Download Should the Government be in the Banking Business? The Role of

Inter-American Development Bank (IDB)
Banco Interamericano de Desarrollo (BID)
Research department
Departamento de Investigación
Should the Government be in the Banking Business?
The Role of State-Owned and Development Banks
Eduardo Levy Yeyati
Alejandro Micco
Ugo Panizza*
Paper prepared for the seminar
Governments and Banks: Responsibilities and Limits
IDB-IIC Annual Meetings
Lima, Peru
March 28, 2004
*
Eduardo Levy-Yeyati, Universidad Torcuato Di Tella, email: [email protected], Alejandro Micco and Ugo
Panizza, Research Department, Inter-American Development Bank, email, [email protected] and
[email protected]. We would like to thank Monica Yañez and Danielken Molina for excellent research
assistance. This paper is circulated to stimulate discussion. The views expressed in this paper are the
authors’ and do not necessarily reflect those of the Inter-American Development Bank. The usual caveats
apply.
1
Introduction
Arthur Lewis, Alexander Gerschenkron, Gunnar Myrdal and several other prominent
development economists writing in the 1950s and 1960s tended to agree that the state should play
a key role in the banking sector. Governments actual behavior was in line with this view and, by
the 1970s, the state owned 50 percent of assets of the largest banks in industrial countries and 70
percent of assets of the largest banks in developing countries (Figure 1).
The 1980s and 1990s witnessed a sea change in the view on the state’s role in the
economy and privatization was at the very center of the neo-liberal economic policies codified in
the Washington Consensus. Consequently, from 1987 to 2003 more than 250 banks were
privatized, raising US$ 143 billion.1 But even after this big privatization wave, the presence of
the state in the banking sector is still widespread and pervasive. In the mid 1990s, about one
quarter of the assets of the largest banks in industrial countries and 50 percent of the assets of the
largest banks in developing countries were still under state control.2 It is, therefore, interesting to
ask whether there is a justification for such a massive public presence in the banking sector.
Some argue that state presence in the banking sector is justified by market failures and
development goals. They point out that financial markets in general and the banking sector in
particular are different from other markets and that government intervention can improve the
working of the financial sector and the overall functioning of the economy. In particular, the
social view emphasizes the role of the public sector to compensate for market imperfections that
leave socially profitable investments underfinanced.3 Also supportive of public participation in
the banking sector is the development view (often identified with Gerscherkron, 1962) that
stresses the need for public intervention in economies where the scarcity of capital, general
distrust of the public, and endemic fraudulent practices among debtors may fail to generate the
sizable financial sector required to facilitate economic development.4
Others argue that it is not necessarily true that banks are different from other businesses
and that the case for financial market imperfection is often overstated. Furthermore, they suggest
that market failures can be better addressed with regulation and subsidies rather than with direct
state ownership of banks. This is the political view that argues that politicians create and maintain
1
See Meggison (2004).
The data reported here are from La Porta et al. (2002) and refer to the assets of the ten largest banks. Data
for the whole banking system (from Barth et al. 2001) are highly correlated with the data for the top ten
banks (the regression coefficient between the two variables is 0.8 and the R2 is 0.5) but the former dataset
shows somewhat lower presence of the public sector (11 percentage points lower on average).
3
See Atkinson and Stiglitz (1980) and Stiglitz (1993), among others.
4
See, for instance, Stiglitz (1994)
2
2
state-owned banks not to channel funds to socially efficient uses but rather as a political tool
aimed at maximizing the politicians’ personal objectives (La Porta et al, 2001). According to the
proponents of this view, state ownership of banks is just dictated by redistributive politics and by
the fact that politicians are interested in appropriating the rents that may derive from controlling
the banking sector. Somewhere in between the benign view of state intervention in the banking
sector (as represented by the social and development views) and the more cynical political view,
there is also an agency view that highlights the trade-off between the allocative efficiency motive
stressed by the social and development views, and internal efficiency, namely the ability of stateowned enterprises to carry out their mandate. This view emphasizes that while market
imperfections may exist, agency costs within government bureaucracies may more than offset the
social gains of public participation.
In order to understand whether the state should be in the banking business it is useful to
decompose the issue into the following two questions: Are there market failures that justify state
intervention in the banking sector? Are these market failures better addressed with subsidies and
regulations or do they require direct state ownership?
The Rationale for State Intervention
Standard arguments for state intervention in the banking sector can be broadly classified into four
groups: (i) maintaining the safety and soundness of the banking system; (ii) mitigating market
failures due to the presence of costly and asymmetric information; (iii) financing socially
valuable (but financially unprofitable) projects; and (iv) promoting financial development and
giving access to competitive banking services to residents of isolated areas.
The first group of reasons has to do with the fact that banks are inherently fragile
institutions because their liabilities consist of demand deposits and their assets consist of more
illiquid loans. Such a situation can lead to self-fulfilling bank runs and widespread bank failures.
However, banking fragility by itself does not justify government intervention aimed at
guaranteeing the stability of the banking system, unless bank failures generate large negative
externalities. It is exactly in this sense that banks are special because, besides intermediating
credit, they also provide two services that have a public-good nature: they are the backup source
of liquidity for all other institutions and the transmission belt for monetary policy (Corrigan,
1982). The need for state intervention also arises from the fact that, due to the large leverage
ratios that characterize financial institutions in general, bank managers and owners may have
strong incentives to pursue investment activities that are riskier than the ones that would be
3
preferred by depositors.5 This would not be a problem if depositors could effectively monitor
banks’ managers. However, there is a free rider problem in bank monitoring because banks’
liabilities are mostly held by small depositors who have very limited incentives and ability to
monitor banks’ activities.6
The second set of explanations has to do with the fact that financial markets in general
and banking in particular are informational intensive activities. It is generally accepted that the
stock of information gathered by banks plays a role in increasing the pool of domestic savings
that is channeled to available investment opportunities. However, as information has some publicgoods characteristics (non-rivalries in consumption and costly excludability) and often entails a
fixed acquisition cost, competitive markets will undersupply information and the fixed cost nature
will lead to imperfect competition in the banking system. Moreover, information can be easily
destroyed, increasing the cost of bank failures as customers of the failed bank may lose access to
credit. It has also been shown that asymmetric information may lead to credit rationing, that is, a
situation in which good projects are underfinanced (or not financed at all) due to the lack of
verifiable information.7 A similar case can be made for the relationship between depositors and
banks: lack of bank-specific information can dissuade savers from depositing in banks,
particularly in incipient banking systems where long-standing customer relationships are still to
be built.
The third group of reasons has to do with the fact that private lenders may have limited
incentive to finance projects that produce externalities. In this line, direct state participation
would be warranted to compensate for market imperfections that leave socially profitable (but
financially unattractive) investments underfinanced.8 Alternatively, state intervention may be
justified by big-push theories like the one originally formulated by Rosenstein-Rodan. It is also
possible to argue that banks may frustrate expansionary monetary policy because they have
limited incentives to lend during periods of economic downturns and low interest rates and do not
internalize the fact that, by increasing lending, they would push the economy out of recession
5
See Jensen and Meckling (1976) and, for a textbook treatment, Freixas and Rochet (1997).
The same problem underlies the role of banks as delegated monitors of depositors´ investments, as
pointed out by Diamond (1984). These arguments have been invoked to motivate the need for more
stringent prudential regulation, as opposed to direct state participation in banking activities.
7
Indeed, rationing may occur as an adverse selection phenomenon in which, by pooling good and bad
projects, the lender may increase the financing costs to the point of driving good projects out of the market.
For a detailed discussion of market failures arising from costly and asymmetric information, see Stiglitz
(1994)
8
See Atkinson and Stiglitz (1982) and Stiglitz (1993), among others.
6
4
(this is the macroeconomic view).9 If this is the case, state intervention could solve a coordination
problem and make monetary policy more effective. A related theoretical argument in favor of
state intervention, borrowed from the literature on financial markets mix, points to the fact that
effective prudential regulation (and, in some cases, the banks’ own incentives) tend to make
private banks too risk averse to finance all potentially profitable investments.10 Then, in the
absence of developed capital markets that allow for alternative sources of financing, which is the
case in most developing countries, state intervention may be warranted.
A last argument that is often invoked by supporters of state intervention in the banking
sector is that private banks may not find it profitable to open branches in rural and isolated areas
and that state intervention is necessary in order to provide banking services to residents of these
areas. Underlying the argument are the beliefs that granting access to banking services may
increase financial development with positive externalities on growth or poverty reduction (see,
for instance, Burgess and Pande, 2003), and that access to financial services is, at any rate, a right
and that the state should make an effort to guarantee its universal provision. Relatedly, the
presence of public banks has also been advocated as a means to guarantee competitive behavior
in an otherwise collusive banking sector. This rationale, however, is likely to be relevant only
when the regulatory and monitoring capacity of the public sector is limited and prone to capture.
How Should the State Intervene?
While most --but not all-- economists would agree that the banking system is characterized but
enough market failures to grant some form of government intervention, they disagree on whether
the state should intervene through the regulation of, and the design of specific contracts with
private suppliers, or through direct ownership. The recent literature on contracting suggests that
addressing market failures and achieving social goals do not necessarily warrant direct state
ownership. As Shleifer (1998, P. 135) states: “When the opportunities for government contracting
are exploited the benefit of outright state ownership becomes elusive…The Contractual
theory…also allows us to think about an imperfect government, which maximizes political goals
such as patronage or simply the income of politicians through bribes.”
9
Prudential regulation may create an additional disincentive, as both the quality of banks´ portfolios and
prospective investments tend to deteriorate during a recession.
10
There are at least two reasons why this may be the case. First, due to the presence of externalities in the
banking sector, the regulator may aim at a suboptimal risk level. Second, reputation costs and significant
market power may induce large private banks to shy away from risky investments in order to protect their
charter value.
5
But what are the conditions under which state ownership can be preferable to contracting
and regulation? Following Shleifer (1998) it is useful to start by assuming a benevolent
government and then look at what happens if this assumption is relaxed. Shleifer starts by making
the point that if the government knows exactly what it wants to produce and if the characteristics
of the goods or services to be produced can be written in a contract or specified by regulation,
then it will not matter whether a given good or service is directly provided by the government or
contracted to a private provider.11
While the availability of perfect contracting and regulation weakens the case for direct
state ownership, things become more complicated when it is not possible to fully describe or
monitor (and hence contract or regulate) the goods or services to be produced. Oliver Hart,
Andrei Shleifer and Robert Vishny (1997) use the theory of incomplete contracts to discuss the
costs and benefits of public ownership in cases in which contracting opportunities are limited
because the good or service to be provided has some “non-contractible” quality.12 In their set-up,
the key variables are the cost of providing the good or service and the incentive to provide it (as
all the other qualities are contractible, they are irrelevant in the choice between public and private
ownership). A key assumption of their analysis is that cost reductions lead to a deterioration of
the non-contractible quality of the good or service. Under this assumption, they find that while
costs are always lower under private provision, quality may be higher or lower according to the
effect of cost reduction activities on the quality of the good or service provided. Thus, public
ownership would be preferable when there is limited potential for quality improvement or when
the adverse effect of cost reduction on quality is likely to be substantial.
