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Does Finance Cause Growth? Evidence from the Origins of Banking in Russia

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  • Daniel Berkowitz
  • Mark Hoekstra
  • Koen Schoors

Abstract

This paper examines the effect of banking on economic growth in modern Russia. To overcome simultaneity and selection, we exploit regional banking variation induced by the creation of “specialized banks” (spetsbanks) in the last years of the Soviet Union (1988-1991). Consistent with the qualitative work of Joel Hellman [1993] and Juliet Johnson [2000], we show that these reforms generated an ideal natural experiment in that the concentration of spetsbanks is jointly uncorrelated with 15 predictors of future growth, including pre-banking income, education, anti-market sentiment, institutional quality, and government interference in the economy. Results indicate that while the presence of one additional spetsbank per million inhabitants increased total within-state lending to private firms and individuals by 14 to 26 percent in the early 2000s, it had no effect on investment or per capita income. In contrast, we find that spetsbanks increased employment. Additional results indicate that spetsbanks increased growth in regions in which they were less connected to government and were generally more similar to non-spetsbanks, as well as in regions that were better at protecting property rights. Our results thus indicate that bank origins, political connections, and property rights are important determinants of effective finance.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18139.

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Date of creation: Jun 2012
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Handle: RePEc:nbr:nberwo:18139

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  1. repec:fth:wobaco:1083 is not listed on IDEAS
  2. Janos Kornai & Eric Maskin & Gerard Roland, 2002. "Understanding the Soft Budget Constraint," Economics Working Papers, Institute for Advanced Study, School of Social Science 0019, Institute for Advanced Study, School of Social Science.
  3. Berkowitz, Daniel & DeJong, David N., 2011. "Growth in post-Soviet Russia: A tale of two transitions," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 79(1), pages 133-143.
  4. Klapper, Leora & Lusardi, Annamaria & Panos, Georgios A., 2012. "Financial literacy and the financial crisis," Policy Research Working Paper Series 5980, The World Bank.
  5. Berkowitz, Daniel & Hoekstra, Mark & Schoors, Koen, 2012. "Does finance cause growth? Evidence from the origins of banking in Russia," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 10/2012, Bank of Finland, Institute for Economies in Transition.
  6. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 111(3), pages 639-70, August.
  7. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  8. Beck, Thorsten & Levine, Ross & Loayza, Norman, 2000. "Finance and the sources of growth," Journal of Financial Economics, Elsevier, Elsevier, vol. 58(1-2), pages 261-300.
  9. Ulrike Malmendier, 2009. "Law and Finance "at the Origin"," Journal of Economic Literature, American Economic Association, vol. 47(4), pages 1076-1108, December.
  10. Simon Johnson & John McMillan & Christopher Woodruff, 1999. "Property Rights, Finance, and Entrepreneurship," CESifo Working Paper Series 212, CESifo Group Munich.
  11. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 1943-77, December.
  12. Abarbanell, Jeffery S. & Meyendorff, Anna, 1997. "Bank Privatization in Post-Communist Russia: The Case of Zhilsotsbank," Journal of Comparative Economics, Elsevier, vol. 25(1), pages 62-96, August.
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Cited by:
  1. Breinlich, Holger & Ottaviano, Gianmarco & Temple, Jonathan, 2013. "Regional Growth and Regional Decline," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9568, C.E.P.R. Discussion Papers.
  2. Berkowitz, Daniel & Hoekstra, Mark & Schoors, Koen, 2012. "Does finance cause growth? Evidence from the origins of banking in Russia," BOFIT Discussion Papers, Bank of Finland, Institute for Economies in Transition 10/2012, Bank of Finland, Institute for Economies in Transition.
  3. Libman, Alexander & Obydenkova, Anastassia, 2013. "Communism or communists? Soviet legacies and corruption in transition economies," Frankfurt School - Working Paper Series 199, Frankfurt School of Finance and Management.

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