Financial structures, political risk and economic growth

Using a panel of 113 countries over the period from 1990 to 2013, this paper provides new empirical evidence to the intensive debate of whether financial structure is relevant for economic growth. Specifically, we evaluate the role of political risk, development stage and their interactions with the structure of the financial system. We find that on average a more market-based financial system is associated with a higher level of economic growth. This impact varies with different levels of political risk and different stages of economic development. Specifically, the comparative development of equity markets compared with banks appear to promote more economic growth in countries with lower political risk and at a better stage of economic development. Moreover, banks are more important to economic growth in over-market-based financial systems, whilst equity markets are more sensitive to economic growth in over-bank-based financial systems. Our paper provides new insights into the real effects of the mixture of banks and markets on the economy.