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Political Origins of Financial Structure

  • Sambit Bhattacharyya

There is a growing policy interest in the role of financial structure in promoting development.� However, very little is known about how different financial structures emerge and evolve.� In this paper we empirically assess the political origins of financial structure.Using difference-indifference estimaton and annual data, we study the effects of democratization on financial structure in a sample of 96 countries covering the period 1970 to 2005. Democratization here corresponds to the event of becoming a democracy. We find that democratization leads to a more market-based financial system. Democractic change could also be incremental rather than a one off.To identify the causal effect of incremental democratic change on financial structure we estimate a separate model and find that democracy matters.� We also find that countries with substantial democratic capital are more likely to have a market-based financial structure.� Our main results are robust to a variety of controls, instrumental variable estimation using commodity price and rainfall as instruments, Arellano-Bond GMM estimation, alternative measures of democracy and financial structure, and across different samples.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number WPS/2011-20.

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Date of creation: 01 Oct 2011
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Handle: RePEc:oxf:wpaper:wps/2011-20
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  9. Shankha Chakraborty & Tridip Ray, 2003. "Bank-based versus Market-based Financial Systems: A Growth-theoretic Analysis," University of Oregon Economics Department Working Papers 2003-6, University of Oregon Economics Department, revised 01 Feb 2002.
  10. Francesco Giavazzi & Guido Tabellini, 2004. "Economic and Political Liberalizations," CESifo Working Paper Series 1249, CESifo Group Munich.
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  12. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
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  14. Bhattacharyya, Sambit, 2009. "Unbundled institutions, human capital and growth," Journal of Comparative Economics, Elsevier, vol. 37(1), pages 106-120, March.
  15. Torsten Persson & Guido Tabellini, 2006. "Democracy and Development: The Devil in the Details," Working Papers 302, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  16. Sambit Bhattacharyya & Roland Hodler, 2008. "Natural Resources, Democracy and Corruption," OxCarre Working Papers 020, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
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  18. Collier, Paul & Hoeffler, Anke, 2009. "Testing the neocon agenda: Democracy in resource-rich societies," European Economic Review, Elsevier, vol. 53(3), pages 293-308, April.
  19. Sambit Bhattacharyya & Roland Hodler, 2010. "Do Natural Resource Revenues Hinder Financial Development? The Role of Political Institutions," CSAE Working Paper Series 2010-40, Centre for the Study of African Economies, University of Oxford.
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  24. Shankha Chakraborty & Tridip Ray, 2003. "The Development and Structure of Financial Systems," University of Oregon Economics Department Working Papers 2003-2, University of Oregon Economics Department, revised 01 Dec 2003.
  25. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
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  27. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment Updates and Implications," NBER Working Papers 7911, National Bureau of Economic Research, Inc.
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