Hostname: page-component-78c5997874-v9fdk Total loading time: 0 Render date: 2024-11-02T18:56:37.745Z Has data issue: false hasContentIssue false
  • English
  • Français

Democracy, Elite Bias, and Financial Development in Latin America

Published online by Cambridge University Press:  03 August 2015

Victor Menaldo  and
Daniel Yoo
Get access

Extract

Does democracy induce financial development? There are good theoretical reasons to believe this to be the case, but the evidence adduced to support this claim has been mixed. In this article, the authors posit that only democracies that appeal to the median voter should experience financial development because those democracies have adopted their own constitution after transition, rather than having inherited one from an authoritarian predecessor. The authors empirically test this theory by focusing attention on Latin America, where there have been several reversals and improvements in financial outcomes and where many countries have cycled between regime types. They find robust support for it across different specifications. While popular democracies tend to reform their financial systems, have greater participation in the banking system, increase the supply of credit and reduce its price, and grow their stock markets, elite-biased democracies do not.

Type
Research Article
Information
World Politics , Volume 67 , Issue 4 , October 2015 , pp. 726 - 759
Copyright
Copyright © Trustees of Princeton University 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abiad, Abdul, Enrica Detragiache, and Thierry Tressel. 2008. A New Database of Financial Reforms. Washington, D.C.: International Monetary Fund.Google Scholar
Acemoğlu, Daron, Johnson, Simon, and Robinson, James. 2001. “The Colonial Origins of Comparative Development: An Empirical Investigation.” American Economic Review 91, no. 5: 1369–1401.CrossRefGoogle Scholar
Acemoğlu, Daron, and Robinson, James. 2006. Economic Origins of Dictatorship and Democracy. New York, N.Y.: Cambridge University Press.Google Scholar
Ahlquist, John, and Ansell, Ben. 2014. “Does Inequality Induce More Borrowing? Electoral Institutions and Responses to Economic Polarization.” Manuscript, University of Wisconsin, Madison, and University of Oxford, UK.Google Scholar
Albertus, Michael, and Menaldo, Victor. 2014a. “Dealing with Dictators: Negotiated Democratization and the Fate of Outgoing Autocrats.” International Studies Quarterly 58, no. 3: 550–65.Google Scholar
Albertus, Michael, and Menaldo, Victor. 2014b. “Gaming Democracy: The Role of Elite Welfare in Democratic Transition.” British Journal of Political Science 44, no. 3: 575–603.CrossRefGoogle Scholar
Arcand, Jean-Louis, Berkes, Enrico, and Panizza, Ugo. 2012. “Too Much Finance?” IMF Working Paper WP/12/161. Washington, D.C.: International Monetary Fund.Google Scholar
Baer, Werner, and Nazmi, Nader. 2000. “Privatization and Restructuring of Banks in Brazil.” Quarterly Review of Economics and Finance 40, no. 1: 3–24.CrossRefGoogle Scholar
Banerjee, Abhijit V., Duflo, Esther, Glennerster, Rachel, and Kinnan, Cynthia. 2013. “The Miracle of Microfinance? Evidence from a Randomized Evaluation.” Working Paper 13-09. Cambridge, Mass.: Massachusetts Institute of Technology.Google Scholar
Barandiarán, Edgardo, and Hernández, Leonardo. 1999. “Origins and Resolution of a Banking Crisis: Chile 1982–86.” Working Paper 57. Santiago, Chile: Central Bank of Chile.Google Scholar
Barth, James, Caprio, Gerard Jr., and Levine, Ross. 2006. Rethinking Bank Regulation: Till Angels Govern. Cambridge, UK: Cambridge University Press.Google Scholar
Becerra, Oscar, Cavallo, Eduardo, and Scartascini, Carlos. 2012. “The Politics of Financial Development: The Role of Interest Groups and Government Capabilities.” Journal of Banking & Finance 36, no. 3: 626–43.CrossRefGoogle Scholar
Beck, Thorsten, Clarke, George, Groff, Alberto, Keefer, Philip, and Walsh, Patrick. 2001. “New Tools in Comparative Political Economy: the Database1 of Political Institutions.” World Bank Economic Review 15, no. 1, 165–76.Google Scholar
Beck, Thorsten, Demirgüç-Kunt, Asli, and Levine, Ross. 2003. “Law and Finance: Why Does Legal Origin Matter?” Journal of Comparative Economics 31, no. 4: 653–75.Google Scholar
Beck, Thorsten, Demirgüç-Kunt, Asli, and Levine, Ross. 2010. “Financial Institutions and Markets across Countries and Over Time: The Updated Financial Development and Structure Database.” The World Bank Economic Review 24, no. 1: 77–92.Google Scholar
