Together, these findings imply a significantly more modest role for law than is commonly understood in the ‘law and finance’ literature, which accords much weight to the civil or common law nature of a country’s legal system. Indeed, the pattern of complementarities between India’s legal, financial and economic structure do not appear to have been determined by the country’s legal origin. Rather, we find more support for the claim that economic structure is a determinant of financial structure.The pattern of India’s (relatively) service-oriented economy appears to be an unintended consequence of the policies pursued during the pre-liberalisation period.

• So how can we learn from that?

Those policies have also had an independent influence on legal reform, as the development of credit markets appears to have been delayed by the need to re-orient regulators and institutions from their former role in industrial policy to simply imposing a hard budget constraint. It seems that it may be easier to create new institutions from scratch (SEBI) than to reorient the culture and interest groups associated with an existing institution designed for a different purpose (RBI).

Extracted from “Law, Finance, and Politics: The Case of India”, by John Armour and Priya Lele. Available online at ecgi.org/wp