Threshold Effects of Trade Openness on Financial Development: The Case of the Asean Region

Abstract

This study examines the effect of trade openness on financial development in eight representative ASEAN countries, including Singapore. Low levels of exports and imports positively influence the depth, accessibility, and efficiency of financial development. Beyond a certain threshold, the benefits of trade openness for financial development begin to diminish. This threshold is lower than the mean value of trade openness, indicating that the ASEAN market possesses high trade flows but its financial sector remains of low quality. In the ASEAN region, the current financial development index is suboptimal compared to trade openness. Prioritizing improvements in financial development quality is thus crucial for mitigating the potential risks associated with excessive trade openness.