Research On The Interaction Between Trade Openness And Financial Development

Since the 90's of 20th century, the world economy shows the development trend of globalization, in which international trade and financial development have got mutual contact and penetration. They become the two major areas of concern, so a growing number of scholars have shifted their perspective from the relationship between trade or finance and economic growth to the intrinsic link between the trade and finance. Existed researches have mostly focused on developed countries, and regarded the financial development is the core aspect of overall economic activity. It may have a positive impact on the scale and structure of trade openness, thus, it is suggested that not only developed countries should continue to deepen financial development as a promotional power for international trade and competitiveness, developing countries should follow the developed countries, by the implementation of "Financial priority" development strategy. However, the fact that trade openness and financial development in those countries at different income levels show the different interactions has not been taken into the consideration, and its policy recommendations for developing countries are also questionable. Therefore, the different interactions between trade openness and financial development in developing countries and developed countries, is the core issue of this paper.Thesis constitutes of 7 chapters, containing the theoretical and empirical study of interaction between trade openness and financial development at different income levels countries, especially the mechanism of trade liberalization influences the financial development in developing countries. Chapter 1 explains the background and significance of topics, the core concept, research contents and chapter arrangement. Chapter 2 summarizes the related literature of international trade and financial development. Chapter 3, following the evolution of the economic globalization, analyses different characteristics of the development phasing of trade openness and financial development according to different income levels. Chapter 4 carries out a multi-angle analysis of interactive mechanism between trade liberalization and financial development. Trade openness and financial development in developing countries show a trade-led "demand following" interaction while finance-driven "supply leading" interactive relationship being found in developed countries. Chapter 5, 76 countries of trade, finance data over past 30 years is analyzed, and further reveals the interaction in developed and developing countries have shown different characteristics and trends. Chapter 6, looking back at China's reform and opening up, it is found that "demand following" as the dominant interaction in China at this stage as well based on the empirical testing. Chapter 7 combined with the current financial crisis, re-considers a variety the interaction to explore the coordination of Chinese trade openness and financial development in the road to sustainable development.At the basis of previous studies, this paper mainly makes innovation in the following five aspects:(1) Putting forward theoretical hypothesis from Patrick (1966): trade openness and financial development in developing countries based mainly on a trade-led "demand following", while the interaction in developed countries shows "supply leading". Through the interactive mechanism such as economies of scale, risk diversification, human capital and comparative advantage, financial development in developing countries, including the size and level of financial sector, influenced by trade liberalization.(2) Using SYS-GMM, JJ Cointegration Test, ARDL Cointegration Test, Granger causality and the Geweke decomposition test methods, a comprehensive study of interactive and interdependent relationship in trade openness and financial development of different income levels countries. The results show the existence of strong correlation between trade openness and financial development in developing countries, both the short-term and long-term. And the positive effect trade openness has on financial development confirms the theoretical hypothesis "demand following". In addition, significant two-way causal relationship between trade openness and financial development also exists in China.(3) The long time series of cross-section and panel data empirical studies involving a total of 76 country sample data of 1960-2006, which includes 49 developing countries, 27 developed countries classified research. The use of "principal component analysis" (principal components analysis) method to transform a few commonly used indicators into 5 synthesis unit. The composite indicators, as an exploratory statistical analysis methods are effective in reducing the data measurement errors or outliers the negative effects.(4) Combined with the current global financial crisis, and the results of theoretical and empirical work, this paper argues that previous studies on international trade and financial development put too much emphasis of the beneficial effects of unilateral. Developing countries should not be always emphasizing "Financial priority" development strategy. By stressing the service function of the financial system and developing it based on the needs of the real economy, developing countries should pay more attention to the coordination between their developments pace.