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Two theories: Government ownership of banks (GOB) should be more prevalent in poorer countries, with less developed financial markets, with less well-

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Presentation on theme: "Two theories: Government ownership of banks (GOB) should be more prevalent in poorer countries, with less developed financial markets, with less well-"— Presentation transcript:


2 Two theories: Government ownership of banks (GOB) should be more prevalent in poorer countries, with less developed financial markets, with less well- functioning institutions. “Development” theory (Alexander Gerschenkron) GOB should benefit subsequent financial and economic development, factor accumulation and productivity growth Political theory GOB should displace financing of private firms The projects financed by the government are inefficient and have adverse affect on productivity growth

3 Four main questions: How significant is government ownership of banks in different countries? What types of countries have more GOB? Does GOB promote subsequent financial development? Does GOB promote subsequent economic growth and how does it effect factor accumulation, savings, and growth of productivity?

4 How common is GOB? 92 countries 10 largest commercial or development banks Notes: – Ownership by foreign governments is classified as private rather than state ownership –Subsidiaries of foreign banks are included as long as they make loans and extend credit locally –Some development banks are regional and are owned by the governments of several countries

5 Variable calculations For each of the 10 largest commercial and development banks in a country, we first calculate the percentage of government ownership by multiplying the share of each shareholder in that bank by the share the government owns in that shareholder, then sum the results and get GB95 ik Government ownership of banks GB95 for the particular country is computed by multiplying GB95 ik of every sampled bank by its total assets, summing the resulting numbers and dividing the sum by total assets of the top 10 banks

6 All variables definitions GB95GOB in 1995; captures the share of the assets of the top 10 banks in a given country that is “owned” by the government GC20The sum of all government-owned (if GB95 ik >0,2) banks (among 10 largest) assets divided by the total assets of 10 largest banks GC50A ratio of the assets of the bank in which the government holds over 50% of equity of the total assets of the 10 largest banks GC90A corresponding measure for banks where government equity ownership exceeds 90% GB70An estimate of the percentage of banking assets owned by the government at the beginning of the period (procedure is the same as GB95)

7 Results GroupsGB95 meanGC20 mean common law28,1633,5 French origin45,4549,4 German origin33,6744,02 Scandinavian origin35,5445,87 Social orign61,6675,83 Total without socialist38,5442,28 Total with socialist41,5547,98

8 Findings (1)  Government involvement in economic life differs significantly across legal origins (French civil law and common law)  GOB is large and pervasive around the world  Privatization sharply reduced but far from eliminated GOB  Adjustments for government control increase the average  Development banks do not account for worldwide differences

9 Findings (2)  The results on the differences in GOB among legal origins are consistent with both views  French legal origin countries have less investor protection and less developed private financial markets than do common law countries  DV: This would increase the demand for government provision of finance  PV: GOB may reflect may reflect the greater politicization of economic activity in French origin countries than in common law countries

10 Which Countries Have High GOB? Method: regression analysis  Regression of GB95 on the country characteristic in question, a constant, and the log of 1960 per capita GDP  Poorer countries indeed have more GOB (-0,1133)

11 Findings (1) Countries with more interventionist government have higher GB95 (measures: regulation, price controls, political rights, government spending) No relationship between GB95 and the size of government GOB is lower in countries that have wider political rights or are more democratic (contradiction to DV!) Countries with less efficient government have greater GOB (measures: tax compliance, bureaucratic quality, corruption)

12 Findings (2) Countries with greater security of property rights have lower GB95 Countries with greater roles of SOEs in the economy also have higher GOB A negative correlation between measures of financial development and GB95 Countries with higher inflation (instability) have higher GB95, the association between GB95 and the measures of instability (problem in causality and timing)

13 Conclusions: The evidence is generally consistent with both theories! Less democratic countries have higher GOB (support for PV!) Countries with higher GB95 are more backward and more statist. They are poorer and have more interventionist and inefficient governments, less secure property rights, less developed financial system

14 Does GOB speed up financial development? DV: Government can encourage lending to private sector + help to develop the institutions of lending + show that long-term lending is good + subsidize private banks PV: Government control of finance and the politicization of resource allocation would slow down financial development

15 Method Regression of GB70 on the measures of future financial development controlling for initial per capita income and initial financial development 2 approaches: - growth in measures of financial development as dependant variables (stock market capitalization to GDP, growth of private credit, etc) - measures of efficiency of banking system at the end of the period (access of firms to credit, financial stability, etc)

16 Findings: The initial level of financial development is negatively correlated with its own subsequent growth (convergence) GOB reduces subsequent financial development (PV!) Higher GB70 is associated with lower measures of access of firms to credit at the end of the period (PV!) The efficiency of the banking sector is lower when GB70 is higher A higher GB70 is associated with greater subsequent financial instability So, financial systems with higher initial government ownership of banks grow less fast, and are less efficient. This evidence supports the political theory!

17 Does GOB Speed Up Economic Growth? DV: GOB should encourage savings, capital accumulation, and productivity growth PV The political resource allocation is likely to have detrimental effects on the growth of productivity

18 Method Regression analysis Dependent variable is the growth in per capita income Independent variables: initial per capita income, GB70 and additional controls NB: initially poorer countries grow faster (convergence)

19 Steps 1)Higher GP70 is associated with slower economic growth (no support for DV) 2)Control for average years of schooling 3)Control for measures of initial financial development. Still large and statistically significantly negative effect! (-0,015 and -0,018) 4)Inclusion of standard measures of government intervention. They are correlated with GP70 and may reduce its true effect. (-0,013)

20 Findings Three channels: savings and capital accumulation, productivity GB70 has no significant influence on either capital or savings accumulation (mild support for DV in terms of savings, but no proof for capital) GB70 has a negative and statistically significantly effect (-0,01) on future productivity growth (PV!) GB70 has a more averse effect on income growth in less developed countries (contradicts DV)

21 Conclusion GOB is large and pervasive around the world in the 1990s Such ownership is larger in countries with low levels of per capita income, underdeveloped financial systems, interventionist and inefficient governments, and poor protection of property rights GOB in 1970 is associated with slower subsequent financial development GOB in 1970 is associated with lower subsequent growth of per capita income (much impact on productivity growth)

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