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Financial Repression And Structural Imbalances

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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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  • Johansson, Anders C. & Wang, Xun, 2011. "Financial Repression And Structural Imbalances," Working Paper Series 2011-19, Stockholm School of Economics, China Economic Research Center.
    • Handle: RePEc:hhs:hacerc:2011-019
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    Cited by:

    1. Johansson, Anders C. & Wang, Xun, 2015. "Financial Liberalization and Urbanization," Stockholm School of Economics Asia Working Paper Series 2015-35, Stockholm School of Economics, Stockholm China Economic Research Institute.
    2. Johansson, Anders C. & Wang, Xun, 2014. "Financial sector policies and income inequality," China Economic Review, Elsevier, vol. 31(C), pages 367-378.
    3. Samuel Cudré, 2014. "Capital’s long march west: saving and investment frictions in Chinese regions," ECON - Working Papers 161, Department of Economics - University of Zurich.
    4. Johansson, Anders C. & Wang, Xun, 2012. "Financial Sector Policies, Poverty and Inequality," Working Paper Series 2012-24, Stockholm School of Economics, China Economic Research Center.
    5. Julian GRUIN, 2013. "Asset or Liability? The Role of the Financial System in the Political Economy of China’s Rebalancing," Journal of Current Chinese Affairs - China aktuell, Institute of Asian Studies, GIGA German Institute of Global and Area Studies, Hamburg, vol. 42(4), pages 73-104.
    6. Werner Hölzl, 2021. "Structural Change towards Services," WIFO Working Papers 631, WIFO.
    7. Pin Guo & Yue Shen, 2016. "The impact of Internet finance on commercial banks’ risk taking: evidence from China," China Finance and Economic Review, Springer, vol. 4(1), pages 1-19, December.

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    More about this item

    Keywords

    Financial repression; Structural change; Structural transformation; Economic development;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • L52 - Industrial Organization - - Regulation and Industrial Policy - - - Industrial Policy; Sectoral Planning Methods
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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