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The Political Economy of Financial Liberalisation

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Listed:
  • Anja Shortland

    (University of Leicester)

  • Sourafel Girma

    (University of Nottingham)

Abstract

Political economy theories of financial development argue that in countries where a narrow elite controls political decisions, financial development may be deliberately obstructed to deny access to finance to potential competitors. This paper empirically examines whether the level of liberalisation of the banking system, the stock market and capital account depend on regime characteristics, using panel data from 26 countries from 1973 – 1999. Our results show that it is predominantly fully democratic regimes that have liberalised financial systems. Countries that are not fully democratic have a lower probability of having liberal banking systems and capital accounts and this probability decreases with increasing democratisation. This suggests that the attractiveness of using financial levers to allocate funds in the economy increases with the amount of competition the government faces, although a fully competitive electoral system creates incentives to relinquish financial control.
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Suggested Citation

  • Anja Shortland & Sourafel Girma, 2005. "The Political Economy of Financial Liberalisation," Money Macro and Finance (MMF) Research Group Conference 2005 39, Money Macro and Finance Research Group.
  • Handle: RePEc:mmf:mmfc05:39
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    File URL: http://repec.org/mmfc05/paper39.pdf
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    References listed on IDEAS

    as
    1. Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2004. "Finance, inequality, and poverty: cross-country evidence," Policy Research Working Paper Series 3338, The World Bank.
    2. repec:cup:apsrev:v:91:y:1997:i:03:p:531-551_21 is not listed on IDEAS
    3. Marco Pagano & Paolo F. Volpin, 2005. "The Political Economy of Corporate Governance," American Economic Review, American Economic Association, vol. 95(4), pages 1005-1030, September.
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    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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