Are Trade Openness and Financial Development Complementary?

Trade liberalization and financial deepening have assumed greater significance for a country’s economic growth performance in recent times. This paper finds that trade openness and financial development are complementary and econometrically tests this hypothesis for India over a period of time. Two important policy implications of the analysis presented in this paper first, although financial deepening has emerged as an important aspect of the economic growth strategy in the Indian context, since the sources of such a deepening may be both domestic as well as external; the importance of a judicious policy mix cannot be neglected, especially in the wake of the current global financial meltdown. Second, as documented in the econometric analysis, the complementarities between trade openness and financial deepening appear to be less pronounced.