Even when developing countries are unwilling to tear down all barriers to imports of foreign goods, they can still generate incentives for institutional reform by removing obstacles that prevent domestic producers from engaging in international trade. Facilitating production for overseas markets creates a greater need for a well-functioning financial system because, to compete effectively in the international arena, firms need better access to capital.
If they can’t get capital, they won’t be able to make the investments they need to increase productivity and price their goods competitively. Accordingly, international trade creates a demand for reforms that will make the financial system more efficient. The case of China We are seeing how the globalization of trade is driving financial reform in China.