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The Great Reversals: The Politics of Financial Development in the 20th Century

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  • Rajan, Raghuram
  • Zingales, Luigi

Abstract

We show that the development of the financial sector does not change monotonically over time. In particular, we find that by most measures, countries were more financially developed in 1913 than in 1980 and only recently have they surpassed their 1913 levels. This pattern is inconsistent with most recent theories of why cross-country differences in financial development do not track differences in economic development, since these theories are based upon time-invariant factors, such as a country?s legal origin. We propose instead an ?interest group? theory of financial development. Incumbents oppose financial development because it breeds competition. The theory predicts that incumbents? opposition will be weaker when an economy allows both cross-border trade and capital flows. This theory can go some way towards accounting for the cross-country differences and the time series variation of financial development.

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  • Rajan, Raghuram & Zingales, Luigi, 2001. "The Great Reversals: The Politics of Financial Development in the 20th Century," CEPR Discussion Papers 2783, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:2783
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    More about this item

    Keywords

    Financial development; History of equity market; Political economy;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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