For centuries, voting rights were limited to wealthy elites, aristocrats, and landlords. For instance,  the electorate in England and Wales in 1780 consisted of less than 3% of the total population.
Suffrage reforms, enacted during the late 19th and the 20th centuries due to enduring civic protests and unions’ efforts, are crucial political changes which affected the ability of elites to obtain disproportionate political leverage, and to design laws and policies to benefit themselves in terms of access to capital and economic opportunities. This historical evolution of expansion of suffrage and democratic processes has led Hans Degryse, Thomas Lambert and Armin Schwienbacher to delve into an intriguing question: Did the scope of the voting franchise have an impact on the development and structure of a country’s financial system?

Their motivation to study it has ended up in an interesting paper: “The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two centuries“ that empirically examines how the diffusion of voting rights across the population helps to explain a country’s reliance on stock market or bank finance. The researchers focus on the scale of external finance (financial development) but also on the degree to which countries have bank-based or market-based financial systems (financial structure). The paper is based on a unique 18-country panel data covering 1830-1999. The analysis on stock market development covers the 19th and 20th centuries while the analysis on banking sector development and financial structure is restricted to the 20th century due to data availability.
As the authors revealed, a restricted voting franchise ensures a wealthy median voter and is more conducive to support strong minority shareholder protection and thereby the development of stock markets.
On the contrary, the franchise expansion induces the median voter to provide political support for banking development as this new electorate has lower financial holdings and benefits less from the riskiness and financial returns from stock markets. A broader political participation empowers a middle class with different preferences, where banks are favored by limiting the rights of minority shareholders. Bank finance is preferred by less wealthy citizens with proportionally more exposure to labor income since it facilitates access to credit.
In addition, Degryse, Lambert and Schwienbacher documented that the voting franchise has contemporaneous effects but also long-lasting effects on national financial systems. Also they found that countries which introduced later universal suffrage exhibit a more market-oriented financial system at the end of the twentieth century.
Offering the evidence for a richer alternative to a simplistic modernization hypothesis, the results of this research emphasize the critical role played by suffrage and political institutions in shaping a country’s financial system and the persistent effects that these institutions produce. This is an additional robust empirical demonstration of the state-economy-society mutual embeddedness, especially with regard to power and capital.

Degryse, Hans, Thomas Lambert and Armin Schwienbacher. 2014. “The Political Economy of Financial Systems: Evidence from Suffrage Reforms in the Last Two centuries.”

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