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Type Working Paper
Scope Discipline-based scholarship
Title Comparative advantage and pathways to financial development: evidence from Japan’s silk-reeling industry
Organization Unit
Authors
  • Mathias Hoffmann
  • Toshihiro Okubo
Language
  • English
Institution University of Zurich
Series Name Working paper series / Department of Economics
Number 387
ISSN 1664-705X
Number of Pages 22
Date 2021
Abstract Text We exploit the natural experiment of Japan’s opening to international trade to examine how comparative advantage can shape a country’s long-run path towards financial development. In the late 19th century, many of Japan’s prefectures had a natural comparative advantage in silk reeling. Producing silk for export required access to finance. At the same time, for technological reasons, borrower-quality in the silk reeling industry was notoriously hard to assess. Silk exporters overcame these frictions by forming local cooperative banks. We show that in the ancient silk prefectures, local cooperative banks continued to dominate local banking markets for over a century while bigger, country-wide banks came to dominate in other regions. By the late 20th century, the silk prefectures are indistinguishable from other regions in terms of their general level of financial development. However, our results suggest that they were effectively less financially integrated with the rest of the country. Hence, comparative advantage in silk favored the emergence of a banking-system dominated by small relationship lenders. But due to the local nature of these lenders, it also caused long-term geographical segmentation in banking markets.
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Keywords Comparative advantage, financial development, financial integration, Japan, banking history, trade credit, export finance, silk industry, relationship lending