Impact of financial development on international trade in BRICS countries: does the sector matter?

Our study aims to examine whether sectoral value-added matters while analysing the impact of financial development on international trade for BRICS (Brazil, Russia, India, China and South Africa) countries. This indirect effect is captured in our study through the transmission channel of sectoral value additions arising from the agriculture, industry and service sectors. The study employs the pooled mean group approach of the panel autoregressive distributed lag (ARDL) model to check for the presence of co-integration and estimate short-run and long-run relationships among the variables of interest. The presence of co- integration between international trade, financial development, sectoral value added and the control variables, namely net foreign direct investment inflows and per- capita income, is found in the case of BRICS countries. The direct effect of financial development on international trade for BRICS countries is found to be positive and significant in the long run. While examining the indirect effect, it was found that the interaction term between the IMF index of financial development and industrial sectoral value added has a positive and significant impact on trade openness in the long run. In the case of service sector value added and financial development interaction, the impact on trade openness is found to be positive but insignificant, whereas in the case of agriculture value added, the impact is found to be negative and insignificant in the long run. Policies for enhancing the access, efficiency and depth of financial markets and financial institutions should be the top priority for BRICS countries, as they aim to become bigger players in the international trade arena. Targeted policy interventions for increasing the value additions emanating from the industry and service sectors will prove helpful in strengthening the indirect positive effect of financial development on international trade for BRICS countries, while also considering the degree of informality in each of these sectors in the member countries when designing such policies.