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Law, politics, and finance

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Author Info
Beck, Thorsten
Demirguc-Kunt, Asli
Levine, Ross

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Abstract

The authors assess three established theories about the historical determinants of financial development. They also propose an augmented version of one of these theories. The law and finance view, stresses that different legal traditions emphasize, to differing degrees, the rights of individual investors relative to the state, which has important ramifications for financial development. The dynamic law and finance vie, augments the law and finance view, stressing that legal traditions also differ in their ability to adapt to changing conditions. The politics and finance view, rejects the central role of legal tradition, stressing instead that political factors shape financial development. The endowment view, argues that the mortality rates of European settlers, as they colonized various parts of the globe, influenced the institutions they initially created, which has had enduring effects on institutions today. When initial conditions produced an unfavorable environment for European settlers, colonialists tended to create institutions designed to extract resources expeditiously, not to foster long-run prosperity. The authors'empirical results are most consistent with theories that stress the role of legal tradition. The resultsprovide qualified support for the endowment view. The data are least consistent with theories that focus on specific characteristics of the political structure, although politics can obviously affect the financial sector. In other words, legal origin - whether a country has a British, French, German, or Scandinavian legal heritage - helps explain the development of the country's financial institutions today, even after other factors are controlled for. Countries with a French legal tradition, tend to have weaker financial institutions, while those with common law, and German civil laws, tend to have stronger financial institutions.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2585.

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Date of creation: 30 Apr 2001
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Handle: RePEc:wbk:wbrwps:2585

