DP8550 | Does Trade Cause Capital to Flow? Evidence from Historical Rainfalls

Publication Date

01/08/2011

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Abstract

We use a historical quasi-experiment to estimate the causal effect of trade on capital flows. We argue that fluctuations in regional rainfall within the Ottoman Empire capture the exogenous variation in exports from the Empire to Germany, France, and the U.K., during 1859-1913. The provisionistic policy of the Ottoman Empire - that is, only a surplus production was allowed to be exported - combined with the fact that different products grow in different regions that are subject to regional variation in rainfall and Germany, France and the U.K. import different products, constitute the basis of our identification. When a given region of the Empire gets more rainfall than others, the resulting surplus production is exported to countries with higher ex-ante export shares for those products and this leads to higher investment by those countries in the Ottoman Empire. Our findings support theories predicting complementarity between trade and capital flows.