indicators of the depth of domestic financial markets in addition to measures of
financial openness2.
Third, most of the literature on the effects of financial openness (or financial
integration) on economic performance essentially looks at economic growth3 . This
paper instead directly considers the income difference between rich and poor
countries, thus assessing the differential impact of financial openness on the speed of
catching-up. Moreover, in studying the contribution of financial openness to
international trade, this paper extends the existing literature on trade empirics by
considering variables not included in previous studies which used gravity equations4.
Finally, our investigation looks at two groups of countries: the formerly centrally
planned economies (referred as “emerging economies”) and a broader set of 44
countries from eastern and western Europe, North America and the CIS5. In both the
groups, there are clear incentives toward forms of regional cooperation and
integration. In this sense, our paper is linked to the fast growing literature on regional
economic integration 6.
The key results of the analysis can be summarised as follows. Financial openness, that
is the degree to which international capital movements are not restricted, significantly
facilitates per-capita income catching-up and trade integration. The trade effect is
particularly evident in the group of emerging economies. Moreover, these effects of
financial openness appear to work over and above any effect stemming from the
development of domestic financial systems. Finally, the effective degree of
involvement of domestic markets into global financial links (i.e. the degree of
international financial integration) also promotes economic integration in both groups.
The rest of the paper is organised as follows. Section 2 briefly surveys the theoretical
hypothesis on the impact of financial openness on the two dimensions of economic
2 Guiso et al. (2004) provides an in-depth analysis of the link between financial development and
financial integration focusing on the EU countries. They claim that most of the growth pay-off from
financial integration occurs through domestic financial development.
3 See Hali et al. (2004) for a survey.
4 Rose (2004) surveys the variables and channels that are most often investigated in the literature on the
macroeconomic determinants of international trade.
5 This second group coincides with the membership of the United Nations Economic Commission for
Europe and it is therefore characterised by some significant degree of cooperation and integration on
socio-economic matters
6 For a recent overview of this literature see Schiff and Winters (2003).