Does openness enhance financial sector development? The experience of the Arab world

Abstract

Purpose – The purpose of this paper is to examine if the simultaneous openness to trade and capital account can promote financial sector development. Design/methodology/approach – Based on a sample of 12 Arab countries over the period from 1985 to 2011, the data were analyzed using the dynamic and static panel data analysis. In particular, the authors apply three estimate techniques: the generalized method of moments, fixed effects and random effects. Findings – The empirical results do not support the simultaneous openness hypothesis. Even trade and financial openness have an important separate role in enhancing financial sector development; their interaction effect is harmful. This empirical evidence indicates that opening Arab countries to both trade and capital account will not necessarily promote financial sector development. Research limitations/implications – Some Arab countries are not included in the study sample because of the lack of data. Practical implications – The main implication of this study is: opening Arab countries for trade and capital account at the same time will not improve the development of financial sector. Social implications – The paper examines one of the most important issues in developing countries; where, the people want to know if the country openness to trade and finance will generate a social and economic welfare for them. Originality/value – This study can be considered as one of the rare studies that examine the simultaneous openness issue in the developing countries. It recommends regulators and policy makers to take gradual steps toward adopting trade and financial openness in the Arab countries.