(Disponible en idioma inglés únicamente) En este trabajo se pone a prueba la eficiencia de diversas estructuras de propiedad de instituciones bancarias, en términos de su capacidad de atender sectores manufactureros específicos que necesitan crédito. Hallamos que los bancos propiedad del Estado no desempeñan un papel significativo en el desarrollo de industrias que dependan más del financiamiento externo o que tengan menos activos tangibles que constituir en garantía, o ambas cosas.

Alejandro Micco

Arturo Galindo

English

Research Papers in Economics

 
 
 
Inter-American Development Bank 
Banco Interamericano de Desarrollo (BID) 
Research Department 
Departamento de Investigación 
Working Paper #483 
 
 
 
 
 
 
Do State-Owned Banks Promote Growth? 
Cross-Country Evidence for Manufacturing 
Industries 
 
 
 
by 
 
Arturo Galindo 
Alejandro Micco 
 
 
 
 
Inter-American Development Bank 
 
 
 
 
 
 
 
February 2003 
 
 
 
 
 Cataloging-in-Publication data provided by the  
Inter-American Development Bank  
Felipe Herrera Library 
 
Galindo, Arturo. 
 
Do state owned banks promote growth? : cross country evidence for manufacturing 
industries / by Arturo Galindo, Alejandro Micco. 
 
p. cm.   (Research Department Working paper series ; 483) 
Includes bibliographical references. 
 
1. Banks and banking--Government ownership.   2. Manufacturing industries.   I. Micco, 
Alejandro.   II. Inter-American Development Bank. Research  Dept.   III. Title.   IV. Series.   
 
332.17  G129--------dc21 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
©2003 
Inter-American Development Bank 
1300 New York Avenue, N.W. 
Washington, D.C. 20577 
 
The views and interpretations in this document are those of the authors and should not be 
attributed to the Inter-American Development Bank, or to any individual acting on its behalf. 
 
The Research Department (RES) produces the Latin American Economic Policies Newsletter, as 
well as working papers and books, on diverse economic issues. 
 
To obtain a complete list of RES publications, and read or download them please visit our web 
site at: http://www.iadb.org/res 
 
  2Abstract
1 
 
This paper tests the efficiency of different structures of bank ownership in terms 
of its ability to target manufacturing sectors in need of credit. We find that state- 
owned banks do not play a significant role in the development of industries that 
rely more on external finance and/or that have less tangible assets to pledge as 
collateral. 
 
 
                                                       
1 We thank Guillermo Ordoñez for valuable research assistance and Alberto Chong and Ugo Panizza for comments. 
The opinions in this paper reflect those of the authors and not necessarily those of the IADB. Contact information: 
arturog@iadb.org, alejandromi@iadb.org. 
  3  41. Introduction 
 
In economies where informational asymmetries prevail many profitable projects can be rationed 
out of credit markets.
2 A common way of dealing with imperfect information in credit markets 
has been through direct intervention by governments in banking. In this paper, we tackle the 
empirical relationship between the ownership structure of banks and growth in a way that deals 
with potential econometric issues, namely omitted variables and reverse causality.  
We explicitly identify the role of private and government owned banking in explaining 
industry growth. We test whether government-owned banking promotes growth by directing 
credit towards the industries that rely more on external finance and/or towards those industrial 
segments where informational asymmetries may be higher. We find that government-owned 
banks do not contribute to increasing the performance of industries that demand more credit, nor 
do they help promote growth of industries that lack collateral. In contrast, we find that private 
banks are more efficient in both tasks and have a significant impact on the growth rates of 
industries that have less collateral and are more dependent on external sources of finding. 
 
2. Empirical  Methods 
 
Our empirical strategy is based on the assumption that the financial sector plays a growth- 
promoting role if it is able to direct financial resources towards the sectors that demand them 
most, and if it is able to identify profitable economic opportunities without having to rely 
exclusively on the availability of collateral.
3 The first claim is based on Rajan and Zingales 
(1998), who show that more developed financial systems, as measured by the ratio of credit to 
the private sector to GDP, are able to provide cheaper funds to firms that require more external 
finance.
4 Our second claim is based on the presumption that more developed financial systems 
rely on more advanced screening technologies that allow them to direct credit towards sectors 
with relatively less assets to pledge as collateral. Economic sectors with less collateral are 
subject to deeper informational asymmetries relative to those that can pledge high volumes of 
collateral. An efficient financial system must be able to identify profitable opportunities beyond 
                                                       