Hart et al. (1997) also make the point that the presence of competition in the provision of
the good or service would reduce the incentives of the private providers to reduce quality by overinvesting in cost-reducing activities.13 Finally, they deviate from the assumption of a benevolent
government and allow for the presence of corruption and political patronage. They show that the
presence of corruption weakens the case for privatization because privatization maximizes the
bribes that can be collected by politicians. At the same time, in the presence of political
patronage, privatization is preferable to public ownership because the latter may lead to excessive
11
This is because, from the government’s point of view, there is no difference between providing the right
set of incentives to the private or public managers, and this holds even in the presence of moral hazard and
adverse selection (Hart et al, 1997).
12
An example of such non-contractible quality could be the “development impact” of banking operations
(i.e., by how much the lending activity of a given bank promotes economic development).
13
This is true only if those who choose the provider care about the non-contractible component. Therefore,
this clearly applies to schools (one of the examples that Shleifer, 1998, and Hart et al., 1997, have in mind)
but may not apply to banking if the non-contractible quality is, for example, the development impact of
banking.
6
costs and misallocation of resources. The case is more ambiguous if corruption and political
patronage go hand in hand.
Following Shleifer (1998), it is possible to summarize the conditions under which state
ownership is preferable to contracting and regulation as: (i) there are cost reducing actions that
have a large negative effect on the non-contractible quality of the good or service; (ii) there is
limited scope for innovation in the production and delivery of the good or service; (iii) there is
limited scope for competition or competition does not concern the non-contractible quality; (iv)
reputation considerations are not at play. The relationship between the costs and benefits of state
ownership and the presence of corruption, patronage, and, more in general, a “weak” state is not
very clear. While state ownership may increase the opportunities for corruption and patronage, a
“weak” state makes contracting and regulation more difficult and hence may increase the benefits
of state ownership.
How Does This Apply to Banking?
Most economists and policymakers agree that the inherent fragility of the banking system is
indeed an issue but that this should not be addressed with direct state ownership. Banking
regulation and supervision together with deposit insurance should be able to reduce banking
fragility without eliminating the positive incentive to reduce costs and innovate that arise from
private ownership.14 This is indeed the avenue followed by most industrial countries. It is,
however, true that deposit insurance and regulation do not work satisfactorily in poor developing
countries that are plagued by high levels of corruption and poor institutional quality (DemirgüçKunt and Detragiache, 2002). In such a situation, direct state ownership could increase the trust of
the public in the banking system and lead to deeper financial markets.
This was the original view of Alexander Gerschenkron that was recently formalized by
Svetlana Adrianova, Panicos Demetriades, and Anja Shortland (2002). They justify their work
using the example of Russia where public mistrust of banks induces most small savers to keep
their funds outside the banking system and where 70 percent of retail deposits are with the largest
state saving bank.15 Note that the argument can be made more generally in terms of a comparison
of agency costs. Credible deposit insurance and effective regulation and supervision can offset the
mistrust of depositors while limiting the contingent liability of the insurance agency (which in
14
In the case of banking, a possible source of cost reduction is better screening of potential debtors. This
would reduce non-performing loans and hence reduce fragility of the banking system.
15
At the cross-country level there is a positive, but not statistically significant, correlation between the
saving ratio and state ownership of banks.
7
this case becomes the principal of the problem). If regulation and supervision are ineffective, the
cost in terms of insurance outlays of providing insured private banking may outweigh the agency
costs of direct state ownership. Thus, the case for direct intervention hinges on the government’s
ability to provide incentives to private bank owners and managers relative to its ability to do so
for its own agents.
The other arguments for state intervention in the banking sector relate to the presence of
asymmetric information and externalities that lead to underprovision of banking services, during
given periods of time (too little lending during recessions), or to certain economic sectors or
geographical areas. The case for too little lending of private banks during recession, while still
unexplored in the literature, would make a strong case for direct state ownership as opposed to
the use of contracts. This is because, while private banks could be induced to increase lending by
offering government guarantees or subsidies, the process would in practice require some sort of
legislative action and would probably be longer than just instructing a manager of a public bank
to increase lending.16 It should be pointed out, however, that there is some empirical evidence in
support of the idea that the effectiveness of monetary policy is reduced (and not enhanced) by the
presence of state-owned banks (Cecchetti and Krause, 2001). Moreover, a case can be made in
favor of contingent contracts that activate in the event of a crisis.17 Direct intervention or
contingent contracts may be the only tools of countries that due to high capital mobility and a
fixed exchange rate or lack of credibility may not implement a countercyclical monetary policy.
While there is a theoretical case for direct lending towards sectors and industries that
generate positive externalities, critics of government intervention argue that this eventually leads
to a situation in which credit allocation is dictated by political rather than economic
considerations (Kane, 1977).18 It is however interesting to abstract from these considerations and
ask whether, in the presence of a benevolent government, directed lending towards given
industries or geographical areas would be better achieved by subsidizing private banks or by
direct state ownership. Here, contract theory can help organize the ideas. Consider first the
objective of providing banking services to isolated areas. This is a relatively straightforward case
in which the government could write a contract and pay a private bank to open branches in a
given location. In this case, contracting would seem to dominate direct ownership if the latter
16
The idea is similar to the argument that monetary policy has shorter implementation lags than fiscal
policy. In addition, the marginal effect of subsidies on credit may be small if they are used in projects that,
with or without the subsidy, would have been financed.
17
While limited to reducing the procyclical effect of prudential regulation, countercyclical provisioning
requirements recently introduced in the regulatory framework of some developed countries are an example
of this sort of contingent arrangement. See, e.g., Fernández de Lis et al. (2000).
18
Sapienza (forthcoming) looks at the case of Italy and finds strong support for this political view.
8
involves the de novo creation of a state-owned institution. A related concern usually voiced by
public bank supporters is the lack of competition in underserved areas. As noted, however,
optimal government intervention would entail in this case the enforcement of competition
policies.
Consider now the case in which a government wants to establish a development bank
whose ultimate objective is to promote economic development by making loans to certain
economic sectors at a subsidized interest rate, due to the presence of important externalities. The
government could either establish a public development bank or contract a private provider.
According to Hart et al. (1997), the private provider will have an incentive to reduce costs and
innovate. However, the incentive to reduce costs may be in contradiction with the development
objective. As economic development cannot be easily monitored (at least in the short term), the
bank could take cost-saving actions that would reduce its long-term development impact. For
instance, it could eliminate (or understaff) its research department and hence reduce its ability to
identify and target sectors that generate large externalities.19 While this problem could be
addressed by separating research from banking activities and by maintaining the former under
state control, such a solution may be inefficient if there are important synergies between the two
activities. This seems to suggest that development banking is a field in which there is a rationale
for direct ownership. In fact, most development banks are indeed either public or have a mixed
(public-private) structure (Figure 2).
It is a common finding that state-owned banks tend to be less profitable than their private
counterparts. Interestingly, the finding of profitable public banks would open the door for an
alternative (also positive) failure story, namely, one in which the pressure for profitability induces
public institutions to mimic private institutions, in what De la Torre (2003) called the Sisyphus
syndrome. According to this story, if for prudential reasons retail public banks are subject to
private regulatory standards and, in contrast with the social view, public recapitalizations are
viewed as a sign of mismanagement and fuel pressures for privatization, public bank managers
will deviate from their social mandate and mimic private banks in their credit allocation criteria.
In this case, public banks, although efficient, would become redundant.
Public Banks Around the World
The industrial countries and Sub-Saharan Africa are the world’s regions with the lowest
prevalence of state ownership of banks (around 30 percent in 1995, Figure 1). South Asia and the
9
Middle East are instead the regions with the largest share of state-ownership of banks (close to 90
percent in the former group of countries and above 60 percent in the latter). As one may expect,
the transition economies of East and Central Europe are the countries that privatized the most
during the 1990s, moving from almost full state ownership of banks (95 percent in 1985) to
intermediate levels of state ownership in 1995 (data for 2001 indicate an even lower level of state
ownership).20 Latin America has a level of state ownership of banks that is just below the
developing countries average and similar to that of countries in the East Asia Pacific region (the
data described here pull together commercial and development banks).
La Porta et al. (2001) do an extremely careful analysis of the main characteristics of
countries that have extensive state ownership of banks. We build on their work by separating the
sample into developed and developing countries. This division allows us to check whether the
relationship between the presence of public banks and a set of institutional and economic
variables differs between these two group of countries. This is particularly important because
some theories aimed at explaining the presence of public banks neatly apply to poor countries
with underdeveloped institutions and financial markets but not to more developed countries. So,
the reasons that may explain the presence of public banks in Central America may be very
different from those that explain the existence of public banks in Western Europe. In particular, it
is possible that public banks that were created with benevolent development objectives
transformed themselves into an instrument of patronage that politicians refuse to privatize. If this
is the case, pulling together developing and industrial countries would mix countries in the first
stage (where the benefits of public banks may be greater than their costs) with countries in the
second stage.21
When one restricts the analysis to developing countries there is a strong and statistically
significant negative correlation between state ownership of banks and GDP per capita (indicating
that poorer developing countries tend to have more state-owned banks). However, this correlation
disappears if we control for an index of overall government intervention in the economy. In other
words, for a given level of state interventionism, there seems to be no special relationship
between GDP per capita and the propensity to intervene in the banking sector (column 1 of Table
19
Or just mimic the behavior of private commercial banks. (This is De la Torre’s Sisyphus syndrome.)
For details of bank privatization in transition countries see Bonin, Hasan and Watchel (2003).
21
It is telling that La Porta et al find a negative and statistically significant relationship between state
ownership of banks and subsequent growth in high income countries (where high income is defined as
having initial GDP per capita income above the median), but fail to uncover any significant relationship
between these two variables in low income countries (which, however, have a larger coefficient in the
state-owned variable).
20
10
1). 22 23 At the same time, in the sample of industrial countries, state ownership of banks is never
significantly correlated with GDP per capita. Finally, if all countries are pulled together,
regressions analysis indicates that there is a negative correlation between GDP per capita and
state ownership of banks (even after controlling for government intervention in the economy).
These results suggest that the relationship between state ownership and the level of development
is mostly driven by differences between developing and industrial countries rather than
differences within these groups of countries.24
The next set of results shows that, once the state propensity to intervene in the economy
is controlled for there is a significant negative relationship between financial development
(measured as domestic credit over GDP) and state ownership of banks in developing countries.
However, this result does not hold for industrial countries or for the joint sample of developing
and industrial countries (Column 2, 5 and 7 of Table 1).25 Figure 3 shows that in the whole
sample (if one does not control for initial GDP) there is a clear negative correlation (-0.41 and
statistically significant at the 1 percent confidence level) between state ownership of banks
(computed as a weighted average of the 1970-1985 and 1995 values) and financial development
(averaged over the 1980-2001 period).
Table 2 examines the correlation between state ownership of banks and several variables
measuring institutional quality. It shows that if the sample is restricted to developing countries,
there is no statistically significant correlation between state ownership of banks and each of
corruption and democracy (surprisingly the correlation is positive), a positive and statistically
significant correlation between state ownership of banks and rule of law, and a negative and
statistically significant relationship between property rights and state ownership of banks. In the
sub-sample of industrial countries there is no significant correlation between institutional
variables and state ownership of banks either. The whole sample (including developing and
22
Table 1 focuses on the 1970s and Table 2 on the 1990s. Full regressions results are reported in the
Appendix. The results reported in Tables 1and 2 and in the appendix differ from La Porta et al (2001) for
several reasons. First of all, in order to emphasize that the results do not imply causality, the regressions
reported here measure all the variables in the same period. So, state ownership in 1995 is regressed over
average GDP per capita and financial development for the 1990s (and not in 1970) and state ownership in
1970 is regressed over average GDP per capita and financial development for the 1970s (La Porta et al. do
not report regressions for state ownership in 1970). Rule of law and corruption are also measured in the
1990s. Finally, the GDP and financial development measures used here are from the World Development
Indicator (WDI), while La Porta et al. complement WDI and IFS data with data from other sources and
manage to obtain a slightly larger sample.
23
See also Column 1-2 of Table A1 in the appendix.
24
This is not due to the fact that there is limited variance in GDP per capita within the countries that are
defined as developing. In fact this group of countries include both very poor countries (like Tanzania) and
some high-income countries (like Singapore and Hong Kong). In fact, the coefficient of variation in the
sample of developing countries (0.93) is not very different from that of the whole sample (1.19).
11
industrial countries) shows a negative and statistically significant relationship between property
rights and state ownership of banks and no statistically significant relationship between state
ownership of banks and the other institutional variables.
Unfortunately, these results do not help clarify whether public banks’ existence is
justified by development and social objectives or whether their existence is purely due to political
reasons. In fact the correlation between state ownership of banks and each of poor institutional
quality (as measured by lack of property rights), low financial development, government
intervention in the economy, and low GDP per capita, is justified by all theories aimed at
explaining state intervention in the banking sector.
An alternative way to look at the issue is to use microeconomic data. But even in this
case, the empirical implications of each theory are often difficult to distinguish given the
available information because both the development and political view of public banks are
consistent with low profitability of public banks, due to the financing of socially (but not
privately) profitable investments, the dominance of agency costs, their exploitation for political
patronage or their subordination to macroeconomic policy (Sapienza, 2002).
Altunas, Evans and Molyneux (2001) investigate scale economies, inefficiencies, and
technical progress for a sample of private, mutual, and publicly-owned banks in the German
market. They find little evidence that privately-owned banks are more efficient than public and
mutual banks. Indeed, inefficiency measures indicate that public and mutual banks have slight
cost and profit advantages over their private commercial banking counterparts, a feature which
may be explained by their lower cost of funds. On the other hand, their results suggest that public
banks do not play the subsidizing role that the social view typically assigns to them.
Sapienza (2002) studies the comparative performance of privately- and publicly-owned
banks in Italy. She shows that: (i) state-owned banks charge lower interest rates than their private
counterparts to similar firms, even if the latter have access to financing from private banks; (ii)
state-owned banks’ lending behavior is affected by the electoral results of the party affiliated with
the bank; (iii) state-owned banks favor mostly large firms; (iv) state-owned banks favor firms
located in depressed areas. While the last finding is somewhat aligned with the development
view, the first three findings provide strong evidence in support of the political view of stateowned banks.
Although considerably more research needs to be done, there is no evidence that German
and Italian public banks fulfill the role of financing rationed firms with large externalities. At best
they mirror private banks (this is De la Torre’s Sisyphus syndrome) and at worst show signs of
25
The correlation is always significant for the 1990s see Table A2 in the appendix.
12
political bias. These previous studies do not focus on the potential effect of state-owned banks on
volatility. As we already mentioned, state-owned banks could be used as a tool to smooth the
economic cycle. Abstracting from this latter point, the existing evidence may justify some
concern among policymakers in countries where state banks play a major role in credit allocation.
Public Banks in Latin America: Evolution and Main Characteristics
Latin America has a level of state ownership of banks similar to that of other developing
countries. Most countries in the region privatized aggressively both in the 1970s (during the
1970-1985 period average state ownership of banks dropped from 64 to 55 percent) and 1990s
(during the 1985-1995 period average state ownership of banks dropped from 55 to 40 percent).26
These averages mask large differences across countries in the region, with Costa Rica being the
country with the largest share of government ownership of banks (90 percent in 1995, down from
100 percent in 1970, Figure 4) and Trinidad and Tobago the country with the smallest share of
state ownership of banks (1.5 percent). Ecuador, Chile and Peru are the countries that privatized
the most, moving from levels of state ownership that were above (or close to in the case of Peru)
90 percent, to state ownership below 40 percent (below 30 and 20 percent in the cases of Peru and
Chile). Uruguay is the only country that increased state ownership of banks, moving from 42
percent in 1970 to 69 percent in 1995. Other countries experienced large swings in the bank
privatization and nationalization process. Mexico, for instance, moved from 82 percent of state
ownership in 1970 to 100 percent in 1985 and back to 35 percent in 1995. A similar pattern holds
for Nicaragua, Colombia, El Salvador, and Bolivia.27
More recent data show that the pattern of bank privatization has continued in most
countries. Over the 1995-2001 period, large bank privatizations raised US$ 5.5 billion in Brazil
(with the privatization of BANESPA, Brazil’s largest bank raising US$ 3.6 billion) US$ 800
million in Mexico and more than US$ 500 million in both Colombia and Venezuela.28 Table 3
illustrates the recent evolution of state ownership of banks in 12 Latin American countries.29 It
26
Studies of bank privatization in Latin America include Beck, Crivelli and Summerhill (2003), Clarke and
Cull (2002) and Haber and Kantor (2003).
27
In Nicaragua state ownership went from 90 (1970), to 100 (1985) to 63 percent. In Colombia, state
ownership went from 57 (1970) to 75 (1985) percent and then back to 53 percent (1995). In El Salvador,
state ownership went from 53 (1970) to 100 (1985) to 26 percent (1995). In Bolivia, state ownership went
from 53 to 69 and then back to 18 percent (1995).
28
Source Megginson (2003).
29
The data are not directly comparable with that of figure 3 because the data in table 1 only include
commercial banks and the data in figure 3 also include development banks. Furthermore, the data in figure
3 only include the assets of the ten largest banks, while table 1 includes all the banks operating in the
13
shows that Argentina, Brazil, Costa Rica and Nicaragua are the countries that privatized the most.
The share of assets controlled by state-owned banks also dropped in Chile, El Salvador, and
Guatemala while it remained more or less constant in Colombia.
Figure 5 describes public bank performance indicators relative to that of private
domestically owned banks.30 It shows that public banks charge lower interest rates than their
private counterparts (at 30 basis points lower, this result is consistent with Sapienza’s findings
discussed above) and also pay lower interest rates on their deposits (90 basis points less than
private banks). It is also the case that public banks tend to lend more to the public sector (the
difference between the share of public sector loans of private and public banks is 8 percentage
points) and have a higher share of non-performing loans (about 8 percentage points). Finally,
public banks have a lower profitability than their private counterparts (the difference in returns on
assets is 0.4 percentage points). Table 2 illustrates the results country by country (it reports both
the public and foreign coefficients) and shows that the relative profitability of public banks is
particularly low in Colombia and Honduras (Costa Rica is the only case in which public banks are
more profitable then their private counterparts). Brazil and Honduras are the countries where
public banks pay and charge the lowest interest rates (again relative to domestically owned
private sector banks), with a rate differential close to two percentage points in the case of loans in
Brazil. Non-performing loans are particularly high for public banks in Costa Rica (this seems in
contrast with their relatively high profitability), Guatemala and Honduras and public sector loans
are particularly high in Chile and Costa Rica.
Table 5 traces the evolution of public sector loans in public, private and foreign banks.
There are three countries (Argentina, Brazil and Colombia) in which the share of public sector
loans increased considerably over the 1995-2000 period, but only in Colombia do public sector
banks seem to have absorbed a disproportionately large share of public sector debt.
While these results should be taken with some caution because they are simple
correlations that control only for bank size, they suggest that while public banks tend to be less
efficient than their private counterparts (with higher non-performing loans, more loans to the
public sector, higher overheads, and lower returns) they are also perceived to be safer and hence
able to pay lower rates on their deposits and extend credit at a lower rate. An alternative
country. Finally, the data of table 1 were computed by assigning 100 percent government ownership to
banks that have at least 50 percent of assets owned by the government and 0 percent government ownership
to others.
30
All the values were obtained by running a bank level regression, controlling for size (expressed as log of
total assets) and including a dummy taking value one for public banks and a dummy taking value one for
foreign-owned banks. The values plotted in Figure 4 are the coefficients of the public bank dummy.
14
explanation for this last result is that state-owned banks may benefit from indirect subsides
coming from government deposits paying no or low interest rates.31
Finally, it is important to stress that state-owned banks may not maximize profits but
social welfare. Therefore it could be the case that an efficient public bank loses money in projects
with negative private present value but with positive externalities or social benefits.
Development Banks
Most of the literature on state ownership of banks either focuses exclusively on commercial banks
or mixes commercial banks with development banks.32 However, these are very different types of
institutions. Development banks are hybrid financial institutions that are better defined by the
term “development finance institution” (Bruck, 1998) and are often primarily concerned with
offering long-term capital finance to projects that are deemed to generate positive externalities
and hence would be underfinanced by private creditors. Rather then working directly with the
public they sometimes operate as second tier institutions (i.e., they operate through other banks)
and often have a well-defined objective that is closely related to the economic development of
either the country or a given sector. The last available survey (Bruck, 1998) indicates that there
are 550 development banks worldwide with 152 development banks located in Latin America and
the Caribbean. Figure 6 describes the relative importance of development banks in different
regions of the world (expressed as a share of development bank assets over assets of the ten
largest banks in each country). Latin America, together with South Asia and Sub-Saharan Africa,
is characterized by a relatively large presence of development banks.
There is some consensus that development banks played an important role in the
industrialization of Continental Europe and Japan (Cameron, 1961, and Armedáriz de Aghion,
1999). Crédit Mobilier (a private institution with close government ties), for instance, played a
very important role in financing the European railway system and through partnership with other
banks contributed to overall European financial development.33 In Germany and Japan,
development institutions were key to the post World War I and II reconstruction eras. According
to Armedáriz de Aghion (1999) one key factor in the success of these financial institutions was
their ability to disseminate their expertise due to their dispersed ownership (this is especially the
31
This is the case of Chile, where the Banco Del Estado de Chile manages the central government checking
account.
32
Important exceptions include Armedáriz de Aghion (1999) Titelman (2003) and ALIDE (2003).
33
For a short history of Crédit Mobilier, see Rajan and Zingales (2003). Cameron (1961) provides a more
detailed account.
15
case for institutions created before World War II) and charters that stated that these institutions
should only provide supplementary finance (hence, leading to the necessity of cofinancing
agreements). In comparing the experience of Crédit National de France with Nacional Financiera
de Mexico, Armedáriz de Aghion (1999) suggests that the type of government involvement (with
subsidized credit and loan guarantees in the first case and direct ownership in the second) and
need for cofinancing agreements (strong in the first case and weak in the second) are among the
factors that made the experience of Crédit National more successful than that of Nacional
Financiera. She also argues that these findings are consistent with a theoretical model showing
that well-targeted state intervention (via subsidies and credit guarantees) and the imposition of
cofinancing restrictions are likely to maximize the positive spillover of development institutions.
Not only may they lead to a better allocation of credit (co-financing may limit the opportunities
for politically motivated credit allocation), but they also disseminate development expertise to the
whole financial system.
Latin America has a large number of institutions that define themselves as development
banks and are part of ALIDE (Asociación Latinoamericana de Instituciones Financieras para el
Desarrollo).34 Out of the 121 members of ALIDE, 75 are first tier banks, 21 second tier banks and
the remaining have a mixed nature. The majority of these development banks are either stateowned or have mixed public-private ownership. In 2002 there were only 11 development banks
with fully private ownership accounting for less than 2 percent of total assets of Latin American
development banks (See Figure 2).35
Dominican Republic, Argentina, and Brazil have the largest number of development
institutions (more than 10) and Paraguay, Nicaragua, Peru and Uruguay, the smallest (two or
less). Development banks are particularly important in Uruguay, Brazil, Panama, the Dominican
Republic, and Costa Rica (where, in 2001 loans totaled more than 15 percent of GDP) and
relatively less important in Ecuador, Venezuela, Honduras, Peru, and El Salvador. BNDES in
Brazil is the largest development bank with total net loans in 2002 of US$ 28.3 billion and annual
disbursements of approximately US$ 11 billion (Figure 7). The second and third largest
development banks are also Brazilian (Banco do Brasil and Caixa Economica Federal) followed
by two Mexican (NAFIN and BANOBRAS) and an Argentine institution (Banco de la Nación
Argentina). It should be clear from this classification that the sample of development banks also
34
The self-definition is adopted because it is difficult to define whether an institution is a development
bank or not.
35
These were Banco Industrial S.A. (operating in Bolivia and Guatemala), Banco del Desarrollo (Chile),
Banco BHD S.A., Banco Dominicano del Progreso S.A., Banco de Desarrollo Citicorp (the Dominican
16
includes institutions that originally functioned as development banks but now mostly engage in
commercial banking activities. If these banks are dropped from the sample the share of
development bank loans over GDP drops substantially. Brazil becomes the country with the
largest presence of development banks followed by Mexico, Colombia and Chile.
Development banks tend to have low profitability and their return on assets tends to be
lower than that of private banks in the country (Figure 8).36 This is particularly true for
Guatemala, Chile, Mexico and Colombia. It should be pointed out, however, that the figure for
Guatemala is completely due to the disastrous returns of one institution which had an ROA of –26
percent! If this institution is dropped from the sample the return on assets of development banks
increases to 0.6 percent. In the case of Chile the negative results are due to the crisis at CORFO
(Corporación de Fomento de la Producción), which in 2001 had an ROA of –4.8 percent (ROA
were mostly positive in the previous years). In the cases of Brazil and Peru, however, there is no
large difference between the profitability of development and private commercial banks (this
could be due to the fact that they get lower cost of funds) and in El Salvador and Bolivia,
development banks seem to be more profitable than private commercial banks.
Do Public Banks Play a Useful Role in Economic Development?
The best way to test whether public banks satisfy some development objective or exist for purely
political motives is to evaluate their effect on the economy. The key question here is whether
public banks generate positive spillovers on financial development and economic performance.
Do they promote growth and financial development? Do they help in smoothing shocks and limit
credit and deposit volatility in times of crisis?
In terms of their potential spillovers to the rest of the economy, the few existing empirical
studies have tended to focus on the way in which public ownership of banks affects the evolution
of the private banking sector and financial markets as a whole and, through them, the
performance of the economy. Looking at the impact of public participation in the banking sector
on financial development, Barth, Caprio and Levine (2002) argue that greater state ownership of
banks tends to be associated with more non-performing loans but they find that, after controlling
for bank regulation, government ownership of banks is not robustly linked with other indicators
Republic) , Banco Empresarial S.A., Financiera Guatemalteca S.A., Financiera Industrial S.A. (Guatemala),
FEDECREDITO (El Salvador)
36
The figure compares average return on assets (weighted by bank assets) for development bank (excluding
first tier banks) and private commercial banks.
17
of bank development and performance.37 These results are somewhat in contrast with their
previous work (Barth, Caprio and Levine, 2000) where, for a sample of 59 developed and
developing countries, they found a negative association between state-ownership and financial
depth as measured by the ratios of bank and non-bank credit to the private sector over GDP, and
by the value of securities traded domestically, even after controlling for economic development
and the quality of government.
The interpretation of these findings in terms of causality is rather difficult, as the authors
themselves recognize. Their correlations pair state-ownership ratios in 1997 with measures of
financial development in previous years, suggesting that financial underdevelopment leads to
public participation. This finding is in line with the development view that implies that public
banks are likely to be more prevalent at earlier stages of financial development. Indeed, even if
one is willing to accept that public shares are sufficiently stable to be used as measures of public
participation in the past, no results are reported on its interaction with economic development and
institutional quality, which may shed light on whether the presence of public banks is induced as
a substitute for private institutions in a less than conducive environment. In addition, the fact that
bank failures during a crisis tend to be followed by nationalization may generate a positive
correlation between the propensity to face banking crises and the extent of ex-post state
ownership, independently of whether or not state participation increases banking fragility.
The results of Barth et al are consistent with those in La Porta et al (2001), who focus
more specifically on the determinants and implications of state ownership of banks. Original data
on public ownership (which comprises public shares for about 90 economies for the years 1970,
1985 and 1995) show that government ownership of banks at an earlier period is associated with a
slower subsequent development of the financial system and slower economic growth. Their tests,
while controlling for initial conditions (financial and economic development, state ownership
ratio), are still limited to cross-section correlations and, as La Porta et al. note, “are not conclusive
evidence of causality.” This is particularly true in light of the strong persistence of both credit
shares and state-ownerships ratios.38 A negative link between government ownership and
financial development is not at odds with Gerscherkron´s (1962) view since underdeveloped
financial markets may call for a stronger public presence to foster economic growth.
37
They also study the relationship between banking crises and state ownership of banks, but they do not
find a significant link. Some evidence for such a relationship is found by Caprio and Martinez Peira (2002).
38
The correlation between state ownership of banks is 0.77 (1970 vs 1995), 0.88 (1970 vs 1985) and 0.79
(1985 vs 1995). In turn, the correlations between private credit over GDP ratios are 0.68 (1960 vs 1986),
0.92 (1960 vs 1970), and 0.78 (1970 vs 1986). P-values are equal to 0.00 in all cases.
18
As the statistical analysis of La Porta et al groups together very different countries,
including former socialist economies where state ownership was the rule and for which output
data for earlier periods are less reliable, a revision of their results is warranted. Tables 6 and 7
revisit their findings using their own measures of state-owned (public) shares in the banking
sector and updating and extending in time the private credit and GDP data following their
definitions and sources.39
Table 6 focuses on the relationship between state ownership of banks and subsequent
financial development. Column 1 reproduces the results in Table IV of La Porta et al. for ease of
comparison. Columns 2 and 3 replicate the regression using the new data. Reassuringly, the
original results remain virtually unchanged, indicating that state ownership of banks depresses
subsequent financial development even after controlling for initial GDP and the initial level of
financial development. This is also true when 1970 is used as the initial year (this dating is in line
with the earlier measure of the state ownership ratio).
While the negative association between public shares and private credit growth is robust,
causality and omitted variable issues are more difficult to assess. In particular, according to the
development view, public banks are more likely to arise in a context in which private financial
intermediation is discouraged by institutional deficits. This suggests that the negative link
between private financial intermediation and state ownership could be due to either reverse
causality or to the omission of institutional variables. Results in columns 4 and 5 provide a
robustness check for this potential simultaneity problem by implementing the state-ownership
variable using an index of state-owned enterprises as a share of the economy.40 With these
specifications the effect of state ownership of banks on subsequent financial development, while
still negative, ceases to be significant.41
Columns (6) and (7) report additional robustness checks by focusing on the impact of
state-ownership at shorter horizons by splitting the sample into two periods (1970-1985 and
39
Initial per capita GDP is expressed in current U.S. dollars (source: World Development Indicators).
Credit to GDP ratios are computed as credit to the private sector (lines 22.d.f and 22zw, plus line 42d) over
GDP (source: International Financial Statistics). The growth in the credit to GDP ratio is computed as the
average of the log difference of the ratio over the period, for those countries for which a minimum of 10
observations is available. In order to maintain data homogeneity columns 2-10 only use data for which
WDI and IFS information are available this reduces the sample to 70 observations
40
The variable, computed as the average of the index for 1975 and 1995 sourced from Gwartney et al.
(1996), is shown in LLS to be highly correlated with state-ownership of banks. In addition, it is not
significantly correlated with private credit growth once the share of public banks is included.
