71 Pages Posted: 22 Jul 2000
Date Written: June 2001
Indicators of the development of the financial sector do not improve monotonically over time. In particular, we find that by most measures, countries were more financially developed in 1913 than in 1980 and only recently have they surpassed their 1913 levels. This pattern cannot be explained by structural theories that attribute cross-country differences in financial development to time-invariant factors, such as a country's legal origin or culture. We propose an "interest group" theory of financial development where incumbents oppose financial development because it breeds competition. The theory predicts that incumbents' opposition will be weaker when an economy allows both cross-border trade and capital flows. This theory can go some way in accounting for the cross-country differences and the time series variation of financial development. When we recognize that different kinds of institutional heritages afford different scope for private interests to express themselves, we obtain a synthesis between the structural theories and private interest theory, which is supported by the data.
Keywords: Corporate Governance, Economic Growth
JEL Classification: G34, O16
Suggested Citation: Suggested Citation
Rajan, Raghuram G. and Zingales, Luigi, The Great Reversals: The Politics of Financial Development in the 20th Century (June 2001). 3rd Annual Fin. Mkt. Dev. Conference, Hong Kong 2001; AFA 2001 New Orleans Meetings; CRSP Working Paper No. 526. Available at SSRN: https://ssrn.com/abstract=236100 or http://dx.doi.org/10.2139/ssrn.236100