Banks, Financial Markets and Industrial Development: Lessons from the Economic Histories of Brazil and Mexico

SCID Working Paper 79



Latin America


What impact do small and concentrated banking systems have on the competitive structure and performance of manufacturing industry? Why do financial markets not serve as a substitute for banks? This paper uses the economic histories of Brazil and Mexico as a natural laboratory to argue argue that when information is costly, government regulatory policies that constrain competition in banking give rise to differential access to capital among entrepreneurs. The result is slower rates of investment, higher levels of industrial concentration, and lower rates of total factor productivity growth than would be obtained if access to capital did not serve as barrier to entry. In fact, in the cases under study here, differences in government regulatory policies regarding banks and financial markets produced rates of TFP growth in Brazil manufacturing that were twice those of Mexico, as well as levels of concentration roughly half those of Mexico.