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Political Origins of Financial Structure

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  • Sambit Bhattacharyya

Abstract

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.

Suggested Citation

  • Sambit Bhattacharyya, 2011. "Political Origins of Financial Structure," CSAE Working Paper Series 2011-20, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2011-20
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    References listed on IDEAS

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    Cited by:

    1. Bhattacharyya, Sambit & Hodler, Roland, 2015. "Media freedom and democracy in the fight against corruption," European Journal of Political Economy, Elsevier, vol. 39(C), pages 13-24.
    2. Kevin Williams, 2017. "Does democracy dampen the effect of finance on economic growth?," Empirical Economics, Springer, pages 635-658.
    3. Bhattacharyya, Sambit & Hodler, Roland, 2014. "Do Natural Resource Revenues Hinder Financial Development? The Role of Political Institutions," World Development, Elsevier, vol. 57(C), pages 101-113.
    4. Sambit Bhattacharyya & Louis Conradie & Rabah Arezki, 2016. "Resource Discovery and the Politics of Fiscal Decentralization," Working Paper Series 08916, Department of Economics, University of Sussex.
    5. Adam, Antonis & Tsarsitalidou, Sofia, 2017. "Do Democracies Have Higher Current Account Deficits?," MPRA Paper 76400, University Library of Munich, Germany.
    6. repec:eee:jcecon:v:45:y:2017:i:2:p:366-382 is not listed on IDEAS
    7. repec:eee:riibaf:v:41:y:2017:i:c:p:260-279 is not listed on IDEAS

    More about this item

    Keywords

    Democratization; Democracy; Financial Structure;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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