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The Political Economy of Financial Liberalisation

  • Anja Shortland

    (University of Leicester)

  • Sourafel Girma

    (University of Nottingham)

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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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2005 with number 39.

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Date of creation: 03 Sep 2005
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Handle: RePEc:mmf:mmfc05:39
Contact details of provider: Web page: http://www.essex.ac.uk/afm/mmf/index.html

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  1. Thorsten Beck & Asli Demirguc-Kunt & Ross Levine, 2004. "Finance, Inequality, and Poverty: Cross-Country Evidence," NBER Working Papers 10979, National Bureau of Economic Research, Inc.
  2. 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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