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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.

Suggested Citation

  • Daniel Berkowitz & Mark Hoekstra & Koen Schoors, 2012. "Does Finance Cause Growth? Evidence from the Origins of Banking in Russia," NBER Working Papers 18139, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:18139
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    Citations

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    Cited by:

    1. Breinlich, Holger & Ottaviano, Gianmarco I.P. & Temple, Jonathan R.W., 2014. "Regional Growth and Regional Decline," Handbook of Economic Growth,in: Handbook of Economic Growth, edition 1, volume 2, chapter 4, pages 683-779 Elsevier.
    2. Çagatay Bircan & Ralph de Haas, 2015. "The Limits of Lending: Banks and Technology Adoption across Russia," CESifo Working Paper Series 5461, CESifo Group Munich.
    3. Simone Auer & Emidio Cocozza & Andrea COlabella, 2016. "The financial systems in Russia and Turkey: recent developments and challenges," Questioni di Economia e Finanza (Occasional Papers) 358, Bank of Italy, Economic Research and International Relations Area.
    4. Libman, Alexander & Obydenkova, Anastassia, 2013. "Communism or communists? Soviet legacies and corruption in transition economies," Economics Letters, Elsevier, vol. 119(1), pages 101-103.
    5. repec:bof:bofitp:urn:nbn:fi:bof-201503111110 is not listed on IDEAS
    6. repec:eee:finana:v:58:y:2018:i:c:p:166-178 is not listed on IDEAS
    7. Jarko Fidrmuc & Zuzana Fungáčová & Laurent Weill, 2015. "Does Bank Liquidity Creation Contribute to Economic Growth? Evidence from Russia," Open Economies Review, Springer, vol. 26(3), pages 479-496, July.
    8. repec:esx:essedp:729 is not listed on IDEAS
    9. Vernikov, Andrei, 2017. "Структурные Или Институциональные Сдвиги? Попытка Измерения На Примере Банковского Сектора
      [Structural change, institutional change and their measurement: The case of banking]
      ," MPRA Paper 79978, University Library of Munich, Germany.
    10. repec:scn:financ:y:2017:i:4:p:40-53 is not listed on IDEAS
    11. Brown, James R. & Cookson, J Anthony & Heimer, Rawley, 2014. "Legal Institutions, Credit Markets, and Economic Activity," Working Paper 1434, Federal Reserve Bank of Cleveland.
    12. Schoors, Koen & Weill, Laurent, 2017. "Russia's 1999–2000 election cycle and the politics-banking interface," BOFIT Discussion Papers 17/2017, Bank of Finland, Institute for Economies in Transition.
    13. Jha, Chandan Kumar, 2015. "Financial Reforms and Corruption," MPRA Paper 65420, University Library of Munich, Germany.
    14. Carol S. Leonard & Zafar Nazarov & Elena S. Vakulenko, 2016. "The impact of sub-national institutions," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(3), pages 421-446, July.
    15. Vernikov, Andrei & Mamonov, Mikhail, 2017. "Долгосрочное Банковское Кредитование: Какие Банки Им Занимаются И Почему?
      [Which banks and why lend long-term in Russia?]
      ," MPRA Paper 77160, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • P3 - Economic Systems - - Socialist Institutions and Their Transitions

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