Faculty of law blogs / UNIVERSITY OF OXFORD

Financial Markets and the Political Center of Gravity


Mark J. Roe
David Berg Professor of Law, Harvard Law School
Travis G. Coan


Time to read

2 Minutes

Academics across multiple disciplines and policymakers in multiple institutions have searched for the economic, political, and institutional foundations for financial market strength. Promising theories and empirics have developed, including major explanations from differences in nations’ political economy.

A common view is that, particularly because many pro-market corporate reforms occurred in Europe during the 1990s, when social democratic parties governed and financial markets deepened, basic left-right explanations fail to explain financial market depth. Hence, more complex political explanations are in play, and the correlation of left governments, market-oriented reforms and financial deepening presents an unexpected paradox. This finding indicates, some say, that left-right orientation is unimportant in affecting financial development and that either nonpolitical institutional issues or different political considerations are more central.

Conceptually, however, it’s not relative local placement of the governing coalition on the nation’s left-right spectrum that counts, but whether the polity as a whole — i.e., its political center of gravity or its dominant governing coalition — is left or right on market-based economic issues. If interests and opinion shift in a nation, such that its political center of gravity is no longer statist and anti-market, then even locally left parties could and would often implement pro-market reforms. (And conversely, in an earlier era when interests and opinions were statist and anti-market, one should not expect to see even locally right parties pushing pro-market financial reforms forward.)

In our recent article, Travis Coan and I bring forward data showing substantial movement over recent decades of political parties and governing coalitions — these shifts must be accounted for in assessing the impact of left-right divisions on financial and securities markets. Prior studies have shown left-orientation not to matter, but these studies have coded, say, Tony Blair’s Labor government as left, just like they coded James Callaghan’s government as left. But the relative degree of pro-market and anti-market thinking and policy of two differed sharply. And, indeed, when one corrects just the coding for Blair and some odd coding of Switzerland as a left-oriented nation for several years, most of the empirical support for left governments supporting strong financial market outcomes disappear.

These political shifts, like that from Callaghan to Blair, correlate with financial markets shifts. Left-right matters not only in the fixed-in-time cross-section, but also the left-right economic shifts over time make an often significant empirical difference. The result from this data and study, in our view, leads to results and correlations that comport with most observers’ intuitions about the impact of left-right politics on financial market depth. The results thereby further buttress the importance of a nation’s basic left-right political orientation in explaining financial market outcomes.

These left-right conceptual issues, and the related data, are discussed and analyzed in Travis Coan’s and my recently completed article, ‘Financial Markets and the Political Center of Gravity’.

Mark J. Roe is Berg Professor of Business Law at Harvard Law School and Travis G. Coan is Lecturer at University of Exeter.


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