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FINANCIAL REPRESSION AND STRUCTURAL IMBALANCES

Anders C. Johansson () and Xun Wang ()
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Xun Wang: China Economic Research Center, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden

No 2011-19, Working Paper Series from China Economic Research Center, Stockholm School of Economics

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.

Keywords: Financial repression; Structural change; Structural transformation; Economic development (search for similar items in EconPapers)
JEL-codes: G18 L52 O16 O40 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fdg
Date: 2011-12-20
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Working Paper: Financial Repression and Structural Imbalances (2012) Downloads
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