Effects of Trade on Banking System and Capital Market Development in Acceded Countries to the WTO

The effect of trade on financial development has already been a matter of debate in the literature. Some economists believe that trade expansion would promote financial development by creating access to external finance for private and public sectors. Others argue that trade expansion as a result of trade liberalization could restrict domestic financial development. This is due to the ensuing crowding out effect and the dominance of the foreign financial services in a competitive environment. Therefore, this paper examines the effects of trade on banking system and capital market development of acceded countries to the WTO. By using a panel data method for the period of 1985 to 2006, the results indicate that trade expansion and accession to the WTO has a positive effect on banking system and capital market development in acceded countries. Thus, increasing trade would be recommended as an adequate policy for financial development in these countries.