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Does openness enhance financial sector development? The experience of the Arab world

Nedal Al-Fayoumi (College of Business and Economics, Qatar University, Doha, Qatar)
Bana Abuzayed (Talal AbuGhazaleh Graduate School of Business, The German Jordanian University, Amman, Jordan)

EuroMed Journal of Business

ISSN: 1450-2194

Article publication date: 26 August 2014

Abstract

Purpose

The purpose of this paper is to examine if the simultaneous openness to trade and capital account can promote financial sector development.

Design/methodology/approach

Based on a sample of 12 Arab countries over the period from 1985 to 2011, the data were analyzed using the dynamic and static panel data analysis. In particular, the authors apply three estimate techniques: the generalized method of moments, fixed effects and random effects.

Findings

The empirical results do not support the simultaneous openness hypothesis. Even trade and financial openness have an important separate role in enhancing financial sector development; their interaction effect is harmful. This empirical evidence indicates that opening Arab countries to both trade and capital account will not necessarily promote financial sector development.

Research limitations/implications

Some Arab countries are not included in the study sample because of the lack of data.

Practical implications

The main implication of this study is: opening Arab countries for trade and capital account at the same time will not improve the development of financial sector.

Social implications

The paper examines one of the most important issues in developing countries; where, the people want to know if the country openness to trade and finance will generate a social and economic welfare for them.

Originality/value

This study can be considered as one of the rare studies that examine the simultaneous openness issue in the developing countries. It recommends regulators and policy makers to take gradual steps toward adopting trade and financial openness in the Arab countries.

Keywords

Acknowledgements

The authors are grateful for the participants in the “Development Strategies: Country Studies and International Comparison Workshop” that was organized by the East China Normal University (ECNU) and the HTW Berlin – University of Applied Sciences within the framework of the DAAD Partnership on Economic Development from November 12 to 15, 2013 in Shanghai, China. The authors would also like to thank the two anonymous referees of this journal for their helpful comments that improved the paper. The first author wants to thank the University of Jordan for cooperation and the DAAD Institution for financing his participation in the “Development Strategies Workshop.”

Citation

Al-Fayoumi, N. and Abuzayed, B. (2014), "Does openness enhance financial sector development? The experience of the Arab world", EuroMed Journal of Business, Vol. 9 No. 3, pp. 318-332. https://doi.org/10.1108/EMJB-01-2014-0001

Publisher

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Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited