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Dani Rodrik February 25, 2005

Comments on “State-Owned Banks: Do They Promote or Depress Financial Development and Economic Growth?”. Dani Rodrik February 25, 2005. New(ish) cross-national evidence.

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Dani Rodrik February 25, 2005

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  1. Comments on “State-Owned Banks: Do They Promote or Depress Financial Development and Economic Growth?” Dani Rodrik February 25, 2005

  2. New(ish) cross-national evidence • Regressing private sector credit growth or economic growth on state ownership of banks yields negative coefficient on state ownership • The relationship is not very strong or robust… • … but it is almost always negative • Therefore, evidence of negative impact is weaker than previously thought, but still no evidence of positive impact.

  3. What do we make of these results? • Theory suggests state ownership of banks responds to • market imperfections, or • political motives • Neither is directly observable • Problem not so much omitted variables, as endogeneity due to one motive or another (or both) • so introducing rule-of-law or other policy variables does not solve problem • With such endogeneity, interpretation of results quite problematic (as I will show)

  4. A key problem: • Under reasonable formulations of the two motives stated above (market-failures versus political) • the cross-national association between state banks and economic performance should be always negative • this is true regardless of which motive is dominant in practice • and, in particular, even if governments maximize social welfare and state banks serve a useful purpose, we will not get a positive association between state banks and economic performance • So a more correct interpretation of the cross-national evidence would be that “it is uninformative” (not just that “it is weak”). • Here is a simple model to see why

  5. IV might solve the problem • But need the instrument to satisfy both the exogeneity and the exclusion conditions • SOE share of the economy not appropriate as instrument, since presumably it responds to the same motives as state banks do. • Need different empirical strategies

  6. So do state banks promote or depress financial development and economic growth? • We don’t know • No need for anyone to alter their priors on the basis of the cross-national work to date.

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