The distributional consequences of trade openness on financial development

Financial development occurs at either the intensive or extensive margin, depending on institutional quality. Weak institutions favor the wealthy with privileged financial access. Trade openness fosters competition and strengthens institutions, improving financial development at the extensive margin, which broadens financial access and helps reduce inequality. This paper provides robust empirical evidence to support the argument. Using dynamic panel estimation techniques on a sample consisting of both developed and developing countries, the analysis finds that financial development generally exacerbates income and wealth inequality. However, when trade openness exceeds a certain threshold, financial development can even reverse these negative trends. These findings highlight that trade openness is essential to ensure financial development promotes more equitable income and wealth distribution.