El trabajo de Amnistía Internacional sobre el petróleo y los derechos humanos

The late 1990s saw the emergence of the institutional school of thought which holds that understanding the institutional environment is imperative for FD and has recently attracted considerable attention from both theorists and empiricists (Fergusson, 2006; Beck and Levine, 2004). The law and finance school emphasises the differences in legal origin in explaining the difference in FD across countries. La Porta Lopez-de-Silanes, Shleifer, Vishny (1997, 1998), Djankov et al. (2007). La Porta et al (1998), Rajan and Zingales (2003), Acemoglu and Johnson (2005), Haber, North and Weingast (2008) argue that institutions that ensure: respect of the rule of law, make sure property rights are protected, contracts are enforced and constrain those in powerare shown to have achieved higher levels of FD, a thought adopted in this study.

The protagonists of the legal school of thought of FD argue that the dissimilarity between financial systems based on banks and financial systems based on the marketsis immaterial. For instance, Levine (1998, 2000, 2001) and Levine et al (2000) using cross-country data from La Porta et al (1997, 1998) on differences in corporate law, regulation and law systems, argue that what is crucial for FD is establishing a general legal framework in an environment in which financial systems can effectively and efficiently operate. The legal view, therefore, asserts that only that part of FD that relies on the legal system is important for promoting growth in the economy. As highlighted above, Yang (2011) asserts that of central importance and at a rudimentary level, the legal institutions could be thought of and being brought about and reinforced by democracy. Contrary to the above views, Marcelin and Mathur (2014) present a framework for understanding the interactions between political and legal institutions, property rights protection, and their implications for FD and find little support that common law legal heritage is more suitable than French civil law for some key features of FD. They conclude that different types of institutional and market reforms are more relevant to financial intermediation than legal systems. We argue that market reforms and legal heritage may affect FD through political stability which in turn depends on the state of democracy. The more democratic a country is the more effective market reforms would be and the more independent the judiciary would be to ensure property rights and contract enforcements.

Recent studies have exemplified the fact that a positive electoral democratic system contributes positively to FD. According to Siegle et al (2004) democracy ensures that: political power is not concentrated in the hands of a few individuals or groups, those in power put in place systems that react quickly and positively to the needs of citizens, there is

transparency, there is a system of self-correcting mechanisms without external help and other aspects of good institutions. Haber et al., (2007) contends that democracies, by encouraging citizens to influence or support government and to compete for political power may limit state involvement in the financial system which are sometimes exploitative and opportunistic and thus bring about more rivalry and efficiency in the banking system. North and Weingast (1989) suggest that when there is no political competition, what will be of crucial importance to ensure that property rights are protected and that contracts are enforced will be the fact that political power is not concentrated in the hands of a few individuals or groups. Acemoglu and Johnson (2005) contend that countries that greatly limit the powers of the government will guarantee greater protection of property rights which ultimately lead to more efficient banking and market financial system. In the same line of thinking, La Porta et al., (2002) is of the view that democratic regimes limits government takeover of financial institutions hence encouraging FD. Rodrik (2000) argues that democracies deliver better institutional outcomes because they tend to create more equal opportunities for people, especially in the fields of health, education and employment opportunity, which manifests itself in a higher share of wages in the national income. In general, therefore, according to Rodrik (2000) democracy helps to build better institutions based on local knowledge: political systems that advocate more involved forms of citizen participation and curbing excessive concentration of power are the most successful in assembling knowledge from within the country. Democracy is thought of as an institution beyond others which is crucial for building other good institutions (Rodrik 2000). Therefore, as a meta-institution, democracy ensures effective constraints on governments and effective policy implementation strategies which positively impact on FD.

