61st Annual Meeting
Finance and Economic Modernization
September 14-16, 2001
Philadelphia, Pennsylvania
ABSTRACTS
SESSION 5C. FINANCE AND ECONOMIC
DEVELOPMENT
Saturday, September 15
3 - 4:40
|
Stephen Haber (Stanford) and Kenneth Sokoloff (UCLA) |
| Abstract: Economic
historians have long argued that the specific features of the laws that
govern financial markets and banks exert a powerful effect on the size
and structure of banking systems and financial markets. They have
also argued that the resulting financial systems have a powerful effect
on the growth of the real economy. Most of the work on this subject,
however, has focused on developed economies. This is unfortunate
in that the best natural laboratories for the study of legal barriers to
entry in banking and securities markets are to be found in the underdeveloped
world. This paper therefore analyzes the specific features of the
institutions that governed financial systems across the Americas during
the nineteenth and early twentieth centuries. Our paper has two goals.
First, we provide a systematic analysis of the institutions that governed
entry into banking and the institutions that governed the formation of
limited liability joint stock companies. We have retrieved a complete
set of the financial and banking laws for a broad array of countries, covering
the period roughly 1820-1930. These countries include: Mexico, Brazil,
Argentina, Guatemala, Bolivia, Peru, Chile, Uruguay, Venezuela, and the
United States. Second, we analyze the size and structure of the resulting
banking systems and financial markets in light of what we know about the
legal system.
Our hypotheses are twofold. First, federal systems produced lower barriers to entry because of competition among states. That is, states ratcheted their requirements to found a bank or Joint Stock Company downwards in order to attract businesses from rival states. Conversely, Latin American countries that were politically centralized tended to erect high barriers to entry. Essentially, central governments traded access to credit from the banks, in exchange for which the bankers were promised that they would not have to compete. Second, extremely concentrated banking systems tended to be associated with small and underdeveloped financial markets. In theory, banks and financial markets are substitutes for one another. As a practical matter, however, the inability of most entrepreneurs to mobilize working capital from the banks made it almost impossible for them to successfully sell equity to investors from outside the founding group. |
|
Mexico's Early Industrialization, 1878-1913" Noel Maurer (ITAM) and Tridib Sharma |
| Abstract: Most explanations for the prevalence of groups multi-company firms with a common source of finance are based on hypothesised increasing returns to scale or missing formal capital markets. These explanations, however, fail to fit the empirical evidence for Mexico during its initial industrialisation, although industrial growth was concentrated in grouped firms. We propose a simpler explanation. In the absence of secure property rights, collateral cannot be credibly offered. This is coupled with the fact that several kinds of idiosyncratic shocks are privately observed by the firm. Thus lending on the basis of past history, or reputation, entails that creditors punish firms for non-payment along the equilibrium path. In such circumstances, firms have incentives to group together in order to insure each other against unpredictable idiosyncratic shocks, assuming that such shocks are not perfectly correlated and monitoring costs are low. We then present empirical evidence to support our hypothesis. |
|
The Rio de Janeiro Stock Exchange and the Industrialization of Brazil, 1889-1930" Aldo Musacchio (Stanford) |
| Abstract: This paper analyzes the relationship between finance and modernization by studying the effects of the institutions that created the stock exchange in Rio de Janeiro, Brazil. The main question addressed is: What was the role of the Rio de Janeiro Stock Exchange in Brazil's industrialization? My hypothesis is that the new institutional framework that regulated financial markets after 1889 in Brazil enabled entrepreneurs and State governments to use new financial instruments to finance the bulk of infrastructure and manufacturing ventures during the period 1889-1930. To test my hypothesis I used disaggregated data for all the securities traded in the Rio de Janeiro Stock Exchange. I show that the role of the stock exchange in the process of industrialization was of primary importance. First, many large investment projects were financed issuing debentures, second State governments participated actively by selling debt to finance infrastructure projects, and third, those governments swapped debentures for government bonds in order to subsidize risky projects in their States. My findings contrast with those of other authors who have underestimated the importance of the Rio de Janeiro Stock Exchange in Brazil's industrialization like Triner (1994) and Levy (1977). |
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