Does Competitive Politics Produce Competitive Markets? Politics of Financial Market Development

This paper is a preliminary exploration of the politics of financial market development. Using panel data for 197 countries over 34 years, we test a range of variables and hypotheses regarding the politics of financial market development. We find only weak support for the legal origins explanations of financial market development. Surprisingly, our study reveals virtually no support for the assertion that financial market development is associated with political institutions that impose credible commitments on the state executive. In contrast, we find support for those who conceptualize political competition as occurring in a political market whose conditions enable politicians to make credible promises to deliver financial development. When we attempt to analyze the impact of political power in our analysis, we run into the problem of inadequate available data to validly model the power of industrial incumbents who are likely to play an important role in the politics of financial market development. Nonetheless, we find support for those who argue that the well-endowed government regulators play an important role in promoting financial market development. Do competitive politics create competitive markets? Our answer is “No” if we conceptualize competitive politics as merely a check on the executive. However, our answer is “Yes” if by competitive politics we mean electoral campaigns where politicians can mobilize popular support through credible promises of public goods, including efficient markets and effective and fair regulation