Antiquity, capitalism & development: The finance-growth perspective

This paper explores the impact of state antiquity (the length of established statehood) on capitalism. We argue that extractive institutions may prevail in societies with ancient roots and offer the in-depth analysis of one particular channel through which these institutions may impair economic growth: the finance-growth nexus. We propose that in countries with ancient statehood, the financial sector might be captured by powerful economic and political elites leading to a distorted finance-growth relationship. We build a model in which the equilibrium relationship between companies and banks depends on elites' entrenchment and the length of established statehood. To validate our argument, we run panel-threshold regressions on a global sample between 1975 and 2014. The results show that financial development—measured by the amount of credit—is indeed negative for growth in states with ancient institutional origins, while it is positive in relatively younger ones. Based on firm-level data, we also find that corruption in lending increases with antiquity.