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The Politics of Financial Development - The Role of Interest Groups and Government Capabilities

Author

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  • Oscar Becerra
  • Eduardo Cavallo
  • Carlos Scartascini

    ()

Abstract

Although financial development is good for long-term growth, not all countries pursue policies that render full financial development. This paper builds on an extensive political economy literature to construct a theoretical model showing that the intensity of opposition to financial development by incumbents depends on both their degree of credit dependency and the role of governments in credit markets. Empirical evidence for this claim is provided, and the results suggest that lower opposition to financial development leads to an effective increase in credit markets’ development only in those countries that have high government capabilities. Moreover, improvements in government capabilities have a significant impact on credit market development only in those countries where credit dependency is high (thus, opposition is low). This paper therefore contributes to this rich literature by providing a unified account of credit market development that includes two of its main determinants, traditionally considered in isolation.

Suggested Citation

  • Oscar Becerra & Eduardo Cavallo & Carlos Scartascini, 2010. "The Politics of Financial Development - The Role of Interest Groups and Government Capabilities," Research Department Publications 4686, Inter-American Development Bank, Research Department.
  • Handle: RePEc:idb:wpaper:4686
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    More about this item

    Keywords

    Financial development; Interest groups; Political economy; Government capabilities;

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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