Banks as Catalysts for Industrialisation

We provide a theoretical framework to address the historical debate about the role of banks in industrialisation. We introduce banks into a model of the big push to examine under what circumstances profit-motivated banks would engage in coordination of investments. We show that banks may act as catalysts for industrialisation provided that: (I) they are sufficiently large to mobilise a critical mass of firms, and (ii) they possess sufficient market power to make profits from coordination. Our model also shows that universal banking helps reduce endogenously derived coordination costs. Our results delineate the strengths and limits of Gershenkrons (1962) view of banks in economic development, and help explain a diverse set of historical experiences. We examine both countries where banks were associated with industrialisation, showing that our theoretical condition holds, as well as countries where the failure to industrialise can be related - at least in part - to the absence of our necessary conditions.