Economic growth is highly correlated with financial development. Financial systems, in turn, are more developed where corruption and the returns to political rent-seeking are less (La Porta & et al. 1997; La Porta 2000; La Porta & et al. 2002; La Porta et al. 2006, 2008). Financial development is neither inevitable nor irreversible. Many countries never sustained dynamic financial systems and, more surprisingly, many that once did ceased doing so (Rajan & Zingales 2003).
One explanation for such financial atavism is that financial development allows an initial cadre of tycoons to grow rich and powerful during an initial burst of economic growth (Rajan & Zingales 2004). Once established, this first generation of business moguls and their descendents fear displacement by upstart entrepreneurs. To entrench their elite economic and social status, these families must somehow erect barriers to entry against such upstarts (Morck et al. 2005b).
Since upstarts, by definition, begin without fortunes of their own; their success depends upon mobilizing capital. Enduringly dynamic financial systems provide capital to successive waves of upstart entrepreneurs in highly developed economies (Schumpeter 1912). In faster growing countries, economic dominance is thus transient (Fogel et al. 2008). There is an elite class, but its membership changes continually as new entrepreneurs displace bumbling scions (Schumpeter 1951).
One obvious way for an otherwise ephemeral elite to slow, or stop, its passing, and become a permanent oligarchy is to take control of the country's financial system. Morck, Stangel and and Yeung (2000) find that economies with more inherited billionaire wealth, scaled by GDP grow slower, spend less on innovation, and erect more entry barriers. Based on this, they propose that entrenched elites with inherited wealth sustain the values of their assets via political rent-seeking directed at depriving upstarts of capital. Rajan and Zingales (2004) argue such elite capture of financial systems explains the reversals in countries' financial development they observe, and argue that legal and regulatory measures to safeguard the independence of a country's private sector financial system are necessary to "save capitalism from the capitalists".
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Bank Control, Capital Allocation, and Economic Performance
