Law, Institutions, and Finance in China and India (original) (raw)
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Law and Finance in India - an Overview
SSRN Electronic Journal, 2006
The central role of legal reforms in sustaining economic growth and financial development is widely recognized in India. Exactly what elements of the legal system affect the financial system and how, are less clear. We review the recent literature on law and finance and assess the state of India's legal and judicial system as well as that of its financial system, particularly relative to the rest of the world. It appears that on paper Indian laws provide good to excellent protection to investor rights. Implementation of these laws, however, has been less than satisfactory. Public enforcement of securities laws has been weak and courts in India have been extremely slow and overloaded with cases. Even a decade and a half after the beginning of the reforms process, India still suffers from an excess of red-tape and bureaucracy (not to speak of corruption) poses hurdles to every major aspect of business. Indian financial markets have had limited though increasing depth and survey evidence reveals the preponderance of internal financing among India's small and medium sector firms as well as marked reliance of Indian small businesses on informal networks and institutions like reputation and trus t rather than the formal legal system to enforce contracts and settle disputes.
Legal institutions and financial development
Why do some countries have growth-enhancing financial systems, while others do not? Why have some countries developed the necessary investor protection laws and contract-enforcement mechanisms to support financial institutions and markets, while others have not? This paper reviews existing research on the role of legal institutions in shaping financial development.
The Journal of Finance, 1998
We investigate how differences in legal and financial systems affect firms' use of external financing to fund growth. We show that in countries whose legal systems score high on an efficiency index, a greater proportion of firms use long-term external financing. An active, though not necessarily large, stock market and a large banking sector are also associated with externally financed firm growth. The increased reliance on external financing occurs in part because established firms in countries with well-functioning institutions have lower profit rates. Government subsidies to industry do not increase the proportion of firms relying on external financing. Diamond, Douglas W., 1996, Liquidity, banks and markets, Policy Research Working Paper No. 1566, The World Bank. Diamond, Douglas W., 1993, Bank loan maturity and priority when borrowers can refinance, in Mayer, Colin, and Xavier Vives, eds.: Capital Markets and Financial Intermediation (Cambridge University Press, Cambridge, England).
Different Legal Institutions for Different Economic Settings : Evidence from Interviews in China
2015
China’s rapid growth in the absence of autonomous legal institutions of the kind found in the west seems to pose a problem for theories which stress the importance of law for economic development. In this paper we draw on interviews with lawyers, entrepreneurs and financial market actors to illustrate the complexity of attitudes to law and economic growth in contemporary China. In the case of product markets, business relations are increasingly characterised by a mix of trust-based transacting and legal formality which is not fundamentally different from practice in the west. Financial markets are less like their western counterparts, thanks to the preponderant role of government in asset allocation, and a lack of transparency in market pricing. However, in both sets of markets we find evidence of a transition from inter-personal trust (guanxi) to impersonal transacting, and of growing demands from business and legal groups for the impartial application of legal rules and market reg...
Law and Finance: The Case of Stock Market Development in China
Having grown to one of the largest in the world in just over two decades, the stock market of China is cited as a counterexample to the significance of law for financial market development. A thorough investigation of the history of China’s stock market development however finds that law is actually critical to sustaining market growth, in that China's stock market faced an existential crisis in the early 2000s as a result of pervasive market abuse and only after market abuse was greatly curbed by law did the market continue to grow. On the other hand, the trajectory of development in China is growth first followed by law and the improvement of law is driven by market growth. The experience of China hence indicates that law and market growth is in a bidirectional rather than unidirectional causal relation, and the course of development is “growth-law-further growth”. Nevertheless, this virtuous circulation is not a guarantee and market growth may not always lead to stronger law, evidenced by the fact that serious mismanagement is still widespread among listed SOEs in China. Political and ideological restrictions are the root obstacle. Politics and ideologies are fundamental to market development, for they not just obstruct the change from market growth to law, but also explain the growth in the first place. On the other hand, the strength of law is not predetermined by the legal origin of a country, and law can improve even in China, a country without the tradition of rule of law.
The Financial System Capacities in China and India
SSRN Electronic Journal, 2007
The extraordinary performance of China and India's economies raises questions about the traditional measures of the size and depth of financial systems. While banks and markets have played a limited role in providing funds for corporate sectors and supporting economic growth in these two countries, non-state, nonlisted firms, relying mostly on internal and alternative financing channels, have been growing faster than the state and listed sectors and contributing much of the growth. The alternative financing channels, excluded in the traditional measures of financial systems, operate outside legal institutions and are backed by alternative mechanisms such as reputation, relationships, and trust. We define the capacity of a financial system to be the total funding available for all corporate sectors in an economy. Our findings from China and India demonstrate that alternative finance can significantly expand the financial system capacity and promote growth at the firm level and economy wide.
2017
This paper explores the impact of industrialisation and urbanisation on financial development by incorporating the role of institutional quality for India and China over the period of 1970-2013. We apply the bounds testing approach, which accommodates structural breaks, in order to test the presence of cointegration between the variables. The results show the existence of long-run dynamics between the series. Furthermore, we establish that industrialisation and urbanisation lead to financial development and that the lack of institutional quality and government size reduces financial development. Trade openness enhances Indian financial development but hinders Chinese financial development. The causality analysis depicts the bidirectional causality between urbanisation (industrialisation) and financial development for India. In the case of China, the urbanisation Granger causes financial development, and the feedback effect exists between industrialisation and financial development. ...