41
It should be pointed out, however, that the coefficient, while not statistically significant, does not chnage
in value, which suggests that the change in significance may be due to the loss of efficiency typical of IV
estimation.
19
1986-2002) in line with the available data on public shares.42 The link is still significant at 10
percent for the later period, but not for the first period.
In sum, the evidence that the prevalence of state ownership in the banking sector
conspires against its ultimate development appears to be weaker than hinted by previous studies.
However, there is no clear indication that state ownership has the positive catalytic effect that
some advocates have suggested. A more balanced reading of these results would indicate that
public banks do not play much of a role in the development of their private counterparts.
The same conclusion can be extracted from the more elusive question on the impact of
public banks on long-run economic growth. While a direct nexus is difficult to construct, there
are at least two indirect avenues through which one could envisage a link, either positive or
negative: public banks may help develop projects with important externalities that would
otherwise be shelved, or; they may inhibit financial development, which ultimately reflects in a
poorer investment record and growth underperformance.
Table 7 explores the link between state ownership of banks and economic growth. As
before, it follows closely the work of La Porta et al., who report a negative association between
state ownership and growth (column 1 reproduces their results for comparison). The first thing to
note is that the negative link between state ownership of banks and growth does not disappear
when the regression controls for the growth rate of financial development (column 2). This
suggests that the relationship between bank ownership and growth is unrelated to changes in the
amount of credit during the period, which is seemingly at odds with the view that financial
underdevelopment (measured as total credit) is the main channel through which bank ownership
may influence economic performance.43 This result may reflect the fact that total credit does not
capture allocative efficiencies and is an intriguing finding that warrants further exploration.
Column 3 interacts financial development with bank ownership (proxies of credit extended by
public banks and credit extended by private banks, respectively) and shows that the two types of
credit have an identical effect on growth. There is a possibility that the equation in column 3 is
miss-specified because public ownership of banks may affect overall financial development
generating non-linearities that are not controlled for in the specification of column 3. Column 4
addresses this issue by controlling for the main effect of public ownership. The results change
dramatically. While the main coefficient on bank ownership is negative, high, and statistically
significant (indicating that state ownership of banks is harmful for growth), the results now
42
Private credit growth is here computed only for countries with at least five observations within the
period.
43
However, this result is consistent with la Porta et al.’s finding that the negative effect of state ownership
of banks manifests itself in lower productivity rather than lower capital accumulation.
20
indicate that, conditional on a given share of public bank ownership, the positive impact of
financial development on growth is larger in countries with a large share of state-owned banks.44
An alternative way to read this last result is that state ownership of banks has its strongest
negative impact on growth in countries with low financial development. This is in line with the
La Porta et al’s finding that state ownership of banks has a negative impact on growth in
countries with low financial development but no statistically significant effect on growth in
countries with high financial development.
To make sense of this battery of results, it is useful to compare the total effect of state
ownership in pairs of countries with similar levels of financial development but different levels of
state ownership. Consider, for instance, the cases of Japan and Italy and South Africa and Turkey.
In 1960, the first two countries had high and similar levels of financial development (around 58
percent of GDP, which put both countries above the 90th percentile of the distribution of financial
development) and the other two countries had intermediate levels of financial development (17
percent and 16.8 percent respectively, just below the median value for the period). At the same
time, Italy and Turkey had a large share of state ownership of banks (76 and 82 percent,
respectively) and Japan and South Africa had a much smaller share (7 and 0 percent,
respectively). According to the estimates in column 1 of Table 7, differences in state ownership
of banks would have led Japan to grow at a rate that was 1.2 percentage points higher than Italy,
and South Africa at a rate that was 1.5 percentage points higher than Turkey. The estimates in
column 3 paint a very different picture, predicting that Italy would grow at the same rate as Japan
and Turkey at the same rate as South Africa. Finally, the estimates in column 4 predict that Italy
should have grown faster than Japan (by approximately 0.5 percentage points) and Turkey much
slower than South Africa (by approximately 2 percentage points). These last results are somewhat
difficult to interpret because they suggest that state ownership of banks promotes growth (or at
least does not hurt growth) only in countries with highly developed financial systems, indicating
that state-owned banks seem to be beneficial for countries that in principle should not need them.
A possible explanation for this finding is that countries with well-developed financial
systems are better equipped to deal with the distortions that arise from government ownership of
banks (La Porta et al.). An alternative interpretation is that public bank ownership is proxying for
some excluded variable which is correlated with both bank ownership and subsequent growth
44
The fact that the main coefficient for private credit is close to zero is probably due to non-linearities in
the relationship between financial development and growth and should not be interpreted as saying that
financial development has no growth effect in countries with no state-owned banks. Indeed, the point
estimates suggest that for the average country (i.e. for the country with average level of state ownership of
21
(institutional quality, for instance) or that there is a causality issue with the relationship between
state ownership of banks and financial development that is not fully addressed by the statistical
models of Table 7.
The remaining columns of the table show that the results are somewhat sensitive to the
sample. For instance, column 5 uses data from La Porta et al but restricts the sample to countries
for which World Bank and IMF data are available and finds no significant correlation between
initial state ownership and subsequent growth. The same is true if data for the 1970-1995 period
are used.
While these findings somewhat mitigate the previous evidence for a negative effect of
state ownership of banks they also fail to support the view that public banks mitigate market
imperfections that lead to allocative inefficiencies. Indeed, the preliminary conclusion from this
evidence suggests that, in terms of its impact on financial development and long-term growth, the
average public bank does not appear to be any better than its private peers.
Besides examining their effect on long-run growth, it is also interesting to check whether
the presence of state-owned banks could play a role in smoothing the effect of external shocks.
Appendix 1 (column 1 of Table A3) shows that external shocks have a large and statistically
significant effect on GDP even after controlling for lagged values of GDP external demand and
real credit (details of the estimation procedure are reported in the appendix). It also shows that
financial development (measured as credit to the private sector divided by GDP) plays an
important role in reducing the impact of the external shocks. In particular, the point estimates
indicate that moving from the country in the 25th percentile of financial development to the
country in the 75th percentile of financial development reduces GDP’s elasticity to external
shocks by 20 percent. Column 3 of table A3 in the appendix checks whether credit to the private
sector extended by public banks (measured as the interaction between the share of public banks
and financial development) has a differential effect with respect to overall financial development.
The main finding is that the coefficient is large and positive but not statistically significant and it
is not robust to alternative specifications. While this does not provide convincing evidence that
the presence of state-owned banks attenuates the smoothing effect of financial development, it
clearly shows that state-owned banks play no role in amplifying the beneficial effect of financial
development. The results are illustrated in Figure 9. The XX line measures how GDP responds to
an external shock if all countries are grouped together. It shows that after a negative shock, GDP
drops in period 1 and then recovers to reach its initial level after 3 periods. The YY line focuses
banks) a one percentage point increase in financial development is associated with a half percentage point
increase in growth.
22
on countries with low state ownership of banks (i.e., countries where state ownership of banks is
below the sample median) and shows that the negative impact of the shock is somewhat smaller
than that for the overall sample. Finally, the ZZ line focuses on countries with high state
ownership of banks and shows that in this case the impact of the external shock is much larger
and more persistent (GDP drops for two periods) and reaches a maximum effect of GG percent
(versus HH percent in the full sample).
It is also possible to check whether state ownership of banks affects how credit responds
to external shock. The appendix shows (column 10 of table A3) that, in contrast with the analysis
for GDP elasticity, state-owned banks may play a role in reducing the elasticity of credit to
external shocks (although, as before, the coefficient is not statistically significant). Taken at face
value, this seems to suggest that state-owned banks play a useful role in smoothing credit but that
their credit is less effective in smoothing the overall output effect of external shocks.
It is also possible to check whether state-owned banks allocate credit better than private
banks by using industry level data to identify the role of bank ownership in explaining industry
growth and volatility. Such a strategy was first employed by Galindo and Micco (2004) to check
whether government-owned banking promotes growth by directing credit towards the industries
that rely more on external finance and/or towards industries where informational asymmetries
may be higher (the methodology and full results are discussed in the appendix). After having
established that more developed financial systems tend to favor economic sectors that for
technological reasons demand more credit (column 1 Table A4, replicating Rajan and
Zinagales’s, 1998, result), it is possible to show that state ownership of banks reduces the
beneficial effects of financial development. In particular, for a country whose median financial
development rises from the 25th percentile of state ownership of banks to the 75th percentile of
state ownership of banks, the beneficial effect of financial development declines by more than 50
percent. Interestingly, financial development is much more important for sector growth in
developing than industrial countries and the negative effect of public banks is much stronger in
industrial countries (state ownership of banks has no significant effect if the sample is restricted
to developing countries). The appendix also checks if state ownership of banks has an effect on
sectoral volatility but finds no evidence to support this hypothesis.
While the finding that state ownership of banks reduces the beneficial effect of financial
development may provide some evidence that state-owned banks allocate credit less efficiently
than private banks, this is not equivalent to saying that state ownership reduces growth by itself; it
just mitigates the growth effect of financial development due to allocative efficiency.
Furthermore, the empirical strategy of the table is still plagued by a possible feedback from state-
23
owned banks to total financial development. In particular, if state ownership of banks plays a
positive role in stimulating financial development (as claimed by the development view) the
results discussed here would overestimate the negative role of state-owned banks on allocative
efficiency which could, indeed, be positive once their effect on financial development is taken
into account. If, on the other hand, state ownership of banks depresses financial development (as
claimed by the political view) the results reported above would underestimate the negative role of
state-owned banks.
It is also interesting and worrisome that the exercise described above yields results which
contrast with those of the cross-country regressions of Table 7 that found that state ownership of
banks may amplify the positive effect of financial development. All this points to a deeper
causality issue that the tests reported here cannot address.
Conclusions
Several prominent development economists writing in the 1960s and 1970s strongly supported
government intervention in the banking sector and direct state ownership of banks. The more
recent view is that state ownership of banks is not beneficial for economic development or, in the
words of a recent World Bank report that: “…whatever its original objectives, state ownership of
banks tends to stunt financial sector development, thereby contributing to slower growth.” (World
Bank, 2001, P. 123).
This paper reviews the existing evidence on the role of state ownership of banks, tests its
robustness, and introduces new evidence. While the paper finds some evidence in support of the
idea that state-owned banks do not allocate credit optimally, it also shows that the results
demonstrating that state ownership inhibits financial development and growth are less robust than
previously thought. On the other hand, the paper finds no evidence in support of the idea that
state ownership of banks has beneficial effects in terms of spurring growth or reducing
volatility.45
One argument that is often invoked against state ownership of banks is that private banks
tend to be more profitable than public banks. There is in fact some robust evidence that this is the
case (especially in developing countries). It should be pointed out, however, that whatever merit
the development view has, it is unfair to judge it by using the profitability benchmark. In fact, it
has been argued that having public banks that maximize profitability would generate an inherent
45
Paradoxically, some of the results seem to indicate that state-owned banks work best in countries with
highly developed financial systems.
