-7-
One possible reason for this rise in international financial cross-holdings is the increase in
international trade, which has also been substantial in recent decades. However, Figures
2.4 and 2.5 show clearly that the increase in financial openness dwarfs the increase in
goods’ trade. Figure 4 shows the IFI and GEQ measures as ratios to exports plus imports
rather than GDP (IFITRADE, GEQTRADE). Both ratios show substantial increases over
the period: in the aggregate, international asset trade has grown far more rapidly than
goods trade by this measure. Figure 5 illustrates that this finding holds at the individual
country level, by showing the relation between the percentage change in the financial
openness to GDP ratio and the percentage change in the trade openness to GDP ratio
during the period 1991-2001. Only for Canada (which measures portfolio equity at book
value, and therefore underestimates external assets and liabilities) and Japan trade
openness has increased more than financial openness.
In theory, international financial integration may simply reflect financial deepening: in
industrial countries, financial assets and liabilities increased much faster than GDP over
the past two decades, and the share of external assets and liabilities in total financial
holdings may thus have remained unchanged. Unfortunately the availability of financial
balance sheets is limited, both along the cross-sectional and the time-series dimension. 4
Nevertheless, available data for the United Kingdom (since the early 1980s) and Belgium
and Italy for the second half of the 1990s shows clearly an increase in the ratioof external
financial holdings over total financial holdings (Figure 6). Another piece of evidence
suggesting that increased international financial integration is more than the reflection of
financial deepening comes from data on portfolio equity holdings. Figure 7 shows that the
4 Kraay et al (2000) calculate a measure of national net wealth, using estimates of physical
capital stocks. However, measuring gross assets and liabilities is a yet more onerous task.
See also Obstfeld and Taylor (2002).