Political Institutions And Financial Development

The essays in this volume employ the insights and techniques of political science, economics and history to provide a fresh answer to this question.

Economists have long maintained that a well-developed and functioning financial system is a vital prerequisite to economic growth. Countries with robust banking sectors and securities markets--that is, countries in which credit cards, loans, mortgages, and the ability to issue stocks and bonds are available to a broad swath of consumers and businesses--are more prosperous than countries that restrict such access to a favored elite. What is less clear is why some countries develop better financial systems than others. The essays in this volume employ the insights and techniques of political science, economics, and history to provide a fresh answer to this question. While scholarly tradition points to the colonial origin of a country's legal system as the most important determinant of the health of its financial system, this volume points instead to a country's political institutions--its governmental structures and the rules of the political game--as the key. Specifically, the openness and competitiveness of a country's political system tends to reflect itself in the openness and competitiveness of its financial system.

This chapter surveys the literature on the political economy of finance. This field offers three main insights. First, it highlights the importance of the role of political institutions in financial development. Second, it shows how the distribution of political power in society drives the prevailing set of contracting institutions and affects capital allocation and access to finance in developed and developing economies. Third, it argues that recognizing the endogenous nature of political institutions is crucial for our understanding of the evolution and functioning of financial systems.

A PDF version of this book is available for free in open access via the OAPEN Library platform, www.oapen.org. This book examines the emergence of both financial markets and carbon markets, and provides an in-depth investigation on the fundamental determinants of financial development.

Only a minority of countries have succeeded in establishing a developed financial system, despite widespread financial liberalization. Confronted with this finding, the political institutions view claims that sustained financial deepening is most likely to take place in institutional environments where governments effectively impose constraints on their own powers in order to create trust. This paper identifies over 200 post-1960 episodes of accelerations in financial development in a large cross-section of countries. We find that the likelihood of an acceleration leading to sustained financial development increases greatly in environments that have high-quality political institutions.

"The essential role institutions play in understanding economic development has long been recognised and has been closely studied across the social sciences but some of the most high profile work has been done by economists many of whom are included in this collection covering a wide range of topics including the relationship between institutions and growth, educational systems, the role of the media and the intersection between traditional systems of patronage and political institutions. Each chapter covers the frontier research in its area and points to new areas of research and is the product of extensive workshopping and editing. The editors have also written an excellent introduction which brings together the key themes of the handbook. The list of contributors is stellar (Steven Durlauf, Throsten Beck, Bob Allen,and includes a diverse mix of Western and non Western, male and female scholars)"

This book focuses on the role of economic and political institutions in economic development. The book offers fresh perspectives on the issues facing less-developed countries and the elements influencing their outcomes. The text includes chapters on democracy, property rights, and economic freedom, and uses diverse methodology such as case studies, spacial econometrics, and cross-country analysis. The volume features the work of prominent scholars in the area of institutional analysis such as Mohammed Akacem, Christopher Coyne, and Andrew Young as well as a number of junior scholars. This book will be useful for researchers and students interested in economic development and institutional analysis in general, in addition to individuals with a specific focus on countries or regions such as Iraq or sub-Saharan Africa.

"A well developed financial system enhances competition in the industrial sector by allowing easier entry. The impact varies across industries, however. For some, small changes in financial development quickly induce entry and dissipate incumbents' rents, generating strong incentives to oppose improvement of the financial system. In other sectors incumbents may even benefit from increased availability of external funds. The relative strength of promoters and opponents determines the political equilibrium level of financial system development. This may be perturbed by the effect of trade liberalization in the strength of each group. Using a sample of 41 trade liberalizers Braun and Raddatz conduct an event study and show that the change in the strength of promoters vis--̉vis opponents is a very good predictor of subsequent financial development. The result is not driven by changes in demand for external funds, or by the success of the trade policy. The relationship is mediated by policy reforms, the kind that induces competition in the financial sector, in particular. Real effects follow not so much from capital deepening but mainly through improved allocation. The effect is stronger in countries with high levels of governance, suggesting that incumbents resort to this costly but more subtle way of restricting entry where it is difficult to obtain more blatant forms of anti-competitive measures from politicians. This paper--a product of the Investment and Growth Team, Development Research Group--is part of a larger effort in the group to understand the relation between finance and the macroeconomy"--World Bank web site.

This article investigates the role of political institutions and culture in creating an efficient financial infrastructure for a country. It further delves into this relationship and addresses the question: do both types of institutions mentioned above affect financial development of a country, jointly? Our findings support the established notion in the literature that institutions matter for financial development. We show both these types of institutions - political institutions and culture - jointly promote financial development. Further, our result stresses that these two types of institutions behave as complements - the presence of efficient political institutions augment the effectiveness of culture and, thus, financial development is enhanced. Our results are robust to various proxies of institutions and alternate estimation models.