Multidimensional Financial Development, Trade Liberalization, and Productivity Growth

Only recently have researchers turned their attention to questions of financial development understood as a multidimensional concept: a combination of depth, access, efficiency, and diversity of financial providers. Using a broad-based index of financial development, we document how the different aspects of financial development affect the relationship between trade and productivity growth across countries. We find that for richer countries, financial depth and access strengthen the effects of trade openness on growth, while for poorer countries, only the degree of efficiency matters. Our results are robust to changes in sample, trade measures, and estimation strategies, and suggest the source of comparative advantage from financial development is different for countries with different levels of income.