: 10.1016/j.jdeveco.2020.102537

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