Download The great reversals: the politics of financial development in the 20th

The great reversals: the politics of financial development in the 20th century
Authors: Zingales, Rajan
By Maia
Countries were more financially developed in 1913 than in 1980 and only recently have they
surpassed their 1913 levels. This could happen because incumbents oppose financial
development, because it breeds competition. In contrast to La Porta and camrades, Common
Law countries were not more financially developed in 1913.
An interest group theory of financial development
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Better disclosure rules will reduce the relative importance of incumbents while allow
newcomers to enter and compete. A more efficient financial system facilitates entry
and leads to lower profits for incumbent firms and financial institutions.
Financial underdevelopment is not the only barrier to newcomers- incumbents could
restrict or prevent entry into theid industry through licensing scheme or smth.
Financial development will only take place when the country’s political structure changes
dramatically or when incumbents want development to take place. The healthiest
industrial incumbents will tap the now open financial markets for finance. Firms that are
able to compete in international markets may not be much worried and thus will not
oppose financial system development. Unhealthy incumbents will need finance, and thus
will also not oppose it (because of product market competition).
Financial development- ease with which entrepreneur can obtain finance. Essential
elements: respect for property rights, accounting and disclosure system, a legal system
that enforces arm’s length contracts cheaply, a regulatory infrastracture that protects
consumers.
For any given level of demand for financing, a country’s domestic financial
development should be positively correlated with trade openness at a time, when the
world is open to cross-border capital flows.
The positive correlation between a country’s trade openness and financial
development should be weaker when world-wide cross-border capital flows are low.
(So both simultaneously are important). Incumbents are most able to coordinate
opposition to financial development when cross-border capital and trade flows are
small , not when they are vibrant. If only foreign capital flow is availavble(without
trade openness) then there is no need for external capital. Domestic financial
institutions will not want to compete with foreign financial institutions and thus will
oppose capital flow.
The Grand Conclusions:
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The work has shown the reversal in the financial markets and its
interpretation.
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Trade openness is correlated to the financial development, especially when it
is associated with the cross-border capital flow
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These findings are consistent with the politics of the interest group (big
players)
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Government can slow down the financial development via closing the
borders.
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Country’s institutions might slow or speed-up interest group activities
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More emphasis needs to be placed on establishing political pre-conditions
for institutions