The Great Reversals: The Politics of Financial Development in the 20th Century

Raghuram Rajan and Luigi Zingales

No 8178, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that the development of the financial sector does not change 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 is inconsistent with most recent theories of why cross-country differences in financial development do not track differences in economic development, since these theories are based upon time-invariant factors, such as a country's legal origin. We propose instead an 'interest group' theory of financial development. 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.

JEL-codes: G30 O16 (search for similar items in EconPapers)
Date: 2001-03
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (168)

Published as Rajan, Raghuram G. and Luigi Zingales. "The Great Reversals: The Politics of Financial Development in the 20th Century." Journal of Financial Economics 69, 1 (July 2003): 5-50.
Published as Falvey, Rodney and Edward Udo Kreickemeier (eds.) Developments in International Trade Theory. Cheltenham: Elgar, 2005.

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Working Paper: The Great Reversals: The Politics of Financial Development in the 20th Century (2001)
Working Paper: The Great Reversals: The Politics of Financial Development in the 20th Century (2000)
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