Richard W. Carney

The Political Economy of Financial Systems

Why do countries with similar levels of development have such different financial systems? Some countries, such as the US and UK, rely extensively upon capital markets for mobilizing new capital, while others, such as Germany, France, and Japan, rely heavily on bank lending. I argue that the structure of a country’s financial system depends on the political power of farmers and labor relative to that of large firms, where farmers and labor prefer banks, while big firms prefer capital markets. I present cross-section time-series statistical analysis across 14 OECD countries from 1976-1990, as well as data spanning the twentieth century for France and Japan. The results suggest that labor-rural political power plays the primary role, while international capital mobility, which permits large firms to seek financing abroad, plays a secondary role in determining the structure of a country’s financial system.

Partisan Politics and Institutional (Re)Creation: Locating and Explaining the Origins of Modern Finance Capitalism

Why do some countries rely more heavily on equities markets, while others depend more on commercial banking? Analyses of the origins of contemporary capitalist institutions usually look back to the late nineteenth and early twentieth century. However, this paper demonstrates that financial institutions – regarded as central to the way capitalist systems are organised – changed radically in the mid-twentieth century in many countries. This paper argues that government partisanship in formative moments of institutional (re)creation can better account for their modern manifestation than prominent alternative explanations. A new measure of partisanship that is sensitive to these institutional transformations is presented. Case studies on Germany and France offer evidence consistent with this argument.

Chinese capitalism in the OECD mirror

As Chinas economy grows and matures, is it developing institutional patterns that resemble those of other wealthy countries? By examining the origins of modern capitalist institutions among wealthy countries, and how interests structured them, I draw implications for China. Specifically, I find that China resembles continental European capitalism far more than Anglo-American capitalism, and that it is likely to remain this way for the foreseeable future.

Institutional (Dis)Incentives to Innovate: An Explanation for Singapore's Innovation Gap

Despite having the fifth highest per capita GDP in the world (according to IMF PPP statistics for 2007), and despite numerous government efforts to spur innovation, Singapore has faced difficulties in establishing a durable base of entrepreneurial activity. Many ascribe this failure to the city-state’s policies, which are often portrayed as generating a culture of risk-aversion and a lack of creativity. In contrast to this conventional view, we argue that the city-state’s institutional arrangements generate conflicting innovation incentives, and ultimately undermine innovative activity. Statistical tests across 23 countries offer evidence that is consistent with this argument.

The Domestic Political Origins of Global Financial Standards: The Agrarian Roots of American Securities Regulations

Americas securities markets constitute a central distinguishing feature of its brand of capitalism. What are their political origins? In contrast to arguments which point to business owners as determining the institutional foundations of Americas political economy, this paper argues that farmers played a leading role. Indeed, the rules and regulations governing U.S. securities markets were created in opposition to the wishes of business owners, and without farmers political influence, the U.S. may have developed a financial system similar to that found in continental Europe. Moreover, to the extent that U.S. securities regulations serve as a template for international financial standards, the paper shows that the humble American farmer inadvertently contributed to the financialization of the modern global economy.

Business–Government Relations and Corporate Governance Reforms

Corporate governance in China principally suffers from inside owners expropriating from outside owners, and to a lesser extent from managers expropriating from a firm’s owners. China’s companies have followed two divergent corporate governance reform trajectories, corresponding to two models of business–government relations: the Guangdong model and the Shanghai model. In the Guangdong model, the local government maintains weaker ties to Beijing, a more fragmented bureaucracy, and better organized private firms. The Shanghai model displays the opposite tendencies. As a result, private firms have played a bigger role in driving corporate reforms in Guangdong as compared to Shanghai.

Financial Regulatory Harmonization in East Asia: Balancing Domestic and International Pressures for Corporate Governance Reforms

Is the harmonization of financial regulatory regimes possible in East Asia? Focusing on corporate governance, which many see as a critical part of the 1997 Asian financial crisis, and which is also seen as unresponsive to calls for change, this paper argues that such harmonization is possible, but that it will not be according to the “best practices” advocated by the International Monetary Fund, World Bank, Organisation for Economic Co-operation and Development, and other international organizations. At present, actors generally feign compliance with these international rules and standards. But this creates potential long-term problems by allowing distortions to persist and accumulate over time. By identifying the key actors that determine regulatory outcomes, this paper points to an alternative regulatory framework that would be adopted more comprehensively. This alternative framework is a compromise between the “best practices” advocated by international organizations, and the domestic political realities of East Asia.

The Shifting Ownership Structure of State-Owned Enterprises: Performance, Pyramids, and Political Regimes

We examine changes to corporate ownership in nine East Asian countries following the 1997 Asian Financial Crisis. Countries with lower incomes and in which policy making involves greater transactions costs (i.e., veto points) have more firms with state ownership. Partial state ownership appears to be effective insurance against crisis. Firms with minority state ownership exhibit 5% (annualized) lower idiosyncratic volatility in the quarter of the Lehman Brothers collapse than firms with either no or dominant state ownership. Minority state-owned firms also enjoy a higher abnormal return of 3.7% and 6.1% in the two quarters following the collapse of Lehman Brothers.

The Rise of Foreign State Ownership in East Asia: Domestic Political Determinants and Stabilizing Effects

Since the Asian Financial Crisis of 1997, the prevalence and transparency of state ownership – both domestic and foreign -- has exhibited considerable variance across the region. To explain this puzzle, I argue that a tight focus on two dimensions of politics yields a remarkable degree of analytic purchase: centralization of political control and a regime’s coordination commitments. The centralization of political control refers to whether the executive faces institutional checks on its decision-making power. Coordination commitments concern political leaders’ need to accommodate particularistic or encompassing interests. The theory leads to the expectation that state-owned firms in authoritarian regimes will exhibit greater stability in a period of heightened financial Volatility. Tests conducted on 896 firms around the collapse of Lehman Brothers offer support for this expectation.

Business Networks and Crisis Performance: Professional, Political, and Family Ties

Previous research on firm performance does not adequately account for the interrelatedness of a firms professional connections, political ties, and family business-group affiliation. Many widely-cited findings may therefore be subject to confounding bias. To address this problem, we adopt a holistic approach by assembling a new dataset covering professional, political, and family networks for 1,290 large East Asian firms. We find that professional networks buoyed performance during the 2008 financial crisis; political and family networks did not. We provide evidence that information access is a key mechanism underlying the effect of professional networks. A one standard deviation improvement to a firms professional network position cushioned the fall in quarterly ROA by approximately 35% during the crisis.