Publication: Law, Politics, and Finance
Date
2001-04
ISSN
Published
2001-04
Author(s)
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
results provide 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.
Link to Data Set
Citation
“Beck, Thorsten; Demirguc-Kunt, Asli; Levine, Ross. 2001. Law, Politics, and Finance. Policy Research Working Paper;No. 2585. © World Bank, Washington, DC. http://hdl.handle.net/10986/19682 License: CC BY 3.0 IGO.”
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