Huang (2010) argues that in countries where there are no political checks and balances and power is concentrated in the hands of a small group of powerful people, they will be more prone to take care of their interests and limit political participation and competition in the system. If such a powerful group controls an inordinate amount of political power, then the more dictatorial the system which ultimately hinders FD. This, therefore, means limiting the power of elite groups through checks and balances increases political participation ensures the political rights of citizens, ensures that individual rights are protected by the law from unjust governmental or other interference. With these guaranteed, the efficiency of institutions would be increased which is advantageous to FD (Huang, 2010). Girma and Shortland (2008) find that FD is promoted where there is regime change from autocracy to democracy as a result of a general increase in wealth. Inferring from this argument, we assert that an increase in wealth would increase savings and investments and ultimately growth. Intermediation is thus increased, a positive feature of FD. We argue that for

democracy to have a real positive effect on FD, it should be substantive10 _{rather than just} procedural.

Building from the work of Yang (2011), Cooray (2011), Anwar and Cooray (2012) and Huang (2010), who contend that political institutions, especially democratic transformation foster FD, we posit that FD in SADC countries could be achieved through democracy, controlling for specific economic and social variables in a non-linear relationship. We test this hypothesis in a region characterised by countries with improving but differentiated levels of FD following deregulation in the 1990s Brownbridge and Harvey (1998) and a wave of democratisation though with fragile and predominantly weak institutions Landsberg (2004). Most previous empirical studies on the effect of institutions on FD suggest a linear relationship. We contend that the effect of democracy on FD could be through interactions with certain social and economic policy variables in a relationship that is non-linear. In this respect we follow Minier (2007) who investigated the indirect effect that institutions may have on growth after allowing for several types of non-linearities. We build on this and suggest that the impact of democracy on FD may be non-linear through their interactions with policy variables.

While the positive impact of democracies on FD is mostly positive and convincing as exposed above, some studies have shown that this assertion is somehow ungrounded on its effects on FD and others on growth. On the effect of institutions on growth, the primordial role of institutions in promoting economic development is discounted by Chang (2003) who concludes that institutional development is not the sine qua non of economic development, and institutional reforms in developing countries should not be imposed from outside, but should be allowed to evolve naturally and internally. This argument may accord with the central conclusion of Rodrik (2000) study and the pioneering research by Hausmann, Pritchett and Rodrik (2005: 303) on ‘growth accelerations’, who suggest that everything we know about economic growth that indicates large-scale institutional transformation is not so necessary for getting growth started, but is very important for sustaining it. These conclusions suggests that the negative effect of institutions on growth may not be conducive for FD if institutions are not in-built and allowed to evolve naturally but imposed from outside. Contemporary, the argument seems to correlate with political instability created in some

10_{We define substantive democracy as one that not only brings about free and fair elections, the} separation of powers and the role of opposition parties but ensures respect of the rule of law, protects property rights as well as contract enforcements, creditor and shareholder rights and puts effective constrain on rulers.

countries around the world as international organisations try to encourage and secure democracy leading to the affected countries experiencing low growth and FD.

Some recent studies have shown a weak association between democracy and FD. An empirical study by Yang (2011) finds that the development of the stock market is negatively associated with FD. He contends that the development of the banking sector positively relates to democracy in cross-sectional regressions but vanishes when using panel regressions. Barro (2008) argues that democracy can hamper growth in the nascent developmental stage caused by: the tendency of the majority voting to support programmes that reapportion income from rich to the poor, policies that increase taxes and other distortions that reduce incentives. Also, Barro (2000) suggests that democracies may give in to pressure groups that redistribute resources to themselves; for example agricultural lobbies, defence contractors and trade unions. Barro’s (2000) conclusions corroborates with that of Alesina and Perotti (1994) in their early survey of the political economy of growth who assert that growth is influenced not so much by the nature of the political regime (democracy or dictatorship) but by the stability of the political regime transitions from dictatorship to democracy, often associated with socio-economic instability, which are typically periods of low growth. These findings were based on the proxy or proxies for FD applied and the stage of economic development of the country or countries in question.

Studies on the effect of institutions in FD and growth in developed and developing economies as highlighted above show mixed results. It should be worth noting that there is inconclusive evidence that institutions matter for FD and growth. We build on this evidence and test our hypothesis in SADC region where we are not aware of any studies exploring the role of institutions on FD. The methodology and empirical analysis in this thesis attempts to fill this vacuum.