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Financial Repression And Structural Imbalances

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  • Johansson, Anders C.

    ()
    (China Economic Research Center)

  • Wang, Xun

    ()
    (China Economic Research Center)

Abstract

This paper analyzes the relationship between financial repression and structural change. We present a simple theoretical model of structural transformation in which the impact of financial repression on unbalanced growth is studied. Governments may choose to repress the financial sector to allow for the development of the industry sector while inhibiting growth in the domestic service sector. When investigating the predictions of our model using data for a panel of countries, we find that financial repression have a significant negative effect on structural transformation. In countries with higher levels of financial repression, the industry sector is developed rapidly while the service sector is held back. The results are robust to different country sample compositions, alternative measures of sectoral structure, and different measures of financial repression. The analysis suggests that financial repression is an important driver of structural imbalances, especially in countries with heavy state intervention and where the government strongly favors industrial expansion. Our findings have policy implications for governments that are experiencing rapid economic transformation and that are using financial repression to achieve a long-run industrial output growth.

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Bibliographic Info

Paper provided by China Economic Research Center, Stockholm School of Economics in its series Working Paper Series with number 2011-19.

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Length: 39 pages
Date of creation: 20 Dec 2011
Date of revision:
Handle: RePEc:hhs:hacerc:2011-019

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Postal: China, Economic Research Center, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-8-736 90 00
Fax: +46-8-31 81 86
Web page: http://www.hhs.se/CERC/
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Keywords: Financial repression; Structural change; Structural transformation; Economic development;

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References

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Cited by:
  1. Johansson, Anders C. & Wang, Xun, 2012. "Financial Sector Policies, Poverty and Inequality," Working Paper Series 2012-24, China Economic Research Center, Stockholm School of Economics.

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