24
contradiction and a vicious circle in which public banks would start with a social policy mandate
and concentrate on high risk and low private return activities. This would lead to recurrent losses
and need for recapitalization that would soon be followed with a re-orientation towards profitable
activities in competition with private banks. In turn, this would lead to insufficient attention to the
social policy mandate and political pressure to restart the cycle (De La Torre, 2002).46
In this context, public banks should be judged on the basis of their development and
stabilizing effect. The main problem in identifying whether state-owned banks play a positive role
in economic development is that both the political view (which assumes that state-owned banks
have a negative impact on the economy) and the development view (which assumes that public
banks can play a beneficial role) are consistent with a negative relationship between state
ownership of banks and both financial development and institutional quality. The main difference
between these two interpretations lies in the fact that, according to the development view, state
ownership helps promote financial development at initial stages and mitigates the negative effect
of poor institutional quality (which would be even more damaging without public intervention)
whereas, according to the political view, state ownership of banks depresses financial
development and possibly promotes corruption. As both financial development and institutional
quality are closely related with economic growth, it is very difficult to make a statement on the
role of public banks without disentangling the causal relationship between these variables and
state ownership of banks. Thus, a definitive answer on the development role of state-owned banks
will require addressing this causality problem, one of the thorniest issues in economics.47
46
Some may find that the fact that state-owned banks have fiscal costs together with the fact that there is no
convincing evidence that they play a beneficial role is sufficient to conclude that they should not exist.
While it is difficult to argue with such a logic, it should be pointed out that this reasoning also applies to
several other areas of government intervention (the IFIs,, inter alia).
47
A brief illustration of the reverse causality problem is useful. Suppose a social scientist wanted to test the
hypothesis that going to the hospital makes people sick by looking at the health status of a randomly
selected group of people. The social scientist would probably find a positive correlation between the
probability of being sick and number of visits to the hospital. It would, however, be wrong to use this
evidence that going to the hospital makes people sick. It is very likely that the causality goes in the opposite
direction: sick people tend to go to the hospital more often! While there are statistical techniques that can
address the causality issue (the instrumental variable method is such a technique) they are often difficult to
apply because they require identifying a variable that is correlated with the variable of interest (in the
previous example, the probability of visiting a hospital) without being directly correlated with the outcome
variable (in the previous example, the probability of being sick). Such variables (called instruments) are
25
BOX 1: Bank Privatization: A Survey of the Empirical Evidence
While there is some evidence that private banks outperform public banks in terms of profitability
and operating efficiency (see Meggison, 2003) and hence privatization could involve fiscal
benefits and increase microeconomic efficiency, the evidence on bank privatization indicates that,
in developing countries, the benefits from privatization have been limited and that in some cases
privatization had a negative effect. According to Haber and Kantor (2003) Mexico’s bank
privatization “produced disastrous results.”48 Chile in the early 1980s is another example where a
fast privatization led to a large financial crisis. Clarke and Cull (2002), instead, suggest that bank
privatization in Argentina was highly beneficial and involved very large fiscal savings (up to half
of a typical province total expenditure).
There are a limited number of studies that try to measure the effect of bank privatization
in developing and industrial countries.49 Their main findings are that in developed countries bank
privatization leads to improvement in terms of profitability and stock performance but that these
improvements are smaller than what is typically found in the case of non-financial companies.
Studies that focus on non-transition developing countries tend to find that privatization has a
positive impact on bank competition but no significant impact on profitability or operating
efficiency and that poorly done privatizations (like the one in Mexico in the early 1990s) can
carry very large costs. Studies focusing on transition countries found more beneficial effects of
privatizations.
The surveyed studies also found that privatization tends to be more beneficial if the state
completely relinquishes its ownership (therefore full privatization tends to be better than partial
privatization) and that privatization that involves (or, at least, allows for) the entry of foreign
banks tends to be better than privatization that excludes foreign ownership.
Privatization can be implemented either by directly selling the bank’s assets to a set of
strategic investors or by selling equity shares in the capital markets (voucher privatization
implemented by some transition countries shares many of the characteristics of this latter
privatization method). There is some evidence that share-issues privatization tends to work better
in countries with a strong institutional environment and well-developed capital market while
often very hard to find, but the causality issue is very important because, in Rajan and Zingales’ (2003)
words: “Correlation is the basis for superstition, while causality is the basis for science.” (p 109).
48
They do not criticize that idea of privatization but the way it was implemented in early 1990s. One of the
major points of criticism was the exclusion of foreign banks from the privatization process.
49
This box is based on the surveys of William Megginson (2003) and George Clark, Robert Cull and Mary
Shirley (2003).
26
direct asset sales (especially those involving foreign strategic investors) are preferable in
countries with poor institutions and limited capital market development.
27
Appendix
A. State ownership of banks and responses to external shocks
Besides examining their effect on growth, it is also interesting to check whether the presence of
state-owned banks could play a role in smoothing how external shocks affect the economy. The
first step consists of building a measure of external demand obtained by computing a weighted
average of trading partner’s GDP growth. Next, it is possible to regress this measure on its two
lags and use the regression’s residuals as a measure of external shock. Column 1 of Table A3 uses
a panel of 77 countries for the 1980-2001 period and shows that this external shock is positively
and significantly correlated with GDP growth (expressed as a deviation from its long run trend)
even after controlling for lagged value of GDP, lagged value of external demands and real credit.
Column 2 shows that financial development plays an important role in reducing the impact of the
external shock. In particular, the point estimates (1.96 and -0.919) indicate that moving from the
country in the 25th percentile of financial development (0.22) to the country in the 75th percentile
(0.62) the effect of an external shock on GDP goes from 1.78 to 1.39, equivalent to a 20 percent
drop in the elasticity of GDP to external shock. Column 3 further interacts the effect of the
external shock and financial development with the share of state-owned banks in the economy
and finds that the presence of state-owned banks attenuates the smoothing effect of financial
development; however, the coefficient is not statistically significant.50
Columns 6 and 7 split the sample according to the level of state ownership of banks.
Column 6 restricts the analysis to countries with high state ownership of banks (i.e. state
ownership above the median value of 38 percent) and column 7 restricts the analysis to countries
with low state ownership of banks. Interestingly, external shocks seem to have a much larger
effect on GDP growth in countries with large state ownership of banks and, in this subset of
countries, financial development amplifies (even though the coefficient is not statistically
significant) rather than smooth the effect of the external shocks. The opposite is true for the case
of countries with low state ownership of banks. In this case, the effect of the external shock on
GDP is much smaller (about half that of column 6) and financial development helps in smoothing
the effect of external shocks (again the coefficient is not statistically significant). While these
results do not provide definitive evidence that the presence of state-owned banks amplify the
50
For a country with a median level of financial development (0.42) located in the 25th percentile of the
distribution of state ownership of banks (0.17), the estimated GDP elasticity of an external shock is 1.55;
for a country with similar financial development but state ownership in the 75th percentile (0.61) the effect
of the external shock would climb to 1.75.
28
effect of external shocks, they surely show that state-owned banks play no additional role in
smoothing the effect of external shocks.
It is also possible to check whether the presence of state-owned banks has an effect on
how credit to the private sector responds to external shocks. Column 8 of table A3 shows that
external shocks have a significant effect on private credit (expressed as a deviation from its longrun trend) and column 9 shows that financial development plays an important role in smoothing
the effect of this shock. In particular, moving from the 25th to the 75th percentile of financial
development reduces the elasticity of real credit from 6.0 to 4.8. Column 10 shows that the
smoothing effect of financial development is even stronger in countries with a large presence of
state-owned banks (even though the coefficient is not statistically significant). This result is
confirmed by columns 11 and 12 that split the sample between countries with high and low state
ownership of banks. In the first sub sample, external shocks have a strong effect on real credit but
this effect is significantly smaller in countries with high levels of financial development. In the
second sub sample there is no statistically significant correlation between external shocks and real
credit. This seems to suggest that in countries with a high share of state-owned banks external
shocks have a much larger impact on credit but that financial development plays a more
important role in mitigating the effects of these shocks.
B. State ownership of banks and sectoral growth and volatility
An alternative empirical strategy consists of using industry level data to identify the role of
private and government-owned banking in explaining industry growth and volatility. Such a
strategy was first used by Galindo and Micco (2004) to check whether government-owned
banking promotes growth by directing credit towards the industries that rely more on external
finance and/or towards those industrial segments where informational asymmetries may be
higher. Their empirical strategy is based on Rajan and Zingales (1998) who show that more
developed financial systems, as measured by the ratio of credit to the private sector to GDP, are
able to provide cheaper funds to firms that require more external finance. In particular, Galindo
and Micco identify the requirements of external finance by using Rajan and Zingales' (1998)
estimations of sectoral external financing needs and the ability to pledge assets as collateral by
using the share of intangible assets with respect to total assets developed by Claessens and
Laeven (2003). They use these measures to check whether state ownership of banks affects the
borrowing ability of sectors that rely the most on external finance and have relatively fewer assets
to pledge as collateral. The basic idea is that if the provision of credit by each type of bank is
29
efficient, larger amounts of credit supplied by it should have positive impacts on the relative
growth rate of those industries that require external finance more and that have higher shares of
intangible assets.
Table A4 reports the basic results. The dependent variable measures the growth rate of
real value added of sector j in country i, all the regressions control for country and industry fixed
effects and for the share of industry j in country i of total value added in manufacturing at the
beginning of the period (initial VA).51 The first column reproduces Rajan and Zinagales’s results
showing that more developed financial systems tend to favor economic sectors that for
technological reasons demand more credit. The second column shows that, after controlling for
external financing needs, the ability to pledge collateral has no additional effect on sector growth.
Column 3 further interacts financial development with the initial share of state-owned banks and
shows that state ownership of banks reduces the beneficial effect of financial development. In
particular, for a country with median financial development (0.415 in the sample of Table A4)
going from the 25th percentile (0.18) of state ownership of banks (0.18) to the 75th percentile
(0.69) of state ownership of banks reduces the beneficial effect of financial development by more
than 50 percent (from 0.008 to 0.003). It should be clear that this is not equivalent to saying that
state ownership reduces growth by itself; it just mitigates the growth effect of financial
development. In particular, if state ownership of banks plays a positive (negative) role in
stimulating financial development the results of table A4 would overestimate (underestimate) the
negative role of state-owned banks. Column 4 shows that the results are robust to substituting the
initial values of financial development and state ownership of banks with their period averages
and column 5 shows that the results are robust to estimating the model for the 1985-1997 period.
