Seminar Series: Abstract

2.00
August 25 2009
Seminar Room B (Arndt Room)

Economic Growth, Democracy and Financial Structure
Sambit Bhattacharyya, RSPAS

What factors determine financial structure? Is it an outcome of rapid economic growth, democratic political institutions, efficient legal institutions, or high level of social capital? This paper empirically explores the determinants of financial structure using panel data covering the period 1975 to 2000 and 88 countries. To tackle endogeneity concerns we use resource rent and rainfall as instruments for economic growth and democracy. We notice that resource rent and rainfall are negative predictors of growth and democracy respectively. The former is in line with the ‘resource curse’ literature. The latter supports the view that high rainfall leads to an increase in pathogens. Pathogens trigger crop failure, conflict and high mortality all of which weakens democratic institutions. We also use a long-run measure of democracy (democratic capital). Our results indicate that economic growth is the most robust positive predictor of financial structure and democracy is statistically insignificant. Our basic result holds after controlling for time varying common shocks, country fixed effects, and various additional covariates. It is also robust to various alternative measures of financial structure and democracy, as well as across different samples and data frequency.