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Political Origins of Financial Structure

  • Sambit Bhattacharyya

There is a growing policy interest in the role of financial structure in promoting development. However, very little is known about how different financial structures emerge and evolve. In this paper we empirically assess the political origins of financial structure. Using difference-in-difference estimation and annual data, we study the effects of democratization on financial structure in a sample of 96 countries covering the period 1970 to 2005. Democratization here corresponds to the event of becoming a democracy. We find that democratization leads to a more market-based financial system. Democratic change could also be incremental rather than a one off. To identify the causal effect of incremental democratic change on financial structure we estimate a separate model and find that democracy matters. We also find that countries with substantial democratic capital are more likely to have a market-based financial structure. Our main results are robust to a variety of controls, instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, alternative measures of democracy and financial structure, and across different samples.

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Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2011-20.

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Date of creation: 2011
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Handle: RePEc:csa:wpaper:2011-20
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