Beck, Thorsten, Levine, Ross, and Loayza, Norman. 2000. “Finance and the Sources of Growth.” Journal of Financial Economics 58, no. 1: 261–300.Google Scholar
Bordo, Michael, and Rousseau, Peter. 2006. “Legal-Political Factors and the Historical evolution of the Finance-Growth Link.” European Review of Economic History 10, no. 3: 421–44.Google Scholar
Calomiris, Charles, and Haber, Stephen. 2014. Fragile by Design: Banking Crises, Scarce Credit, and Political Bargains. Princeton, N.J.: Princeton University Press.Google Scholar
Campos, Nauro, and Coricelli, Fabrizio. 2009. “Financial Liberalization and Democracy: The Role of Reform Reversals.” Working Paper 4339. Bonn, Switzerland: Institute for the Study of Labor.Google Scholar
Cecchetti, Stephen, and Kharroubi, Enisse. 2012. “Reassessing the Impact of Finance on Growth.” Working Paper 381. Basel, Switzerland: Bank for International Settlements.Google Scholar
Cheibub, José Antonio, Gandhi, Jennifer, and Vreeland, James Raymond. 2010. “Democracy and Dictatorship Revisited.” Public Choice 142: 67–101.Google Scholar
Chwieroth, Jeffrey. 2007. “Testing and Measuring the Role of Ideas: The Case of Neoliberalism in the International Monetary Fund.” International Studies Quarterly 51, no. 2: 5–30.Google Scholar
Cohen, Benjamin, Mateos y Lago, Isabelle, Martin, Ricardo, and Takagi, Shinji. 2004. The IMF and Argentina, 1991–2001. Washington, D.C.: International Monetary Fund.Google Scholar
Demirgüç-Kunt, Asli, and Levine, Ross. 2009. “Finance and Inequality: Theory and Evidence.” NBER Working Paper. Cambridge, Mass.: National Bureau of Economic Research.Google Scholar
Díaz-Alejandro, Carlos. 1985. “Good-Bye Financial Repression, Hello Financial Crash.” Journal of Development Economics 19, no. 1: 1–24.CrossRefGoogle Scholar
Easterly, William. 2007. “Inequality Does Cause Underdevelopment: Insights from a New Instrument.” Journal of Development Economics 84, no. 2: 755–76.Google Scholar
Elkins, Zachary, Ginsburg, Tom, and Melton, James. “Comparative Constitutions Project.” At comparativeconstitutionsproject.org, accessed May 5, 2015.Google Scholar
Fisman, Raymond, and Love, Inessa. 2003. “Financial Development and Growth in the Short and Long Run.” NBER Working Paper. Cambridge, Mass.: National Bureau of Economic Research.Google Scholar
Galor, Oded, and Moav, Omer. 2004. “From Physical to Human Capital Accumulation: Inequality and the Process of Development.” Review of Economic Studies 71, no. 4: 1001–26.Google Scholar
Galor, Oded, and Moav, Omer. 2006. “Das Human-Kapital: A Theory of the Demise of the Class Structure.” Review of Economic Studies 73, no. 1: 85–117.CrossRefGoogle Scholar
Girma, Sourafel, and Shortland, Anja. 2008. “The Political Economy of Financial Development.” Oxford Economic Papers 60, no. 4: 567–96.Google Scholar
Greenwood, Jeremy, and Jovanovic, Boyan. 1990. “Financial Development, Growth, and the Distribution of Income.” Journal of Political Economy 98, no. 5: 1076–107.CrossRefGoogle Scholar
Haber, Stephen. 2009. “Latin America’s Quiet Revolution.” Wall Street Journal. January 31: W3.Google Scholar
Haber, Stephen, and Menaldo, Victor. 2011. “Do Natural Resources Fuel Authoritarianism? A Reappraisal of the Resource Curse.” American Political Science Review 104, no. 1: 1–26.Google Scholar
Haber, Stephen, North, Douglass, and Weingast, Barry, eds. 2008. Political Institutions and Financial Development. Stanford, Calif.: Stanford University Press.Google Scholar
Haber, Stephen, Razo, Armando, and Maurer, Noel. 2003. The Politics of Property Rights: Political Instability, Credible Commitments, and Economic Growth in Mexico, 1876–1929. Cambridge, UK: Cambridge University Press.Google Scholar
Heston, Alan, Summers, Robert, and Aten, Bettina. 2009. Penn World Table Version 6.3. Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, September. At https://pwt.sas.upenn.edu/php_site/pwt62/pwt62_form.php, accessed May 25, 2015.Google Scholar
Hoffman, Philip, Postel-Vinay, Gilles, and Rosenthal, Jean-Laurent. 2009. Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Capital Markets. Cambridge, Mass.: Harvard University Press.Google Scholar
Huang, Yongfu. 2010. “Political Institutions and Financial Development: An Empirical Study.” World Development 38, no. 12: 1667–77.Google Scholar
