CAMBRIDGE – For Egypt, the question of the day is whether the country will build an open, democratic political system or relapse into some form – new or old – of autocracy. But an equally important question – above all for Egyptians, but also for other developing countries (and for development experts) – is the economic impact of its revolution.
For the past quarter-century, a major agenda item for the international development organizations, such as the International Monetary Fund and the World Bank, has been to bolster developing nations’ financial markets. Stronger financial markets can move savings to where they can do the most to spur economic growth. And that capacity has been seen as one of the handful of key prerequisites for economic development. Making finance work should boost economic development significantly.
Economic historians point to financial revolutions as setting the stage for strong economic development in England (in the seventeenth and eighteenth centuries, following the Glorious Revolution), in the United States (after Alexander Hamilton in the 1790’s built up major financial structures in a primarily agricultural country), and in Japan (after the Meiji Restoration).
The World Bank, the IMF, and dozens of academics have studied long and hard what makes financial markets grow and what holds them back. Many focus on the quality of institutions, such as courts and tax authorities. Others emphasize the quality of corporate law. Still others look at policies, like trade openness or lightness of taxation. Everyone extols property rights.