Interestingly, columns 6 through 9 show that financial development is much more important for
sector growth in developing than industrial countries and that the negative effect of public banks
is much stronger in industrial countries. In fact, the interaction term is never significant in the sub
sample of developing countries of columns 9 and 10.
Table A5 presents an experiment similar to that of table A4 but rather than looking at the
effect of financial development on sectoral growth, it looks at how financial development affects
sectoral volatility (so the dependent variable is the standard deviation of sectoral value added
growth). Column 1 shows that financial development reduces volatility the most in sectors that
51
The sector value-added data comes from the United Nations Statistical Division and covers 20 industries
in 33 countries. The measure of financial sector development is the standard ratio of credit to the private
sector to GDP from the World Development Indicators of the World Bank. The measure of credit provided
by government-owned institutions is from La Porta et al. (2001).
30
have a larger external financing need (this is the FDRZ interaction) and have a larger share of
intangible assets (FDITG interaction) while there is no differential effect according to the level of
inventory over assets (FDRD interaction). In all cases, the regressions show that the share of
state-owned banks has no significant effect on volatility.
31
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35
Table 1: State Ownership of Banks GDP per capita and Financial Development
(1)
(2)
(4)
(5)
Developing
Industrial
1970
1970
1970
1970
LGDP_PC
-6.437
0.558
4.995
4.106
(1.24)
(0.09)
(0.37)
(0.29)
FD
-1.075
0.088
(2.37)**
(0.33)
GOV_INT
-3.736
-2.000
-11.846
-12.109
(1.84)*
(0.85)
(3.60)***
(3.50)***
Constant
125.712
92.599
45.823
50.989
(3.59)***
(2.54)**
(0.38)
(0.41)
Observations
46
43
24
24
R-squared
0.14
0.19
0.42
0.42
Absolute value of t statistics in parentheses
* significant at 10%; ** significant at 5%; *** significant at 1%
(6)
(7)
All Countries
1970
1970
-8.816
-5.172
(3.43)***
(1.47)
-0.354
(1.51)
-5.113
-3.953
(3.14)***
(2.15)**
148.061
125.089
(7.04)***
(5.13)***
70
67
0.27
0.25
Table 2: State Ownership of Banks GDP per Capita and Institutional Quality
(1)
LGDP_PC
RULE
-15.976
(3.85)***
7.479
(1.90)*
CORR
(2)
(3)
Developing Countries
-13.975
-4.754
(3.51)***
(1.11)
11.542
(0.79)
-8.931
(1.61)
(6)
(7)
Industrial Countries
0.746
-1.604
(0.05)
(0.12)
-11.859
(2.45)**
144.293
(5.35)***
55
0.22
133.667
(5.05)***
55
0.19
(8)
(9)
119.362
(4.63)***
59
0.24
(10)
-1.056
(0.08)
-12.963
(4.14)***
3.731
(1.21)
-12.565
(4.20)***
-45.64
(0.35)
27
0.10
30.875
(0.23)
27
0.01
(12)
-3.751
(1.18)
-10.102
(3.78)***
2.342
(1.19)
-3.722
(0.39)
0.419
(0.32)
128.337
(4.56)***
59
0.13
(11)
All
-1.759
(0.47)
DEMO
Observations
R-squared
-11.006
(2.82)***
(5)
3.502
(1.34)
PRIGHT
Constant
(4)
56.995
(0.48)
27
0.01
-10.272
(2.43)**
-0.711
(0.41)
40.169
(0.31)
27
0.01
133.212
(7.06)***
82
0.26
129.184
(7.22)***
82
0.25
107.548
(6.28)***
86
0.28
0.230
(0.23)
122.329
(6.31)***
86
0.22
36
Table 3: Share of Public Bank Assets
Country
Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
Guatemala
Honduras
Nicaragua
El Salvador
1995
1998
2000
2002
42.48%
0
52.77%
13.29%
19.60%
80.95%
6.36%
NA
29.22%
0
49.56%
10.61%
16.32%
76.71%
3.84%
3.23%
25.70%
0
46.57%
9.49%
21.10%
73.23%
3.78%
2.28%
NA
0
42.71%
10.34%
19.39%
68.02%
3.22%
1.78%
52.98%
9.05%
13.32%
6.99%
0.46%
5.73%
NA
4.28%
Source: own calculations based on Balance sheet data
Table 4: Public and Foreign Bank Performance Indicators Relative to Private Domestic Banks
Country
Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
Guatemala
Honduras
Mexico
Nicaragua
Peru
El Salvador
ROA
Public
-0.0037
-0.0026
-0.0001
-0.0098
0.0014
-0.0010
-0.0058
-0.0035
-0.0111
-0.0052
Foreign
-0.0006
-0.0026
-0.0002
-0.0005
-0.0016
-0.0023
0.0058
0.0049
0.0010
-0.0003
-0.0013
Interest Rate
(Loans)
Public
-0.0045
-0.0194
-0.0034
0.0078
0.0039
-0.0042
-0.0162
0.0013
0.0185
-0.0070
Foreign
0.0000
-0.0109
-0.0228
-0.0004
0.0094
-0.0101
-0.0098
-0.0096
0.0014
-0.0054
-0.0033
Interest Rate
(Deposits)
Public
-0.0023
-0.0176
-0.0094
0.0001
-0.0013
-0.0021
-0.0147
0.0312
0.0056
-0.0041
Foreign
-0.0002
-0.0060
0.0073
-0.0001
-0.0016
-0.0117
-0.0052
-0.0176
0.0035
-0.0013
-0.0005
NPL
Public
0.0644
0.0090
0.0703
0.2337
0.2465
0.2620
0.0158
0.1163
0.1219
Foreign
Loans to
Public Sector
Public
0.0876
0.0927
-0.0108
-0.0002
-0.0156
0.0590
-0.1051
-0.1216
-0.0360
0.0009
0.1725
0.0734
0.1661
-0.0031
0.0428
-0.0150
Foreign
-0.0060
0.0806
-0.0013
-0.0205
0.0318
0.0100
0.1030
0.0296
0.0218
0.0003
0.0106
0.0636
0.0104
37
Table 5: Public Sector Loans
Country
Argentina
Bolivia
Brazil
Chile
Colombia
Costa Rica
Guatemala
El Salvador
Private
Public
Foreign
Private
Public
Foreign
Private
Public
Foreign
5.28%
0.97%
21.53%
0.14%
2.61%
6.25%
31.99%
16.48%
1995
16.65% 7.95%
NA
10.09%
13.33% 18.96%
1.14%
0.80%
5.16%
2.02%
7.09%
7.44%
19.75% 27.40%
33.77% 9.13%
8.16%
6.46%
33.05%
0.11%
3.73%
3.29%
21.24%
25.05%
1998
14.42% 8.11%
NA
9.80%
21.26% 33.68%
1.30%
0.56%
5.79%
4.06%
13.64% 2.70%
18.06% 34.51%
20.87% 17.40%
12.88%
6.30%
31.24%
0.15%
8.85%
4.36%
24.51%
30.26%
2000
21.64% 12.09%
NA
6.70%
24.83% 33.13%
1.52%
0.89%
23.06% 13.11%
11.01% 2.17%
6.21% 36.76%
23.26% 20.39%
Table 6: The Effect of State Ownership of Banks on Financial Development
Dependent Variable: Average annual growth rate of private credit / GDP
Source
(periods)
(1)
LLS
(60-99)
(2)
IPES
(60-99)
(3)
IPES
(70-02)
(4)
IPES
(70-02)
(5)
LLS
(60-99)
(6)
IPES
(70-85)
(7)
IPES
(86-02)
Methodology
(OLS)
(OLS)
(OLS)
(IV)
(IV)
(OLS)
(OLS)
-0.056
(0.433)
-0.056***
(0.019)
-0.039***
(0.011)
6.681**
(2.616)
82
0.21
-0.205*
(0.122)
-0.037***
(0.009)
-0.021**
(0.008)
6.651***
(1.225)
66
0.26
-0.176
(0.135)
-0.036***
(0.009)
-0.019**
(0.009)
6.257***
(1.305)
70
0.20
-0.076
(0.152)
-0.041**
(0.019)
-0.026
(0.027)
5.663***
(1.934)
65
0.17
-0.572
(0.487)
-0.041**
(0.178)
-0.030
(0.024)
8.749**
(3.744)
73
0.22
-0.030
(0.270)
-0.083***
(0.025)
-0.015
(0.015)
7.040***
(2.601)
66
-0.345
(0.212)
-0.051***
(0.015)
-0.039**
(0.017)
9.411***
(2.276)
77
0.17
0.21
GDPPC (initial)
Priv. Cred. (initial)
Public share (initial)
Constant
Observations
R-squared
Robust standard errors in parentheses
* significant at 10%; ** significant at 5%; *** significant at 1%
38
Table 7: State Ownership and Output Growth
Source
(periods)
GDPPC (initial)
Public share (initial)
School enroll. (avg.)