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Related research
Keywords: Legal Institutions of the Market Economy; Legal Products; Judicial System Reform; Labor Policies; Gender and Law; Legal Products; National Governance; Judicial System Reform; Legal Institutions of the Market Economy; Gender and Law;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 1999. "The Quality of Government," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(1), pages 222-79, April.
    Other versions:
  2. Beck, Thorsten & Levine, Ross, 2000. "New firm formation and industry growth - does having a market- or bank-based system matter?," Policy Research Working Paper Series 2383, The World Bank. [Downloadable!]
  3. Levine, Ross & Zervos, Sara, 1998. "Stock Markets, Banks, and Economic Growth," American Economic Review, American Economic Association, vol. 88(3), pages 537-58, June. [Downloadable!] (restricted)
    Other versions:
  4. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 1999. "A new database on financial development and structure," Policy Research Working Paper Series 2146, The World Bank. [Downloadable!]
  5. Easterly, William & Levine, Ross, 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1203-50, November.
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  6. Barth, James R. & Caprio Jr, Gerard & Levine, Ross, 2001. "The regulation and supervision of banks around the world - a new database," Policy Research Working Paper Series 2588, The World Bank. [Downloadable!]
  7. Raghuram G. Rajan & Luigi Zingales, 2000. "The Great Reversals: The Politics of Financial Development in the 20th Century," OECD Economics Department Working Papers 265, OECD, Economics Department. [Downloadable!]
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  8. Levine, Ross, 1998. "The Legal Environment, Banks, and Long-Run Economic Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 596-613, August.
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  9. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank. [Downloadable!]
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  10. Demirguc-Kunt, Asli & Maksimovic, Vojislav, 1999. "Institutions, financial markets, and firm debt maturity," Journal of Financial Economics, Elsevier, vol. 54(3), pages 295-336, December. [Downloadable!] (restricted)
  11. Daniel Berkowitz & Karina Pistor & Jean-Francois Richard, 2001. "Economic Development, Legality, and the Transplant Effect," William Davidson Institute Working Papers Series 410, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
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  12. Beck, Thorsten & Clarke, George & Groff, Alberto & Keefer, Philip & Walsh, Patrick, 2000. "New tools and new tests in comparative political economy - the database of political institutions," Policy Research Working Paper Series 2283, The World Bank. [Downloadable!]
  13. King, Robert G. & Levine, Ross, 1993. "Finance, entrepreneurship and growth: Theory and evidence," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 513-542, December. [Downloadable!] (restricted)
  14. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 261-300. [Downloadable!] (restricted)
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  15. Raghuram G. Rajan & Luigi Zingales, . "Financial Dependence and Growth," CRSP working papers 344, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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  16. Levine, Ross & Loayza, Norman & Beck, Thorsten, 2000. "Financial intermediation and growth: Causality and causes," Journal of Monetary Economics, Elsevier, vol. 46(1), pages 31-77, August. [Downloadable!] (restricted)
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  17. Asli Demirgüç-Kunt & Vojislav Maksimovic, 1998. "Law, Finance, and Firm Growth," Journal of Finance, American Finance Association, vol. 53(6), pages 2107-2137, December. [Downloadable!] (restricted)
  18. Klaus Neusser & Maurice Kugler, 1998. "Manufacturing Growth And Financial Development: Evidence From Oecd Countries," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 638-646, November. [Downloadable!] (restricted)
  19. Alesina, Alberto & Baqir, Reza & Easterly, William, 1999. "Public goods and ethnic divisions," Policy Research Working Paper Series 2108, The World Bank. [Downloadable!]
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  20. Rousseau, Peter L & Wachtel, Paul, 1998. "Financial Intermediation and Economic Performance: Historical Evidence from Five Industrialized Countries," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(4), pages 657-78, November.
  21. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  22. Barth, James R. & Caprio Jr., Gerard & Levine, Ross, 2001. "Bank regulation and supervision : what works best?," Policy Research Working Paper Series 2725, The World Bank. [Downloadable!]
    Other versions:
  23. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Law, Siong Hook & Azman-Saini, W.N.W., 2008. "The Quality of Institutions and Financial Development," MPRA Paper 12107, University Library of Munich, Germany. [Downloadable!]
  2. Raghuram G. Rajan & Luigi Zingales, 2001. "The Great Reversals: The Politics of Financial Development in the 20th Century," CRSP working papers 526, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
    Other versions:
  3. Gérard Charreaux, 2004. "Corporate Governance Theories: From Micro Theories to National Systems Theories," Working Papers FARGO 1041202, Université de Bourgogne - Latec/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  4. Berglöf, Erik & Bolton, Patrick, 2003. "The Great Divide and Beyond - Financial Architecture in Transition," CEPR Discussion Papers 3476, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  5. César Calderón & Alberto Chong & Rodrigo Valdés, 2004. "Normativa del mercado laboral y desigualdad del ingreso: elementos de juicio de un grupo de países," RES Working Papers 4376, Inter-American Development Bank, Research Department. [Downloadable!]
  6. Milo, Melanie S., 2007. "Integrated Financial Supervision: an Institutional Perspective for the Philippines," Discussion Papers DP 2007-17, Philippine Institute for Development Studies. [Downloadable!]
  7. Donato Masciandaro & María J. Nieto & Henriëtte Prast, 2007. "Financial governance of banking supervision," Banco de España Working Papers 0725, Banco de España. [Downloadable!]
  8. J. Benson Durham, 2003. "Foreign portfolio investment, foreign bank lending, and economic growth," International Finance Discussion Papers 757, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  9. Klapper, Leora F. & Love, Inessa, 2002. "Corporate governance, investor protection, and performance in emerging markets," Policy Research Working Paper Series 2818, The World Bank. [Downloadable!]
    Other versions:
  10. Siong Hook Law & Panicos Demetriades, 2004. "Capital inflows, trade openness and financial development in Developing Countries," Money Macro and Finance (MMF) Research Group Conference 2004 38, Money Macro and Finance Research Group. [Downloadable!]
  11. Gérard Charreaux, 2004. "Les théories de la gouvernance:de la gouvernance des entreprises à la gouvernance des systèmes nationaux," Working Papers FARGO 1040101, Université de Bourgogne - Latec/Fargo (Research center in Finance,organizational ARchitecture and GOvernance). [Downloadable!]
  12. Frank H. Stephen & David Urbano & Stefan van Hemmen, 2005. "The impact of institutions on entrepreneurial activity," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(7), pages 413-419. [Downloadable!]
  13. César Calderón & Alberto Chong & Rodrigo Valdés, 2004. "Labor Market Regulations and Income Inequality: Evidence for a Panel of Countries," RES Working Papers 4375, Inter-American Development Bank, Research Department. [Downloadable!]
  14. Robert C. Merton & Zvi Bodie, 2004. "The Design of Financial Systems: Towards a Synthesis of Function and Structure," NBER Working Papers 10620, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Erik Berglof & Patrick Bolton, 2002. "The Great Divide and Beyond: Financial Architecture in Transition," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 77-100, Winter. [Downloadable!] (restricted)
  16. Erik Berglof & Patrick Bolton, 2001. "The Great Divide and Beyond: Financial Architecture in Transition," William Davidson Institute Working Papers Series 414, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  17. Islam, Roumeen & Montenegro, Claudio E., 2002. "What determines the quality of institutions?," Policy Research Working Paper Series 2764, The World Bank. [Downloadable!]
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