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The Effectiveness of Law, Financial Development, and Economic Growth in an Economy of Financial Repression: Evidence from China

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  • Feng Lu, Susan
  • Yao, Yang

Abstract

Summary In an economy characterized by financial repression, enhancing the legal system may hinder the development of some aspects of the financial sector, especially informal arrangements aiming at circumventing the repression. Using Chinese provincial data in the 1990s, we find that enhanced legal system suppresses private investment and has no effect on financial depth although it increases the private share of bank credits and bank competition. We interpret these findings as evidence showing the existence of the leakage effect that moves financial resources from the privileged state sector to the rationed private sector. In addition, we find that enhanced legal system does not have a significant effect on the average GDP growth rate. We conclude that the smooth functioning of the legal system requires other institutions to complement.

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  • Feng Lu, Susan & Yao, Yang, 2009. "The Effectiveness of Law, Financial Development, and Economic Growth in an Economy of Financial Repression: Evidence from China," World Development, Elsevier, vol. 37(4), pages 763-777, April.
    • Handle: RePEc:eee:wdevel:v:37:y:2009:i:4:p:763-777
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    9. Peter J Buckley & L Jeremy Clegg & Hinrich Voss & Adam R Cross & Xin Liu & Ping Zheng, 2018. "A retrospective and agenda for future research on Chinese outward foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(1), pages 4-23, January.
    10. Fungáčová, Zuzana & Weill, Laurent, 2017. "Trusting banks in China," BOFIT Discussion Papers 9/2017, Bank of Finland Institute for Emerging Economies (BOFIT).
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    13. Fungáčová, Zuzana & Weill, Laurent, 2017. "Trusting banks in China," BOFIT Discussion Papers 9/2017, Bank of Finland, Institute for Economies in Transition.
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    17. Akinci, Gönül Yüce & Akinci, Merter & Yilmaz, Ömer, 2014. "Financial Development-Economic Growth Nexus : A Panel Data Analysis Upon Oecd Countries," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 55(1), pages 33-50, June.
    18. Linda Yueh, 2010. "The Economy of China," Books, Edward Elgar Publishing, number 3705.
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    21. Anwar, Amar & Iwasaki, Ichiro, 2022. "The Finance–Growth Nexus inAsia : A Meta-Analytic Approach," CEI Working Paper Series 2022-03, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
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