Financial Property Rights Under Colonialism: Some Counterfactual Possibilities

Abstract

This paper seeks to explain the lack of institutionalized (i.e. state supported and connected) financial systems in certain “colonial” economies with otherwise substantial presence of “native” financial capital holders. Attributing the poor development of financial systems to colonialism would seem to beg the question. Why would colonialism retard market development, especially since it is often credited with introducing European style market institutions in the first place? Borrowing from the literature on property rights, it demonstrates that the emergence of such institutions was the result of a certain kind of power relationship between rulers and financial capital holders where the two were forced to mutually cooperate; financial systems represented the institutionalization of this mutual cooperation. Specific kinds of “colonialism” represent just one special case of a relationship where the latter does not obtain.

Methodologically, the paper uses the single case of India to test some of the key propositions of the argument. It does so by exploiting a historical accident in order to test the plausibility of one of the key counterfactual suggested by the theoretical framework, namely, the emergence of a state-integrated financial system under the East India Company State.

Keywords: Financial markets, colonialism, market formation, state formation, institutions, political economy

JEL Classification: B15, B25, N15, N20, N25, P43, P52