Political institutions and financial development : evidence from new world economies

Abstract

There is a consensus among economists that the development of banking systems plays a causal role in economic growth. What remains unresolved is why some countries have large banking systems that allocate credit broadly, while other countries have small banking systems that allocate credit narrowly. This paper draws on the economic history of the United States, Mexico, and Brazil in order to test three propositions: there are systematic differences in the incentives facing bankers and political entrepreneurs under democracy and authoritarianism; there are systematic differences in the incentives facing bankers when authoritarian governments cannot credibly propose to share rents; and there are systematic differences in the incentives facing bankers and political entrepreneurs under democracy when suffrage is limited, as opposed to when it is not limited.