Trade liberalization and the politics of financial development
Matias Braun and
No 04-3, Working Papers from Federal Reserve Bank of Boston
A well-developed financial system enhances competition in the industrial sector by allowing easier entry. The impact varies across industries, however. For some, small changes in financial development quickly induce entry and dissipate incumbents? rents, generating strong incentives to oppose improvement of the financial system. In other sectors incumbents may even benefit from increased availability of external funds. The relative strength of promoters and opponents determines the equilibrium level of financial system. This may be perturbed by the effect of trade liberalization on the strength of each group. Using a sample of 41 trade liberalizers, we conduct an event study and show that the change in the strength of promoters vis--vis opponents is a very good predictor of subsequent financial development. The result is not driven by changes in demand for external funds or by the success of the trade policy. The relationship is mediated by policy reforms, the kind that induce competition in the financial sector, in particular. Real effects follow not so much from capital deepening but mainly through improved allocation. The effect is stronger in countries with high levels of governance, suggesting that incumbents resort to this costly but more subtle way of restricting entry where it is difficult to obtain more blatant forms of anti-competitive measures from politicians.
Keywords: International trade; Financial modernization (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent, nep-int, nep-pol and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10) Track citations by RSS feed
Downloads: (external link)
Working Paper: Trade liberalization and the politics of financial development (2005)
Working Paper: Trade Liberalization and the Politics of Financial Development (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbwp:04-3
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by ().