Financial Reforms and International Trade

Appendix A: list of countries

Appendix B: seven dimensions of financial reform

1. Directed Credit: Countries often require that a minimum amount of bank lending be directed toward certain “priority” sectors (based on the respective industrial policy) or to the government (for purposes of financing budget deficits). Occasionally these directed credits are required to be extended at subsidized rates. Additionally, governments may impose excessively high reserve requirements, beyond what can be reasonably expected for prudential purposes, and reserves may not be remunerated at market rates of return. The questions used to guide the coding of this dimension are the following: are there minimum amounts of credit that must be channeled to certain sectors, or are there ceilings on credit to other sectors? Are directed credits required to carry subsidized rates? How high are reserve requirements? Loosening of these restrictions indicates reform.

2. Interest rate controls: In the most restrictive case, the government specifies both lending and deposit rates by fiat, or equivalently, sets ceilings or floors tight enough to be binding in most circumstances. An intermediate regime allows interest rates to fluctuate within a band. Interest rates are considered fully liberalized when all ceilings, floors or bands are eliminated.

3. Banking supervision: This is the only measure where a greater degree of government intervention is considered reform. The questions used to derive this measure: Does a country adopt risk-based capital adequacy ratios based on the Basle I capital accord? Is the banking supervisory agency independent from the executive’s influence and does it have sufficient legal power? Are certain financial institutions exempt from supervisory oversight? How effective are on-site and off-site examinations of banks?

4. Privatization: Share of banking sector assets controlled by state-owned banks reflects governments’ controls over credit allocation. Lowering this share indicates reform. Thresholds of 50, 25 and 10% are used to delineate the grades between full repression and full liberalization.

5. Entry barriers: Entry barriers may take the form of outright restrictions on the participation of foreign banks; restrictions on the scope of banks’ activities; restrictions on the geographic area where banks can operate; or excessively restrictive licensing requirements. Removal of these restrictions indicates reform.

6. International capital: These restrictions included multiple exchange rates for various transactions, as well as transactions taxes or outright restrictions on inflows and/or outflows specifically regarding financial credits. Lowering of these restrictions indicates reform. Criteria used to measure reform: Is the exchange rate system unified? Does a country set restrictions on capital inflow? Does a country set restrictions on capital outflow?

7. Securities market: Reform indicates policies to encourage and develop securities markets. These policies include: auctioning of government securities, establishment of debt and equity markets, establishment of a security commission, tax incentives or development of depository and settlement systems, development of the derivatives markets, deregulation of portfolio investments and pension funds, deregulation of stock exchanges, and opening up the equity market to foreign investors?

Appendix C: estimates of the effects of financial reform with separate exporter fixed effect, industry fixed effects, and time fixed effects

Appendix D: estimates of the effects of financial reform with exporter–time and industry fixed effects

Appendix E: coefficients of the estimated effects of financial reform with exporter–time and exporter–industry fixed effect: 1986–1995

Appendix F: probit regressions for propensity to export and financial reforms

We conduct a preliminary analysis of whether or not financial reforms have an impact on the propensity of industries to export, particularly for industries that have high external financial dependence and low levels of collateralizable assets.¹⁴ The role of financial reforms in industry-level exports to happen in the first place is an important research question in its own right. However, the nature of the data constrains the possibility of a robust analysis of this issue. The identification in our main specification relies on the variation across industry’s export for countries at a given point in time. If a country trades in most industries (or does not trade in most industries) then that country for that time period cannot be accounted for in the presence of exporter × time fixed effect. This is true for more than 80% of the country-year pairs. Hence, with the kind of variation available in the data, the probit model cannot include exporter × time and exporter × industry fixed effects. Including separate exporter, industry and time fixed effects, a probit model can be estimated, although the countries that trade in almost all industries in all periods drop off the sample (about 13% of the sample). These probit estimates are presented below. There is no clear cut monotonic relationship between reform intensities and propensity to export based on industry characteristics. All reforms at some intensity interacted with industry characteristics do show a statistically significant impact on propensity to export with expected sign (with the exception of banking supervision in case of asset tangibility).

Appendix G: financial reforms and exports over the period 1986–2005

The table presents results from the sample obtained by trimming the full sample from one end (i.e., excluding the observations before 1986). In this trimmed sample the more recent changes, i.e., post 1986 would have a greater role in determining the results relative to the 1976–2005 sample. While direct comparisons may not be made between results in Table 3 and this table, some points can be made with regards to the changes that may have affected our coefficients of interest. There are several possible changes that could have led to the difference in the effects that we observe in this trimmed sample. Take the example of Globalized Value Chains (GVCs). If GVCs de facto reduce the variation across industries in terms of their asset tangibility, then it would change the impact of reforms on exports across industries. GVCs could also change distribution of assets in the same industry across countries and do so non-uniformly across countries as supply chains are spread over national boundaries. To the extent that changes like GVCs would bring about possible non-uniform changes across industries and across countries, it is difficult to make a priori assumptions about the nature and the strength of these impacts. These are important areas for future research with more targeted datasets that would allow the researcher to disentangle these issues and delineate the sources of differential role of industry characteristics and exporter identity in more recent samples.

Appendix H: financial reforms and exports in the sample stratified by median asset tangibility

The table presents results when the sample is stratified based on asset tangibility. The first column presents results for the set of industries where asset tangibility is high (greater than median) and the second column presents the reverse case where asset tangibility is low. Our variable of interest is the interaction between EFD and the financial reform index. In the high asset tangibility sample, the interaction of financial reforms with EFD has a larger coefficient than that of the low asset tangibility sample. The effect of financial reforms on exports of industries based on the external financial dependence varies by whether the set of industries comprises one with high asset tangibility or with low asset tangibility.