The Coevolution of Finance and Property Rights: Evidence from Transition Economies.

Abstract

The transition from communism to capitalism was necessarily accompanied by a sudden and abrupt increase in the financialization of society. This increase occurred in an environment that, even now, still has little experience with or expertise in financialization. Given that financialization occurred simultaneously with the growth and evolution of other political and economic institutions, the question arises: What was the effect on these other nascent institutions like property rights? This article empirically analyzes the relationship between financialization and property rights in transition countries. Using a unique monthly database of twenty transition countries over a period from 1989 to 2012, this article finds that the influence of financialization depends on which definition of “financialization” is used. In particular, increases in basic financial intermediation improved property rights. However, higher-order “financialization,” proxied here by the size of capital markets and the wages in the financial sector, appeared to have a negative impact on the development of broad-based property rights in transition.