Politics and Finance: Evidence From Middle East

The research context

The fall of 1980,s saw the emergence of a new concept relating politics to economics and finance (Roe, 1996: 45). However little research have been able to successful evaluate the link between finance and politics and hence it still remains a topic treated with lots of skeptism. This paper evaluates the link narrowing down its focus to the middle eats cases. It seeks to establish whether the recent trends witnessed in the Middle East ascertain the assumptions that finance and politics have some form of relationship.

The research question

In a bid to success achieve the objective of this research, the following research questions will be used as a guide:

  • Are there any observable trends of relationship between politics and finance?
  • Does the indicators of political scenario of a country impact on its financial situation?

Literature review

Politics and finance

Various researchers have presented literature relating politics and finance either directly or indirectly. Hall argues that the scope of political landscape within a nation/region directly impacts on the financial structure of the same and y extension other regions. The reverse is likewise true. For instance, it has often been mentioned that Goldman Sachs has a great influence in American politics likewise the recent economic recession saw politics play a fundamental role by offer of economic bail outs to various institutions (La Porta et al., 1998: 1118).

In financial development, political and financial views forecast various political aspects which prevail on legal aspects and hence financial development (Olson 1993). The political theories proposed by North (1993) state that, “…. Institutional structures and policy formations are architectured by those in power in order to maintain power and amass wealth.” Applying this statement to financial institutions, Rajan argues that the elite and powerful members of society may or may not be pro-financial development.

For instance, if self-formed merchants form the cream of the ruling elite, then such a scenario would favor arrangements supportive to financial development. However, when autocrats form the elite and powerful society membership, limitation may emerge with regard to autonomy of financial markets competing for existing interest (Rajan and Zingales, 2001).

Further researchers have stressed that time-invariant factors like legal origin are inapplicable in explaining variations in financial development. The politics and finance perspectives puts a lot of emphasis on the fact that central governance institutions often show some level of incompatibility to financial growth and development (King & Levine, 2009: 516). Effectively operating financial bodies and markets seek discretionary government limitations which are often unacceptable to centralized and powerful state governments Demirgüç-Kunt & Maksimovic, 2003: 2111).

Similarly, powerful government authorities often lack credible commitment to non-engagement in expropriations unnecessarily. These as well as default claims are important in financial market functionality. Unlike centralized governance structures, decentralized governments provide environments which are more conducive for financial growth. Some political structures are driven by special interest groups who often force governments to make decisions in their favor at the expense of the rest of the nation (Bernard, 2001:215). Such governments which represent special group interests may lack the capacity to support positive financial growth.

Voting systems likewise enable narrow interests to disproportionately impact on legislations and hence affect enactment of legislations which foster financial growth and development. This is more common when the narrow interest groups realize the threat that financial development poses to them (Rajan & Zingales, 2001: 561; Levine, R., Loayza, N. & Beck, 2005). In general though, closed political structures are subject to minimal competition and hence lack checks and balances on the ruling structures, the results is often a poorly developed financial systems as compared to their counterparts with decentralized, open and highly competitive politics. Open political structures are competitive and there is expanded room for checks and balance on the sitting government.

According to Rajan & Zingales (2001) it is political structures which define the availability and enforcement of investor protective laws. Early financial centers across Europe which have now attained success emerged from small political architectures which had appropriate checks and balances on the powers of the executive. London’s rise for instance is attributed to the creation of a strong parliament which kept the executive in check. Various financial scholars have stressed that decentralized political structures resist centralized systems propensity to watch over markets and limit competition (Rosenbluth & Thies, 2000).

It would be arguable that politics and legal traditions of a nation are intertwined and hence inseparable. While the broad influences of politics and law are key to understanding the relation between the two, these are not the focus of this literature (Dawson, 1968: 65). Instead it evaluates politics and finance’s relation in context of the Middle East. As Rosenbluth & Thies, (2000) argues, the political variables influencing financial markets include political structure competiveness, checks and balances present in a political system, and the role of groups of special interest groups in decision making.

The literature generally assumes that political competition usurps the enlarged interest associated with status quo of those in power and hence promotes evolutionary interest which facilitates financial growth and development (Rajan & Zingales, 1993: 563). Increased competition amongst special interest formations, legislative oversight bodies and authorities, and enhanced government transparency greatly enlarge possibility of formation of institutional environments which facilitate financial growth and development. According to King & Levine (1993) existence of checks and balances is an important aspect of measuring influence of politics to other areas of the economy.

They are reflected by the presence of large number of political layers who represent a wide political and economic variation. In general, it enhances credibility of policy changes and hence foster sustainable positive financial growth and development (La Porta et al., 2001: 1135). On the other hand, increased influence of special interest groups in decision making processes lowers the possible forecasted levels of financial growth and development.

