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

16 Pages Posted: 23 Feb 2009

See all articles by Susan F. Lu

Susan F. Lu

Purdue University - Krannert School of Management

Yang Yao

Peking University - China Center for Economic Research (CCER)

Date Written: February, 23 2009

Abstract

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.

Keywords: legal system, financial development, financial repression, economic growth

Suggested Citation

Lu, Susan Feng and Yao, Yang, The Effectiveness of Law, Financial Development, and Economic Growth in an Economy of Financial Repression: Evidence from China (February, 23 2009). World Development, Forthcoming, Simon School Working Paper No. FR 09-07, Available at SSRN: https://ssrn.com/abstract=1348275

Susan Feng Lu

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

HOME PAGE: http://https://sites.google.com/site/susanluhome/home

Yang Yao (Contact Author)

Peking University - China Center for Economic Research (CCER) ( email )

Beijing, 100871
China

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