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Trade liberalization and the politics of financial development

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  • Braun, Matias
  • Raddatz, Claudio

Abstract

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 political equilibrium level of financial system development. This may be perturbed by the effect of trade liberalization in the strength of each group. Using a sample of 41 trade liberalizers the authors conduct an event study and show that the change in the strength of promoters vis-a-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 induces 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.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3517.

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Date of creation: 01 Feb 2005
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Handle: RePEc:wbk:wbrwps:3517

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Keywords: Payment Systems&Infrastructure; Health Economics&Finance; Labor Policies; Economic Theory&Research; Environmental Economics&Policies; Economic Theory&Research; Environmental Economics&Policies; TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT; Achieving Shared Growth; Macroeconomic Management;

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Citations

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Cited by:
  1. Efraim Benmelech & Tobias J. Moskowitz, 2010. "The Political Economy of Financial Regulation: Evidence from U.S. State Usury Laws in the 19th Century," Journal of Finance, American Finance Association, vol. 65(3), pages 1029-1073, 06.
  2. Kalina Manova, 2008. "Credit Constraints, Heterogeneous Firms, and International Trade," NBER Working Papers 14531, National Bureau of Economic Research, Inc.
  3. repec:dgr:uvatin:2007006 is not listed on IDEAS
  4. Kim, Dong-Hyeon & Lin, Shu-Chin & Suen, Yu-Bo, 2010. "Dynamic effects of trade openness on financial development," Economic Modelling, Elsevier, vol. 27(1), pages 254-261, January.
  5. Augusto de la Torre & Sergio L. Schmukler, 2007. "Emerging Capital Markets and Globalization : The Latin American Experience," World Bank Publications, The World Bank, number 7187.
  6. Eduardo Siandra, 2005. "Uruguay Capital Market: Law-in-the-books or Law-in-action?," Documentos de Trabajo (working papers) 0205, Department of Economics - dECON.
  7. Alexander Aganin & Paolo Volpin, 2005. "The History of Corporate Ownership in Italy," NBER Chapters, in: A History of Corporate Governance around the World: Family Business Groups to Professional Managers, pages 325-366 National Bureau of Economic Research, Inc.
  8. Do, Quy-Toan & Levchenko, Andrei A., 2006. "Comparative advantage, demand for external finance, and financial development," Policy Research Working Paper Series 3889, The World Bank.
  9. Marco Pagano & Paolo Volpin, 2005. "Shareholder Protection, Stock Market Development, and Politics," CSEF Working Papers, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy 149, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  10. Becker, Bo, 2006. "City Size and Financial Development," SIFR Research Report Series, Institute for Financial Research 46, Institute for Financial Research.
  11. Manova, Kalina, 2008. "Credit constraints, equity market liberalizations and international trade," Journal of International Economics, Elsevier, vol. 76(1), pages 33-47, September.
  12. Stijn Claessens & Erik Feijen, 2006. "Financial Sector Development and the Millennium Development Goals," World Bank Publications, The World Bank, number 7145.
  13. Julian di Giovanni & Andrei A. Levchenko, 2006. "Openness, Volatility and the Risk Content of Exports," 2006 Meeting Papers, Society for Economic Dynamics 86, Society for Economic Dynamics.
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