Private credit (initial)
(1)
LLS
(19601995)
-1.749***
(0.300)
-0.017**
(0.007)
0.545***
(2)
LLS
(19601995)
-1.740***
(0.308)
-0.016**
(0.008)
0.540***
(0.123)
(0.126)
0.030***
(0.010)
0.031***
(0.011)
0.016
(0.073)
Private credit (growth)
Priv. Cred. * Public
share (initial)
Priv. Cred. * (1Public share) (initial)
(3)
LLS
(19601995)
-1.603***
(0.297)
0.586***
(0.126)
(4)
LLS
(19601995)
-1.922***
(0.277)
-0.040***
(0.912)
0.586***
(0.113)
(5)
LLS
(19601995)
-1.872***
(0.384)
-0.008
(0.008)
0.549***
(5)
IPES
(19702002)
-1.604***
(0.376)
0.001
(0.007)
0.596***
(0.157)
(0.140)
0.001
(0.012)
0.030***
(0.009)
0.020**
(0.008)
9.817***
(1.917)
7.397***
69
69
0.41
0.39
0.036**
0.082***
(0.016)
(0.024)
0.031**
(0.012)
Constant
Observations
R-squared
9.417***
9.292***
7.338***
(1.628)
(1.710)
(1.415)
11.230***
(1.356)
82
82
0.42
0.42
82
0.36
82
0.49
(1.763)
Robust standard errors in parentheses
* significant at 10%; ** significant at 5%; *** significant at 1%
39
Table A1
(1)
(2)
(3)
Developing Countries
1970
1970
1995
LGDP_PC
-10.510
-6.437
-11.315
(2.31)**
(1.24)
(3.31)***
gint_75
-3.736
(1.84)*
Constant
136.161
125.712
131.712
(4.19)***
(3.59)***
(5.06)***
Observations
50
46
60
R-squared
0.10
0.14
0.16
Absolute value of t statistics in parentheses
* significant at 10%; ** significant at 5%; *** significant at 1%
(4)
(5)
Industrial Countries
1970
1970
-11.616
4.995
(0.93)
(0.37)
-11.846
(3.60)***
148.433
45.823
(1.25)
(0.38)
27
24
0.03
0.42
(6)
(7)
(8)
(9)
All
1995
-4.030
(0.35)
1970
-10.087
(4.08)***
63.886
(0.56)
27
0.00
133.411
(6.69)***
77
0.18
1970
-8.816
(3.43)***
-5.113
(3.14)***
148.061
(7.04)***
70
0.27
1995
-9.906
(5.07)***
121.571
(7.38)***
87
0.23
Table A2
(1)
(2)
(3)
(4)
(5)
(6)
Developing Countries
Industrial Countries
1970
1970
1995
1970
1970
1995
LGDP_PC
-9.257
0.558
-6.359
-10.944
4.106
11.161
(1.98)*
(0.09)
(1.76)*
(0.86)
(0.29)
(1.00)
FD1
-0.422
-1.075
-0.345
-0.156
0.088
-0.374
(1.13)
(2.37)**
(2.98)***
(0.57)
(0.33)
(2.97)***
gint_75
-2.000
-12.109
(0.85)
(3.50)***
Constant
135.357
92.599
108.784
149.504
50.989
-54.747
(4.25)***
(2.54)**
(4.25)***
(1.24)
(0.41)
(0.51)
Observations
46
43
60
27
24
27
R-squared
0.14
0.19
0.27
0.05
0.42
0.27
Absolute value of t statistics in parentheses
* significant at 10%; ** significant at 5%; *** significant at 1%
(7)
1970
-8.022
(2.79)***
-0.207
(1.01)
122.544
(6.03)***
73
0.20
(8)
All
1970
-5.172
(1.47)
-0.354
(1.51)
-3.953
(2.15)**
125.089
(5.13)***
67
0.25
(9)
1995
-4.017
(1.68)*
-0.329
(3.81)***
91.238
(5.29)***
87
0.34
40
Table A3
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
GDP Growth
Ext. Demand (t-1)
(10)
(11)
(12)
Real credit growth
(13)
(14)
Bank deposits Growth
-0.094
-0.095
-0.081
-0.104
-0.089
-0.032
-0.173
0.427
0.426
0.411
-2.086
0.547
-0.579
-0.452
(0.153)
(0.152)
(0.153)
(0.153)
(0.154)
(0.421)
(0.163)
(0.351)
(0.348)
(0.343)
(1.594)
(0.331)*
(1.632)
(0.410)
Ext. Demand (t-2)
-0.095
-0.059
-0.048
-0.050
-0.040
-0.392
0.015
-0.150
-0.036
-0.062
0.827
-0.131
1.359
0.431
(0.158)
(0.157)
(0.158)
(0.164)
(0.165)
(0.379)
(0.176)
(0.360)
(0.354)
(0.356)
(1.529)
(0.341)
(1.714)
(0.373)
GDP (t-1)
0.789
0.785
0.783
0.783
0.781
0.737
0.825
0.442
0.428
0.431
0.503
0.396
-0.087
0.257
(0.047)***
(0.048)***
(0.048)***
(0.048)***
(0.048)***
(0.052)***
(0.084)***
(0.120)***
(0.120)***
(0.121)***
(0.188)***
(0.162)**
(0.165)
(0.193)
-0.246
-0.245
-0.245
-0.245
-0.245
-0.198
-0.272
-0.198
-0.196
-0.198
-0.273
-0.117
0.096
-0.353
(0.044)***
(0.043)***
(0.043)***
(0.044)***
(0.044)***
(0.060)***
(0.066)***
(0.118)*
(0.118)*
(0.118)*
(0.192)
(0.141)
(0.179)
(0.142)**
-0.007
-0.007
-0.007
-0.012
-0.011
-0.010
-0.004
0.828
0.826
0.826
0.812
0.847
0.638
0.559
(0.009)
(0.009)
(0.009)
(0.014)
(0.014)
(0.010)
(0.020)
(0.041)***
(0.041)***
(0.041)***
(0.055)***
(0.055)***
(0.058)***
(0.061)***
GDP (t-2)
Real Cred (t-1)
Real Cred (t-2)
-0.015
-0.015
-0.014
-0.006
-0.007
-0.014
-0.018
-0.222
-0.221
-0.220
-0.225
-0.228
-0.159
-0.177
(0.008)*
(0.008)*
(0.008)*
(0.012)
(0.012)
(0.009)
(0.016)
(0.036)***
(0.036)***
(0.036)***
(0.048)***
(0.045)***
(0.055)***
(0.046)***
0.016
0.014
(0.040)
(0.040)
Real Cred (t-1) * FD
Real Cred (t-2) * FD
Ext Dda Shock
-0.026
-0.023
(0.030)
(0.030)
1.233
1.960
1.659
1.956
1.665
2.592
1.349
1.676
4.097
4.345
11.861
1.237
9.735
-0.999
(0.190)***
(0.372)***
(0.443)***
(0.373)***
(0.443)***
(0.857)***
(0.412)***
(0.457)***
(1.148)***
(1.281)***
(3.066)***
(1.027)
(2.963)***
(1.405)
Ext Dda Shock * FD
-0.919
-0.815
-0.915
-0.816
0.499
-0.394
-3.058
-3.112
-11.642
-0.423
-8.759
0.839
(0.351)***
(0.390)**
(0.358)**
(0.395)**
(1.741)
(0.360)
(1.202)**
(1.203)***
(5.133)**
(0.943)
(5.716)
(1.452)
Ext Dda Shock * FD * SOB
FD (AVG)
2.108
2.042
-1.979
(1.597)
(1.600)
(3.985)
-0.000
-0.000
-0.000
-0.000
-0.001
0.000
-0.002
-0.004
-0.008
0.007
-0.014
0.005
(0.002)
(0.002)
(0.002)
(0.002)
(0.003)
(0.003)
(0.008)
(0.008)
(0.014)
(0.009)
(0.015)
(0.012)
FD SOB (AVG)
0.000
0.000
(0.004)
0.019
(0.004)
(0.013)
Observations
1340
1340
1340
1340
1340
670
670
1340
1340
1340
670
670
661
618
R-squared
0.48
0.48
0.49
0.49
0.49
0.49
0.50
0.53
0.53
0.53
0.52
0.58
0.35
0.29
High
Low
High
Low
High
Low
Sample
Robust Standard errors in parentheses * significant at 10%; ** significant at 5%; *** significant at 1%
GDP, Real Credit and the External Demand (in log) have been detrended using the HP filter (for annual frequency).
FD is the time average of credit over GDP during 1980 and 2001. SOB is the time average share of SOB in the banking industry.
We do not include the 2% country-year observations that have extreme changes in real credit (in t and t-1).
We also exclude the county-year observation with inflation larger than 100% and lower than -10%.
41
Table A4: Growth
(1)
FD RZ (Initial Year)
FD ITG (Initial Year)
FD SOB RZ (Initial Year)
FD RZ (AVG)
FD SOB RZ (AVG)
Initial VA (ln)
Observations
R-squared
(2)
(3)
All Countries
0.015
0.015
0.025
(0.006)*** (0.006)*** (0.007)***
0.004
(0.004)
-0.027
(0.008)***
(4)
(5)
1985-1997
0.021
(0.006)***
-0.016
(0.009)*
(6)
(7)
Industrial Countries
0.009
(0.007)
-0.021
(0.008)**
(8)
(9)
Developing Countries
0.033
(0.016)**
-0.017
(0.038)
0.018
-0.005
0.027
(0.004)***
(0.005)
(0.007)***
-0.017
-0.018
-0.014
(0.007)**
(0.007)***
(0.017)
-0.010
-0.010
-0.011
-0.012
-0.013
-0.010
-0.013
-0.013
-0.014
(0.002)*** (0.002)*** (0.002)*** (0.001)*** (0.001)*** (0.003)*** (0.002)*** (0.002)*** (0.001)***
767
767
754
1013
968
359
411
395
602
0.59
0.59
0.61
0.67
0.56
0.57
0.70
0.62
0.67
Standard errors in parentheses * significant at 10%; ** significant at 5%; *** significant at 1%
Average annual growth. All regressions include country and industry fixed effect.
The sample includes 28 manufacturing industries, defined at 3 digits ISTC Rev2, for all middle and high income countries.
RZ stands for external requirement from Rajan and Zingales, ITG for intangible assets (fraction), FD for financial development and SOB for state-owned banks (fraction).
42
Table A5: Volatility
Sectoral Volatility: Whole Sample.
(1)
FD RZ (AVG)
FD RD (AVG)
FD ITG (AVG)
FD SOB RZ (AVG)
FD SOB RD (AVG)
FD SOB ITG (AVG)
(2)
-0.016
-0.018
(0.005)*** (0.005)***
-0.006
(0.006)
-0.014
(0.005)***
(3)
-0.002
(0.006)
(4)
(5)
(6)
SD VA-Growth 1970-1997
-0.014
(0.005)***
-0.007
(0.006)
-0.014
(0.005)***
-0.003
(0.009)
-0.003
(0.011)
(7)
(8)
(9)
-0.013
(0.005)**
-0.008
(0.004)**
0.003
(0.009)
1628
0.71
-0.007
(0.004)*
-0.003
(0.009)
0.003
(0.009)
1628
0.71
-0.010
(0.006)*
-0.011
(0.004)**
-0.003
(0.012)
0.002
(0.009)
1628
0.71
Observations
1854
1854
1854
1854
1628
1628
R-squared
0.68
0.68
0.68
0.68
0.71
0.71
Standard errors in parentheses * significant at 10%; ** significant at 5%; *** significant at 1%
SD of sectoral VA rate of growth during the specified period. All regressions include country and industry fixed effect.
The sample includes 28 manufacturing industries, defined at 3 digits ISTC Rev2, that have 5 or more annual rate of growth to compute the SD.
RZ stands for ext. req. from Rajan and Zingales, RD for inventory (over assets), ITG for intangible assets (fraction), FD for fin. Dev.
and SOB for state-owned banks (fraction).
43