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Export diversification and financial openness

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Abstract

This paper investigates empirically the effect of export diversification (i.e. both export product diversification and services export diversification) on financial openness, using a sample of 119 countries (including both developed and developing countries) over the period 1985–2014. Based on the Blundell and Bond’s two-step system Generalized Method of Moments, the analysis has revealed that both export product diversification and services export diversification influence positively financial openness. However, this outcome hides differentiated effects across countries in the full sample. Especially, countries with a very high real per capita income experience a positive effect of export concentration on financial openness, while for countries with a relatively lower per capita income, it is rather export diversification that drives positively financial openness. Interestingly, the effect of export diversification on financial openness depends on the size of external shocks that affect domestic economies, as well as countries’ economic growth performance. Overall, these findings add to the empirical literature on the effect of international trade on financial openness by showing that both export product diversification and services export diversification matter for financial openness.

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Notes

  1. Studies include, for example, Grilli and Milesi-Ferreti (1995), Gnangnon (2019a, b), Joyce and Noy (2008), Quinn and Inclan (1997), Steinberg et al. (2018), and Vo and Daly (2007).

  2. Studies on this matter include, for example, Anand et al. (2012), Gnangnon (2021a), Gozgor and Can (2016), Haddad et al. (2013), Hausmann et al. (2007), Kramarz et al. (2020), McIntyre (2018), Mishra et al. (2011), Stojkoski et al. (2016), and Vannoorenberghe et al. (2016).

  3. Eichengreen and Gupta (2013) have argued that “traditional services” include trade and transport, tourism, financial services, and insurance. Modern services encompass communications, computer, information, and other related services. Sahoo and Dash (2017) has considered that traditional services covers transport and travel services, while modern services include transportability and tradability, financial services, insurance, business processing, and software services.

  4. Kose et al. (2009) have provided a literature survey on the matter.

  5. For example, Hausmann et al. (2007) have shown that as far as the relationship between export product structure and economic growth is concerned, what matters is the type of countries’ exports, including the sophisticated nature of those exports.

  6. Countries are often confronted with external shocks such as commodity price shocks, export demand fluctuations, sudden surges or reversals of capital flows, natural disasters, and diseases. More than developed countries, developing ones experience a high persistence of shocks (e.g. Aguiar and Gopinath, 2007) and a higher frequency of such shocks (e.g. Álvarez et al., 2021; Dabla-Norris and Gündüz, 2014; Guillaumont, 2009).

  7. See, for example, Haddad et al. (2013), Koren and Tenreyro (2007) and McIntyre (2018).

  8. Macbean and Nguyen (1980) have, nevertheless, provided a theoretical framework, which shows that in practice, commodity concentration might not be the main explanation of export earnings instability in developing countries.

  9. See, for example, Agénor (2003), Fernandez-Arias (1996), Ghosh et al. (2014), Qureshi and Sugawara (2018), and Vo and Daly (2007).

  10. Nevertheless, Grilli and Milesi-Ferreti (1995) have reported no significant effect of capital account liberalization and economic growth.

  11. We have identified 18 countries in the full sample for which the values of the indicator of financial openness do not change at all or change once from one sub-period to another over the full period. The countries excluded are Algeria, Austria, Canada, China, Congo Rep, Denmark, Germany, Moldova, Namibia, Nepal, Netherlands, New Zealand, Panama, Singapore, Switzerland, Tajikistan, the UK, and the USA.

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Acknowledgements

This paper represents the personal opinions of individual staff members of the WTO and is not meant to represent the position or opinions of the WTO or its members, nor the official position of any staff members. The author expresses his profound gratitude to the anonymous reviewers for their very insightful and constructive comments on the paper. Any errors or omissions are the fault of the author.

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Appendices

Appendix 1

Table 5

Table 5 Definition and source of variables
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Appendix 2

Table 6

Table 6 Descriptive statistics on unstandardized (non-transformed) variables used in the analysis
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Appendix 3

Table 7

Table 7 List of countries contained in the full sample
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Appendix 4

Table 8

Table 8 List of countries contained in the sub-samples
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Gnangnon, S.K. Export diversification and financial openness. Int Econ Econ Policy 19, 675–717 (2022). https://doi.org/10.1007/s10368-022-00533-w

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