Financial Development and International Trade

Financial development and trade play crucial roles in fostering economic growth and development. The present chapter provides an overview of the existing research pertaining to the relationship and causal link between financial development and trade, as well as their consequential effects on economic growth. In addition to examining the mechanisms by which financial development impacts trade, this chapter also analyses the trends of financial development and trade, as well as the advantages and disadvantages that an economy experiences when it liberalizes its financial and trade sectors. The objective is to identify specific areas that necessitate policy intervention and further research. The vast majority of empirical research exploring the financial development-trade nexus has discovered a positive link between the two variables and also with economic growth. The review of literature provides evidence that shows that financial development plays a catalytic role in international commerce by increasing export quantities, technical breakthroughs, and overall trade structure improvements, which ultimately spurs growth. Nevertheless, the certainty of this assumption is questionable when considering sub-Saharan Africa. While several studies provide evidence in favour of the proposition that financial development and trade contribute to the growth of sub-Saharan Africa, other research suggests a negative or weak association between financial development, trade, and their influence on growth. In light of the findings in some empirical studies, it is recommended that developing economies in Africa put measures in place to develop their financial sectors. This measure would facilitate the provision of financial resources to domestic enterprises, potentially leading to a reduction in the costs associated with trade due to increased foreign involvement and competitiveness. Consequently, it would stimulate international trade and contribute to the overall expansion of the economy. It is imperative to prioritize the focus on export businesses that are highly reliant on finance and exhibit increasing returns to scale, while simultaneously striving to enhance financial development.