Asymmetric effects of financial development on South–South and South–North trade: Panel data evidence from emerging markets

Abstract

Using bilateral trade data in total and technology-and-skill-intensive manufactured goods for 28 developing countries that account for 82% of all developing country manufactures exports between 1978 and 2005, this paper explores the effects of financial development on the pattern of specialization in South-South and South-North trade. The empirical results using dynamic panel regressions and comprehensive sensitivity tests suggest that financial development in the South has an economically and statistically significant positive effect on the share of total and technology-andskill-intensive manufactures exports in GDP, and total exports in South-South trade. In contrast, no such significant or robust effect of financial development is found in South-North trade. Overall, the positive effect of financial development is found to be asymmetric favoring South-South significantly more than South-North trade. In addition, financial development is found to be increasing technologyand-skill-intensive manufactured goods exports significantly more than total manufactured or merchandise goods exports. JEL Classification Codes: F14; F15; G10; O16; O54

South–south and North–south Economic Exchanges: Does It Matter Who Is Exchanging What and With Whom?

“…Kletzer and Bardhan (1987), Rajan and Zingales (1998), Demirguc-Kunt and Maksimovic (1998), Beck (2002), Svaleryd and Vlachos (2005), and Hur et al (2006) argue that credit-market imperfections cause differential comparative costs even with identical technologies and endowments and therefore industries that are more dependent on external finance such as those in capital intensive sectors grow faster in countries with better developed financial systems. In an extension of this work, Demir and Dahi (2011) argue and provide empirical support to the hypothesis that the comparative disadvantage of the South against the North in financial development can be alleviated in South-South trade where such asymmetries are smaller. As a result, a financially underdeveloped Southern country can have a better chance of exporting higher skill-and-technology-intensive products that are more reliant on external finance to other Southern countries.…”

“…Recent empirical work supports Linder's theses showing that the level of institutional and cultural similarity as well as closeness in incomes, endowments, technological, and preference structures between countries boost bilateral trade as well as the potential for economic convergence and spillovers through economic exchanges (Hallak, 2006(Hallak, , 2010Demir and Dahi, 2011;Bergstrand and Egger, 2013;Demir, 2013, 2016;Regolo, 2013;Bahar et al, 2014;Fajgelbaum et al, 2015;Cheong et al, 2015;Demir, 2016;Demir and Hu, 2016). Regolo (2013), for example, finds that endowment similarity between country pairs stimulates greater export diversification.…”

Examining the Relationship between Financial Development and International Trade in Croatia

“…Furthermore, according to the results of their research, an export from developing countries is more affected by financial development than an export from developed countries. Demir and Dahi (2011) indicate that a well-developed financial sector has positive impacts on exports with higher value added and on exports of manufactured goods that depend on external finance. Awojobi (2013) examined the relationship in Greece and found unidirectional causality from trade openness to financial development.…”

Do South–South preferential trade agreements undermine the prospects for multilateral free trade?

“… As noted in Demir and Dahi (), South–South trade has become a substantial force in world trade. Between 1978 and 2005, the share of the South in world manufactures exports increased from 5% to 32%.…”

“…2 See Das and Ghosh (2006), Goyal and Joshi (2006), Furusawa and Konishi (2007), Yildiz (2010, 2011) and Saggi et al (2013) for a detailed discussion. 3 As noted in Demir and Dahi (2011), South-South trade has become a substantial force in world trade. Between 1978 and2005, the share of the South in world manufactures exports increased from 5% to 32%.…”