Download Government Ownership of Banks

Two theories:
Government
ownership
of
banks
(GOB)
should be more
prevalent in poorer
countries,
with
less
developed
financial markets,
with less wellfunctioning
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
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?
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
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 GB95ik
• Government ownership of banks GB95 for the
particular country is computed by multiplying
GB95ik of every sampled bank by its total assets,
summing the resulting numbers and dividing the
sum by total assets of the top 10 banks
All variables definitions
GB95
GOB in 1995; captures the share of the assets of the top
10 banks in a given country that is “owned” by the
government
GC20
The sum of all government-owned (if GB95ik >0,2) banks
(among 10 largest) assets divided by the total assets of
10 largest banks
A 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
GC50
GC90
A corresponding measure for banks where government
equity ownership exceeds 90%
GB70
An estimate of the percentage of banking assets owned
by the government at the beginning of the period
(procedure is the same as GB95)
Results
Groups
common law
French origin
German origin
GB95 mean GC20 mean
28,16
33,5
45,45
49,4
33,67
44,02
Scandinavian origin
Social orign
Total without socialist
35,54
61,66
38,54
45,87
75,83
42,28
Total with socialist
41,55
47,98
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
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
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)
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)
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)
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
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
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)
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!
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
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)
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)
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)
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)