BUKU ABSTRAK - Universiti Putra Malaysia

Social Sciences
Trade Openness, Capital Flows and Financial Development in Developing
Economies
Assoc. Prof. Dr. Law Siong Hook
Faculty of Economics and Management, University Putra Malaysia,
43400 UPM Serdang, Selangor, Malaysia.
+603-8946 7768; lawsh@econ.upm.edu.my
This paper examines the impact of trade openness and capital flows on financial development in developing
countries using a dynamic panel GMM estimation technique. The empirical results reveal that trade openness and
capital flows are statistically significant determinants of financial development. Simultaneous opening of both
the trade and capital accounts also appear to have positive impacts on financial development. The evidence also
suggests that openness leads to improved financial development through institutional quality and competition
channels. However, the institutional channel outperforms competition in ensuring the positive effects of openness
on financial market depth in developing countries. Although competition plays an important role, its effect is
much lower than that of institutions. This finding suggests that openness can weaken the political power of
entrenched business interests that might otherwise block institutional reforms. They will be more likely to support
reforms that promote a deeper and more efficient financial system since they need greater access to external
sources of capital.
Keywords: Financial development, trade openness, capital flows, dynamic panel GMM analysis
The Role of Financial Development on Income Inequality in Malaysia
Assoc. Prof. Dr. Law Siong Hook
Tan Hui Boon
Faculty of Economics and Management, University Putra Malaysia,
43400 UPM Serdang, Selangor, Malaysia.
+603-8946 7768; lawsh@econ.upm.edu.my
This study examines the role of financial development in influencing income inequality in Malaysia over the
period of 1980-2000. The empirical results based on ARDL bounds test indicate that financial market development
is, at best, very weak and statistically insignificant in reducing income inequality in Malaysia. The evidence is
valid for a variety of financial indicators, including the banking sector, the stock market and financial aggregate
variables. This finding suggests that financial intermediaries should improve their efficiency in terms of allocating
financial resources to finance household’s productive activities, and hence contribute towards improving income
inequality. The development of an efficient financial development thus should be at the center of a propoor
development strategy. The evidence also highlights that besides various government’s development programs,
efforts should also concentrate on improving institutional quality, economic development and maintaining low
inflation in its attempt to combat income inequality.
Keywords: Banking sector, capital market, financial development, income inequality, ARDL bounds test
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