Download This PaperDemocracy, Elite-Bias and Financial Development in Latin America
2015, World Politics, 67, no. 4: 726-759.
48 Pages Posted: 31 Dec 2013 Last revised: 22 Nov 2016
Date Written: December 30, 2013
Abstract
Does democracy induce financial development? There are good theoretical reasons to believe this to be the case. However, the evidence adduced to support this claim has, to this point, been mixed. In this paper, we try to make sense of this fact by unpacking democracy. We posit that only democracies that appeal to the median voter, because they have adopted their own constitution after transition, rather than inherited one from an authoritarian predecessor, should experience financial development. 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, we empirically test this theory. We find very 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, reduce its price, and grow their stock markets, “elite-biased” democracies do not.
Keywords: Democracy, Financial Development, Factor Endowments, Latin America
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