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Political Economy Origins of Financial Markets in Europe and Asia

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  • Svetlana Andrianova

    (University of Leicester)

  • Panicaos Demetriades

    (University of Leicester)

  • Chenggang Xu

    (London School of Economics)

Abstract

This paper contributes to the finance-growth literature by examining the political economy origins of some of the most successful financial markets in Europe and Asia. It provides historical evidence from London, Amsterdam and Hong Kong that highlights the essential role played by the government sector in kick-starting financial development. We show that the emergence of financial systems did not occur through laissez-faire approaches and that secure property rights alone were not sufficient for financial development. In the cases of London and Amsterdam, governments created large trade monopolies which were responsible for all the major financial innovations of the time. In the case of Hong Kong, where the financial developmentmodel was bank-based, large banking monopolies with close links to the state were created. We argue that the three examples are not special cases and the role of government in the early stages of financial development has been widespread world-wide.

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Bibliographic Info

Paper provided by ESRC World Economy and Finance Research Programme, Birkbeck, University of London in its series WEF Working Papers with number 0034.

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Date of creation: Jan 2008
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Handle: RePEc:wef:wpaper:0034

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Keywords: Monopoly; politics; institutions; finance;

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References

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  1. Peter L. Rousseau, 2003. "Historical perspectives on financial development and economic growth," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 81-106.
  2. Charles Goodhart, 1988. "The Evolution of Central Banks," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262570734, December.
  3. Raghuram G. Rajan & Luigi Zingales, 2001. "The Great Reversals: The Politics of Financial Development in the 20th Century," NBER Working Papers 8178, National Bureau of Economic Research, Inc.
  4. David Stasavage, 2002. "Credible Commitment in Early Modern Europe: North and Weingast Revisited," Journal of Law, Economics and Organization, Oxford University Press, vol. 18(1), pages 155-186, April.
  5. Bordo, Michael D. & Rousseau, Peter L., 2006. "Legal-political factors and the historical evolution of the finance-growth link," European Review of Economic History, Cambridge University Press, vol. 10(03), pages 421-444, December.
  6. Andrianova, Svetlana & Demetriades, Panicos & Shortland, Anja, 2008. "Government ownership of banks, institutions, and financial development," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 218-252, February.
  7. Acemoglu, Daron & Johnson, Simon & Robinson, James A., 2005. "Institutions as a Fundamental Cause of Long-Run Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 6, pages 385-472 Elsevier.
  8. Acemoglu, Daron & Johnson, Simon H. & Robinson, James A., 2003. "The Rise of Europe: Atlantic Trade, Institutioanl Change and Economic Growth," Working papers 4269-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
  9. Peter L. Rousseau & Richard Sylla, 2001. "Financial Systems, Economic Growth, and Globalization," Vanderbilt University Department of Economics Working Papers 0119, Vanderbilt University Department of Economics.
  10. Sylla, Richard & Legler, John B. & Wallis, John J., 1987. "Banks and State Public Finance in the New Republic: The United States, 1790–1860," The Journal of Economic History, Cambridge University Press, vol. 47(02), pages 391-403, June.
  11. Ross Levine, 2003. "More on finance and growth: more finance, more growth?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 31-46.
  12. Peter L. Rousseau & Richard Sylla, 2000. "Emerging Financial Markets and Early U.S. Growth," Vanderbilt University Department of Economics Working Papers 0015, Vanderbilt University Department of Economics.
  13. Acemoglu, Daron & Johnson, Simon & Robinson, James A, 2004. "Institutions as the Fundamental Cause of Long-Run Growth," CEPR Discussion Papers 4458, C.E.P.R. Discussion Papers.
  14. Michele Fratianni & Franco Spinelli, 2006. "Did Genoa and Venice Kick a Financial Revolution in the Quattrocento?," Working Papers 112, Oesterreichische Nationalbank (Austrian Central Bank).
  15. Panicos O Demetriades & Kul B Luintel, 2000. "Financial Restraints in the South Korean Miracle," Discussion Papers in Economics 00/5, Department of Economics, University of Leicester.
  16. Panicos Demetriades & Svetlana Andrianova, . "Finance and Growth: What We Know and What We Need To Know," Discussion Papers in Economics 03/15, Department of Economics, University of Leicester.
  17. Carlos, Ann M. & Key, Jennifer & Dupree, Jill L., 1998. "Learning and the Creation of Stock-Market Institutions: Evidence from the Royal African and Hudson's Bay Companies, 1670–1700," The Journal of Economic History, Cambridge University Press, vol. 58(02), pages 318-344, June.
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  20. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
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Cited by:
  1. Zuzana Fungáčová & Jan Hanousek, 2011. "Determinants of Firm Delisting on the Prague Stock Exchange," Prague Economic Papers, University of Economics, Prague, vol. 2011(4), pages 348-365.
  2. Anwar, Sajid & Cooray, Arusha, 2012. "Financial development, political rights, civil liberties and economic growth: Evidence from South Asia," Economic Modelling, Elsevier, vol. 29(3), pages 974-981.
  3. Xu, Cheng-Gang, 2010. "The Institutional Foundations of China’s Reforms and Development," CEPR Discussion Papers 7654, C.E.P.R. Discussion Papers.

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