XII Апрельская международная научная конференция «Модернизация экономики и общества»
Ekaterina Glushkova (HSE, PhD student, Banking Department)1,
Andrei Vernikov (HSE, Professor, Banking Department)2
DOES STATE OWNERSHIP OF BANKS REALLY HINDER FINANCIAL
DEVELOPMENT AND ECONOMIC GROWTH IN EMERGING
MARKETS?
Abstract
This paper provides empirical analysis of macroeconomic effects of state ownership of
commercial banks. The aim is to test one of the key findings of theoretical and empirical
literature of 1990s, namely that sizeable state ownership of commercial banks hinders financial
development and economic growth. We focus on the 4 countries known as BRICs, i.e. Brazil,
China, India and Russia. Our hypothesis is that the sign (positive or negative) of the impact of
state ownership on macroeconomic indicators is not constant for all times but varies depending
on the type of national economy (mature market or emerging market) and, within the emerging
markets category, on the achieved level of economic development.
After the seminal article of La Porta, López-de-Silanes and Shleifer (2002) the literature
on development economics was based on the solid assumption that state ownership of
commercial banks is universally detrimental to economic growth and financial development.
Only recently empirical research started to challenge that assumption by suggesting that such
finding must be qualified, and policy conclusions need fine-tuning with regard to specific
circumstances. Most notably, Andrianova, Demetriades and Shortland (2009) and Körner and
Schnabel (2010) independently found that, if anything, public ownership might be harmful only
if a country has low financial development and low institutional quality. The negative impact of
public ownership on growth fades quickly as the financial and political system develops, so in
highly developed countries no harmful effects were found but even positive effects. Our
empirical study fits within that context by testing the basic hypothesis on a more focused range
of economies. We see it important to research where exactly La Porta et al. (2002) committed an
overgeneralization that subsequently eroded the empirical proof to their findings.
1
1st Samotechny per., 12-86, Moscow 127473, Russia. Tel.+7(916) 268-2442. Email: gkatenka@yandex.ru
2
P.O. Box 43, Moscow 125057, Russia. Tel.+7(495) 629-7495. Email: verand77777@gmail.com
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XII Апрельская международная научная конференция «Модернизация экономики и общества»
The paper is of an empirical nature. We use country-level macroeconomic and banking
statistical data from the International Financial Statistics of the IMF, as well as central banks
and top bank regulatory authorities of respective countries. We construct 2 data panels, one for
the period of 1995 through 2002 that includes Brazil, China, India, Indonesia, Mexico and
Pakistan; and the other panel for the period from 2001 through 2009 that includes Brazil, China,
India and Russia.
We compare results obtained through pooled regression, random effects and fixed effects.
Our explanatory variables include the combined share of state-controlled banks in the country’s
total banking assets; the degree of openness of the national economy; banking sector
concentration as measured by the top-3 banks’ share in total assets; size of the banking industry
expressed as natural logarithm of bank assets; and the starting point for economic growth
expressed as natural logarithm of the country’s real GDP in the moment t-1. We try to see the
impact of these variables on:
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Financial intermediation depth, proxied by bank assets / GDP, loans / GDP, and deposits /
GDP;
-
Confidence in the banking sector, proxied by demand deposits / savings deposits ratio
and money / money plus quasi-money ratio;
-
Transaction costs, proxied by interest rate spread;
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Lending activity of banks in the private sector of the economy, proxied by claims on
private sector / GDP and customer loans / assets;
-
Political bias in favor of public sector financing, proxied by public sector loans / GDP;
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Quality of banks’ loan portfolio, proxied by NPLs / assets, and loan-loss provisions /
assets;
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Economic development and growth, proxied by real GDP growth rates, gross national
income per capita, gross fixed capital formation, and industrial production index.
The main findings of our research can be summarized as follows. Analyzing statistical
data from several largest emerging market economies (Brazil, China, India, Russia, Indonesia,
Mexico and Pakistan), we:
-
Found insufficient empirical proof that significant state ownership of commercial banks allows
to overcome general insufficiency of financial resources, or contributes to efficient reallocation
of such resources in favor of the private sector, or plays a catalytic role in the transformation of
private savings into investment;
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XII Апрельская международная научная конференция «Модернизация экономики и общества»
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Failed to confirm the universal validity of the cornerstone assumption of the «political theory» of
government banking with regard to invariably negative impact of public ownership of banks on
financial intermediation, economic growth rates and productivity growth;
-
At the same time found proof to the assumption of heterogeneous effects of government direct
presence in the banking sector of emerging market countries, depending on the given level of
economic development. For low-income countries state presence might impede investment
activity and productivity growth. However, these effects tend to disappear or even reverse as the
economy develops. That essentially confirms earlier findings by Andrianova et al. (2009) and
Körner and Schnabel (2010) while contradicting the argument of La Porta et al.(2002).
We request that this paper be included in the program of one the following sections of the
Conference:
-
Banking and Finance; or
-
Macroeconomics and Economic Growth.
November 8, 2010
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