Inman, Robert, and Rubinfeld, Daniel. 2008. Federal Institutions and the Democratic Transition: Learning from South Africa. NBER Working Paper. Cambridge, Mass.: National Bureau of Economic Research.Google Scholar
Karlan, Dean, and Zinman, Jonathan. 2010. “Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts.” Review of Financial Studies 23, no. 1: 433–64.Google Scholar
Keefer, Philip. 2007. “Beyond Legal Origin and Checks and Balances: Political Credibility, Citizen Information and Financial Sector Development.” In Haber, Stephen, North, Douglass, and Weingast, Barry, eds., Political Institutions and Financial Development. Stanford, Calif.: Stanford University Press.Google Scholar
King, Robert, and Levine, Ross. 2004. Finance and Growth: Schumpeter Might Be Right. Washington, D.C.: World Bank Publications.Google Scholar
Laeven, Luc, and Valencia, Fabian. 2008. “Systemic Banking Crises: A New Database.” IMF Working Paper Wp/08/224. Washington, D. C.: International Monetary Fund.Google Scholar
La Porta, Rafael, López de Silanes, Florencio, Shleifer, Andrei, and Vishny, Robert. 1998. “Law and Finance.” Journal of Political Economy 107, no. 6: 1113–55.Google Scholar
Larraín, Felipe, and Meller, Patricio. 1991. “The Socialist-Populist Chilean Experience, 1970–1973.” In Dornbusch, Rudiger and Edwards, Sebastian, eds., The Macroeconomics of Populism in Latin America. Chicago, Ill.: University of Chicago Press.Google Scholar
Levine, Ross. 1997. “Financial Development and Economic Growth: Views and Agenda.” Journal of Economic Literature 35, (June): 688–726.Google Scholar
Levine, Ross, Loayza, Norman, and Beck, Thorsten. 2000. “Financial Intermediation and Growth: Causality and Causes.” Journal of Monetary Economics 46, no. 1: 31–77.Google Scholar
Menaldo, Victor, and Yoo, Daniel. 2015. Supplementary material. At http://dx.doi.org.10.1017/S0043887115000192.Google Scholar
Montenegro, Armando. 1997. “Directed Credit in Latin America.” in Staking, Kim, ed., Policy-Based Finance and Market Alternatives: East Asian Lessons for Latin America and the Caribbean. Washington, D.C.: Inter-American Development Bank.Google Scholar
Musacchio, Aldo. 2009. Experiments in Financial Democracy: Corporate Governance and Financial Development in Brazil, 1882–1950. New York, N.Y.: Cambridge University Press.Google Scholar
Perotti, Enrico C., and von Thadden, Ernst-Ludwig. 2006. “The Political Economy of Corporate Control and Labor Rents.” Journal of Political Economy 114, no. 145–74.Google Scholar
Petersen, Mitchell, and Rajan, Raghuram. 1995. “The Effect of Credit Market Competition on Lending Relationships.” Quarterly Journal of Economics 110, no. 2: 407–43.CrossRefGoogle Scholar
Quintyn, Marc, and Verdier, Genevieve. 2010. “Mother Can I Trust Government? Sustained Financial Deepening, a political Institutions View.” IMF Working Paper WP/10/20. Washington, D.C.: International Monetary Fund.Google Scholar
Rajan, Raghuram, and Zingales, Luigi. 1998. “Financial Dependence and Growth.” American Economic Review 88, no. 3: 559–86.Google Scholar
Rajan, Raghuram, and Zingales, Luigi. 2003. “The Great Reversals: The Politics of Financial Development in the twentieth century.” Journal of Financial Economics 69, no. 1: 5–50.Google Scholar
Roett, Riordan. 2011. The New Brazil. Washington, D.C.: Brookings Institution Press.Google Scholar
Solt, Frederick. 2014. “The Standardized World Income Inequality Database.” Working Paper. SWIID Version 5.0. October, at http://myweb.uiowa.edu/fsolt/swiid/swiid.html.Google Scholar
Sylla, Richard. 2008. “The Political Economy of Early U.S. Financial Development.” In Haber, Stephen, North, Douglass, and Weingast, Barry, eds., Political Institutions and Financial Development. Stanford, Calif.: Stanford University Press.Google Scholar
Vo, Ngoc, and Williams, Jonathan. 2013. “bank restructuring and bank stability in latin america.” In Monsalvez, Jose Pastor, and de Guevara Radoselovic, Juan Fernandez, eds., Modern Bank Behaviour. London, UK: Palgrave MacMillan.Google Scholar
Wright, Joseph, and Escribà-Folch, Abel. 2012. “Authoritarian Institutions and Regime Survival.” British Journal of Political Science 42, no. 2: 283–309.Google Scholar
Yang, Benhua. 2011. “Does Democracy Foster Financial Development? An Empirical Analysis.” Economics Letters 112, no. 3: 262–65.Google Scholar
Supplementary material: PDF

Menaldo and Yoo supplementary material

Appendix

Download Menaldo and Yoo supplementary material(PDF)
PDF 187.1 KB