Some researches have shown that the variables mentioned may be determined endogenously by financial growth and development. This is due to arising biases towards formation of a relation between politics and finance. The Middle East offers a fertile research ground for study of relationship between politics and fiancé. Despite taking pride a major share of world’s oil reserves, many in this region still face a lot of problems as a result of poverty. Perhaps it would be important to asses whether the volatile political landscape in the area has influenced this position.

Middle East politics

Middle East has remained a center of world affairs for a long time based on its volatility. Its political structures have largely been criticized as being dictatorial and insensitive to the needs of its people. Most leaders have worked with great autonomy in ignorance of the immediate needs of its population and hence impeding growth of financial markets. However, this stereotype can not be attributed to all nations as some which have adopted more democratic leadership approaches have been doing well, a case in hand is the United Arab Emirates.

Type of research

This is an empirical based research where data will be obtained from respective databases and primary sources. The data will then be statistically evaluated in order to come with reasonable answers to the research questions.

Research design and methodology

Political variables

Successful evaluation of the hypothesis proposed will require a large range of measures of initial and prevailing political structures. The current political structure variables are obtained from the database of political institutions (DPI) covering a period of 1980 – 2010. Initial political structures as well as variables date back to as early 1950 or the period of independence whichever comes later. In controlling potential political system’s endogeneity, focused will be directed towards initial political system variables. However, the analyses will also incorporate the indicators of prevailing political structure. Initial political systems indicators will be based on four indicators:

  • Executive competition: this defines the extent to which nations executives are chosen through competitive election processes, based on a scale of 0 to 3; lowest to highest.
  • Elective openness: this indicates the degree of transparency in which existing opportunities for non-elites to occupy executive offices are awarded based on a scale of 0 – 4, highest values indicating increased transparency.
  • Non-elite: this indicates the level to which non-elite members of the society are able to express themselves politically ranging from a scale of 0 – 5, with the highest values indicating highest inclusions in expression.
  • Autocracy: this indicates the level of closeness exhibited by political institutions ranging from 0 – 10 with highest values reflecting highest closed political structures.
  • In examining the current political structures the aspects to be evaluated will include:
  • Legislative Competition: competition involved in the latest legislative elections ranging from 1 to 7, lowest competition to highest competition respectively.
  • Executive Competition: level of competition for elective posts ranging from 1 to 7, lowest to highest competition levels.
  • Checks and balances: evaluates the number of influential veto powers at both legislative and executive levels.

Financial indicator

The variables discussed above will all be measured against the financial markets competitiveness of the respective nations at the corresponding periods. Competitiveness of financial markets will be measured based on trade ratios. The ratio is given by the ratio of exports and imports combined to the nation’s gross domestic product (GDP). This is done considering that opens and familiarity with other nations fosters improvement of financial institutions. This data is obtained from the Middle East economic database (MED).

The research analysis criteria used will be quantitative and will involve the use of SPSS data analysis software. As mentioned earlier the statistical data to be used will be obtained from two different data bases. This includes the database of political institutions (DPI) and the Middle East Economic Database (MED). Covering a period of 60 years, starting from 1950 to 2010, the data to be used will be extensive and large enough to provide a representative of the Middle East case.

15 countries will be included in this research. These are Iraq, Iran, Israel, Saudi Arabia, Kuwait, Egypt, Tunisia, Libya, Lebanon, Palestine, United Arab Emirates, Qatar, Bahrain, Turkey and Jordan. It is important to note that these countries have different political structures and hence inter-comparison will further help in answering our earlier stated research questions.

Statistical analysis

A regression analysis will be conducted where the aforementioned variables will be modelled with focus on the relationship between financial condition (dependent variable) and a set of independent variables identified earlier. Basically, this will help in understanding how the dependent variable (financial situation) changes when one of the independent variables is altered.


This paper will evaluate the effects of various determinants of political structure of financial market growth and expansion. A trade ratio has been proposed which is given by summation of imports to exports and the result divided by GDP to get a ratio. The study covers a scope of 15 Middle East nations. Information will basically be obtained from websites and the two databases mentioned. However for a clear insight into the area of study, various published literature works will be incorporated into the study. Their opinions and finding will form basis upon which the finally conclusions will be drawn.

According to the assumptions of the study, politics impact on financial markets growth and expansion, an assumption drawn from various literatures as discussed in the literature review section. Financial market performance is the dependent variable in this research. The dependent variable is the financial situation while all the other variables are independent. As mentioned in the methodology section, regression analysis with the help of SPSS will be performed in order to draw conclusive assertions with regard to the study hypothesis.


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