On the Hidden Links Between Financial and Trade Opening
AbstractThis paper investigates the association between commercial and financial openness of developing countries. The data suggest that, controlling for GDP/Capita changes and allowing for country specific effects, increase in a developing country's (exports + imports)/GDP is associated with a highly significant increase in financial openness [measured by (gross private capital inflows + gross private outflows)/GDP]. I outline a model accounting for some of the endogenous linkages between financial and trade openness. I show that developing countries, characterized by high costs of tax collection and enforcement, opt to use financial repression as an implicit tax on savings. The resultant financial repression provides the impetus for capital flight. A frequent mechanism facilitating illicit capital movements is to over invoice imports and under invoice exports with the scale of these activities being proportional to the commercial openness of the economy. This linkage is subject to costly control by the fiscal authorities, where curtailing illicit capital flows requires spending resources on monitoring and enforcement of existing capital controls. The effectiveness of capital controls would increase with the resources spent on monitoring and enforcement per one dollar of international trade. Under these circumstances, greater commercial openness increases the effective cost of enforcing financial repression, thereby reducing the usefulness of financial repression as an implicit tax. This in turn implies that financial reforms tend to be the by-product of greater trade integration.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9906.
Date of creation: Aug 2003
Date of revision:
Note: IFM ITI
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Other versions of this item:
- Aizenman, Joshua, 2008. "On the hidden links between financial and trade opening," Journal of International Money and Finance, Elsevier, vol. 27(3), pages 372-386, April.
- F15 - International Economics - - Trade - - - Economic Integration
- F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-08-17 (All new papers)
- NEP-FIN-2003-08-17 (Finance)
- NEP-IFN-2003-08-17 (International Finance)
- NEP-MFD-2003-08-17 (Microfinance)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Eggerstedt, Harald & Brideau Hall, Rebecca & van Wijnbergen, Sweder, 1993.
"Measuring capital flight : a case study of Mexico,"
Policy Research Working Paper Series
1121, The World Bank.
- Barro, Robert J, 1979.
"On the Determination of the Public Debt,"
Journal of Political Economy,
University of Chicago Press, vol. 87(5), pages 940-71, October.
- Joshua Aizenman, 2002.
"Financial Opening: Evidence and Policy Options,"
NBER Working Papers
8900, National Bureau of Economic Research, Inc.
- Aizenman, Joshua & Guidotti, Pablo E., 1994.
"Capital controls, collection costs and domestic public debt,"
Journal of International Money and Finance,
Elsevier, vol. 13(1), pages 41-54, February.
- Joshua Aizenman & Pablo E. Guidotti, 1990. "Capital Controls, Collection Costs, and Domestic Public Debt," NBER Working Papers 3443, National Bureau of Economic Research, Inc.
- Michael P. Dooley, 1996. "A Survey of Literature on Controls over International Capital Transactions," IMF Staff Papers, Palgrave Macmillan, vol. 43(4), pages 639-687, December.
- Arteta, Carlos & Eichengreen, Barry & Wyplosz, Charles, 2001.
"When Does Capital Account Liberalization Help More Than it Hurts?,"
CEPR Discussion Papers
2910, C.E.P.R. Discussion Papers.
- Carlos Arteta & Barry Eichengreen & Charles Wyplosz, 2001. "When Does Capital Account Liberalization Help More than It Hurts?," NBER Working Papers 8414, National Bureau of Economic Research, Inc.
- Andrew K. Rose & Mark M. Spiegel, 2002.
"A gravity model of sovereign lending: trade, default and credit,"
Working Papers in Applied Economic Theory
2002-09, Federal Reserve Bank of San Francisco.
- Andrew K. Rose & Mark M. Spiegel, 2004. "A Gravity Model of Sovereign Lending: Trade, Default, and Credit," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 50-63, June.
- Andrew K. Rose & Mark M. Spiegel, 2002. "A Gravity Model of Sovereign Lending: Trade, Default and Credit," NBER Working Papers 9285, National Bureau of Economic Research, Inc.
- Joshua Aizenman & Ilan Noy, 2003. "Endogenous Financial Openness: Efficiency and Political Economy Considerations," NBER Working Papers 10144, National Bureau of Economic Research, Inc.
- Graciela L. Kaminsky & Carmen M. Reinhart, 1996.
"The twin crises: the causes of banking and balance-of-payments problems,"
International Finance Discussion Papers
544, Board of Governors of the Federal Reserve System (U.S.).
- Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
- Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
- Simeon Inidayo Ajayi, 1997. "An Analysis of External Debt and Capital Flight in the Severely Indebted Low Income Countries in Sub-Saharan Africa," IMF Working Papers 97/68, International Monetary Fund.
- Renu Kohli & Kenneth Kletzer, 2001. "Financial Repression and Exchange Rate Management in Developing Countries: Theory and Empirical Evidence for India," IMF Working Papers 01/103, International Monetary Fund.
- Martin Feldstein, 2003. "Economic and Financial Crises in Emerging Market Economies," NBER Books, National Bureau of Economic Research, Inc, number feld03-1, July.
- Giovannini, Alberto & de Melo, Martha, 1993. "Government Revenue from Financial Repression," American Economic Review, American Economic Association, vol. 83(4), pages 953-63, September.
- Demirguc-Kent, Asli & Detragiache, Enrica, 1998.
"Financial liberalization and financial fragility,"
Policy Research Working Paper Series
1917, The World Bank.
- Edwards, Sebastian & van Wijnbergen, Sweder, 1986. "The Welfare Effects of Trade and Capital Market Liberalization," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(1), pages 141-48, February.
- Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
- Claessens, Stijn & Naude, David, 1993. "Recent estimates of capital flight," Policy Research Working Paper Series 1186, The World Bank.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading list or among the top items on IDEAS.Access and download statistics
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.