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The Political Economy of Financial Development

Author

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  • Sourafel Girma
  • Anja Shortland

Abstract

Political economy theories of financial development argue that in countries where a narrow elite controls political decisions, financial development may be obstructed to deny access to finance to potential competitors. We use panel data on developed and developing countries from 1975- 2000 to examine this hypothesis, as well as looking at the effect of regime stability on financial development. Our results show that the degree of democracy and political stability are significant explanatory factors in determining the speed of financial development. The banking sector benefits from regime stability and increasing democracy, while stock market capitalisation grows fastest in fully democratic regimes.

Suggested Citation

  • Sourafel Girma & Anja Shortland, 2004. "The Political Economy of Financial Development," Discussion Papers in Economics 04/21, Division of Economics, School of Business, University of Leicester, revised Oct 2004.
    • Handle: RePEc:lec:leecon:04/21
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    File URL: https://www.le.ac.uk/economics/research/RePEc/lec/leecon/dp04-21.pdf
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    Keywords

    Financial markets; Financial Development; Politics; Law and Economics;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • K0 - Law and Economics - - General
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State

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