On the Hidden Links Between Financial and Trade Opening

No 9906, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This 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.

JEL-codes: F15 F21 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-fin, nep-ifn and nep-mfd
Note: IFM ITI
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Published as 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.

Downloads: (external link)
http://www.nber.org/papers/w9906.pdf (application/pdf)

Related works:
Journal Article: On the hidden links between financial and trade opening (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:9906

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w9906

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().