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Law, politics, and finance

Author

Listed:
  • Beck, Thorsten
  • Demirguc-Kunt, Asli
  • Levine, Ross

Abstract

The authors assess three established theories about the historical determinants of financial development. They also propose an augmented version of one of these theories. The law and finance view, stresses that different legal traditions emphasize, to differing degrees, the rights of individual investors relative to the state, which has important ramifications for financial development. The dynamic law and finance vie, augments the law and finance view, stressing that legal traditions also differ in their ability to adapt to changing conditions. The politics and finance view, rejects the central role of legal tradition, stressing instead that political factors shape financial development. The endowment view, argues that the mortality rates of European settlers, as they colonized various parts of the globe, influenced the institutions they initially created, which has had enduring effects on institutions today. When initial conditions produced an unfavorable environment for European settlers, colonialists tended to create institutions designed to extract resources expeditiously, not to foster long-run prosperity. The authors'empirical results are most consistent with theories that stress the role of legal tradition. The resultsprovide qualified support for the endowment view. The data are least consistent with theories that focus on specific characteristics of the political structure, although politics can obviously affect the financial sector. In other words, legal origin - whether a country has a British, French, German, or Scandinavian legal heritage - helps explain the development of the country's financial institutions today, even after other factors are controlled for. Countries with a French legal tradition, tend to have weaker financial institutions, while those with common law, and German civil laws, tend to have stronger financial institutions.

Suggested Citation

  • Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2001. "Law, politics, and finance," Policy Research Working Paper Series 2585, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2585
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    References listed on IDEAS

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    Cited by:

    1. Klapper, Leora F. & Love, Inessa, 2004. "Corporate governance, investor protection, and performance in emerging markets," Journal of Corporate Finance, Elsevier, vol. 10(5), pages 703-728, November.
    2. Cooray, Arusha, 2011. "The role of the government in financial sector development," Economic Modelling, Elsevier, vol. 28(3), pages 928-938, May.
    3. Gérard Charreaux, 2004. "Corporate Governance Theories: From Micro Theories to National Systems Theories," Working Papers CREGO 1041202, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    4. Erik Berglof & Patrick Bolton, 2002. "The Great Divide and Beyond: Financial Architecture in Transition," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 77-100, Winter.
    5. César Calderón & Alberto Chong & Rodrigo Valdés, 2004. "Normativa del mercado laboral y desigualdad del ingreso: elementos de juicio de un grupo de países," Research Department Publications 4376, Inter-American Development Bank, Research Department.
    6. Donato Masciandaro & María J. Nieto & Henriëtte Prast, 2007. "Financial governance of banking supervision," Working Papers 0725, Banco de España;Working Papers Homepage.
    7. Siong Hook Law & Panicos Demetriades, 2004. "Capital inflows, trade openness and financial development in Developing Countries," Money Macro and Finance (MMF) Research Group Conference 2004 38, Money Macro and Finance Research Group.
    8. Alberto Chong & Florencio Lopez-de-Silanes, 2004. "Privatización en México," Research Department Publications 4374, Inter-American Development Bank, Research Department.
    9. César Calderón & Alberto Chong & Rodrigo O. Valdés, 2005. "Labor Market Regulations and Income Inequality: Evidence for a Panel of Countries," Central Banking, Analysis, and Economic Policies Book Series,in: Jorge Restrepo & Andrea Tokman R. & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Edi (ed.), Labor Markets and Institutions, edition 1, volume 8, chapter 7, pages 221-279 Central Bank of Chile.
    10. repec:wsi:jdexxx:v:12:y:2007:i:01:n:s1084946707000538 is not listed on IDEAS
    11. Bernardo Bortolotti & Marcella Fantini & Domenico Siniscalco, 2001. "Privatisation Around the World: New Evidence from Panel Data," CESifo Working Paper Series 600, CESifo Group Munich.
    12. Hatra Voghouei & M. Azail & Siong Law, 2013. "The effect of dynamic legal tradition on financial development: panel data evidence," European Journal of Law and Economics, Springer, vol. 35(1), pages 109-136, February.
    13. J. Benson Durham, 2003. "Foreign portfolio investment, foreign bank lending, and economic growth," International Finance Discussion Papers 757, Board of Governors of the Federal Reserve System (U.S.).
    14. Gérard Charreaux, 2004. "Les théories de la gouvernance:de la gouvernance des entreprises à la gouvernance des systèmes nationaux," Working Papers CREGO 1040101, Université de Bourgogne - CREGO EA7317 Centre de recherches en gestion des organisations.
    15. Robert C. Merton & Zvi Bodie, 2004. "The Design of Financial Systems: Towards a Synthesis of Function and Structure," NBER Working Papers 10620, National Bureau of Economic Research, Inc.
    16. Islam, Roumeen & Montenegro, Claudio E., 2002. "What determines the quality of institutions?," Policy Research Working Paper Series 2764, The World Bank.
    17. Milo, Melanie S., 2007. "Integrated Financial Supervision: an Institutional Perspective for the Philippines," Discussion Papers DP 2007-17, Philippine Institute for Development Studies.
    18. Choy, HiuLam & Gul, Ferdinand A. & Yao, Jun, 2011. "Does political economy reduce agency costs? Some evidence from dividend policies around the world," Journal of Empirical Finance, Elsevier, vol. 18(1), pages 16-35, January.
    19. Wihlborg, Clas, 2002. "Insolvency and Debt Recovery Procedures in Economic Development: An Overview of African Law," WIDER Working Paper Series 027, World Institute for Development Economic Research (UNU-WIDER).
    20. Raghuram G. Rajan & Luigi Zingales, 2000. "The Great Reversals: The Politics of Financial Development in the 20th Century," OECD Economics Department Working Papers 265, OECD Publishing.
    21. Law, Siong Hook & Azman-Saini, W.N.W., 2008. "The Quality of Institutions and Financial Development," MPRA Paper 12107, University Library of Munich, Germany.
    22. Frank H. Stephen & David Urbano & Stefan van Hemmen, 2005. "The impact of institutions on entrepreneurial activity," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(7), pages 413-419.

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