2 See Stiglitz and Weiss (1981). 
3 Collateral has been observed to serve as a mechanism to resolve informational asymmetries and reduce credit 
rationing (see Coco, 2001).  
4 Their main finding is that industries that are more dependent on external financing have relatively higher growth 
rates in countries where financial sectors are more developed. 
  5collateral availability. We explore whether different providers of credit in the form of state- 
owned or private institutions make a difference.
5  
The test we propose involves whether ownership structure of banks matters in terms of 
efficiency of credit allocation. For this purpose we decompose aggregate credit to the private 
sector into credit provided by state-owned and private banks, respectively. If the provision of 
credit by each type of bank is efficient, greater amounts of credit supplied by it should have 
positive impacts on the relative growth rate of those industries that require external finance more 
and that have higher shares of intangible assets.  
When analyzing the impact of state-owned banking on growth, certain empirical 
challenges emerge. In particular, the question of endogeneity of the share of private banking 
appears as an issue. Regressions between economic performance and the share of public banking 
can be biased by omitted variable problems. To illustrate, think of a country where market 
imperfections are so large due to extremely limited property rights that private banking cannot 
develop. In such a country only government-owned banking could emerge, but because of weak 
property rights the economy would not be able to grow.
6 
In order to identify the requirements of external finance we use Rajan and Zingales’ 
(1998) estimation based on the difference between investment and operating income for U.S. 
firms, where capital markets are assumed to be frictionless. To identify the difficulty of pledging 
assets as collateral we use the share of intangible assets with respect to total assets developed by 
Claessens and Laeven (2002).  
   We interact these variables with the share of credit coming from each type of provider in 
order to estimate the efficiency with which credit is provided.
7 Additionally, and in order to 
control for specific factors that can affect industry performance, we control for country and 
industry fixed effects. This way we address the omitted variable problem discussed above and 
                                                       
5 Note that we do not explore the impact of state-owned banking on private banking. Previous research (see La 
Porta, López-de-Silanes, and Shleifer, 2000) has done so and finds that countries with greater shares of government 
property in the financial sector have less developed financial systems.  
6 See La Porta, López-de-Silanes, Shleifer and Vishy (1997 and 1998). 
7 By controlling for these specific factors the omitted variable problem is significantly reduced. Moreover, by 
estimating the interactive term we can fully identify the impact of credit market size as opposed to other correlated 
variables.  
 
  6the possibility of reverse causality.
8 Specifically, We estimate the following empirical model 
using cross-industry-country data: 
 
ij j i j i
j i ij ij
x owned gov credit
x private credit share growth
ε λ µ α
α α α
+ + +
+ + + = −
* _ _
* _
3
2 1 1 0  (1) 
 
where the dependent variable is the growth rate of real value added of sector j in country i, 
shareij-1 is the share of industry j in country i of total value added in manufacturing at the 
beginning of the period, credit_privatei is the ratio of credit to the private sector to GDP 
provided by privately owned institutions in country i, credit_gov_ownedi is the ratio of credit to 
the private sector to GDP provided by publicly owned financial institutions,  and xj is either the 
requirement of industry j for external funds or the share of intangible assets of industry j that is 
used to proxy difficulties in pledging collateral. Additionally we include µi a country fixed effect, 
and λj, an industry fixed effect.  Finally, εij is the error term. Our test is on the α2 and α3 
coefficients. That is on how credit from private banks and credit from government-owned banks 
affect the performance of firms separately. If there are no differences between government-
owned and private banks’ efficiency in the provision of financial services these should be equal. 
If the provision of state-owned financial services improves the performance of firms that require 
external funding the most or that have less collateral (relatively more intangible assets), α3 
should be larger than α2 and significant. 
Our sector value-added data comes from United Nations Statistical Division and covers 
20 industries in 33 countries. The measure of financial sector development used in this paper is 
the standard ratio of credit to the private sector to GDP from the World Development Indicators 
of the World Bank. The measure of credit provided by government-owned institutions is based 
on La Porta, López-de-Silanes, and Shleifer (2000), who show the percentage of government-
owned assets in the 10 largest banks in each country in 1970. We multiply this share by the 
measure of total credit described above. Credit provided by privately owned institutions is the 
difference between the measure of total credit to GDP and the former. The following section 
shows our empirical results using this methodology and data.  
 
 
                                                       
8 See Rajan and Zingales (1998) for a discussion. 
  73. Private  Banking,  Government-Owned Banking, and Sector Performance  
Table 1 reports our baseline results. Column 1 shows that more developed financial systems tend 
to favor economic sectors that for technological reasons demand more credit (this is the basic 
Rajan and Zingales result). Column 2 additionally shows that more developed financial systems 
also are beneficial for those industries that have less collateral available.  This validates the 
hypothesis that financial development is accompanied by the development of screening 
technologies that allow lenders to identify profit opportunities even when physical assets are not 
available as collateral.
9 Column 3 shows that both results hold even when included 
simultaneously in our benchmark regression. In summary, columns 1-3 suggest that financial 
development is crucial for the performance of industries that require more credit for 
technological reasons and have less collateral available. 
Columns 4-6 analyze whether the provider of credit matters or, in other words, whether 
private or state-owned financial institutions are equally efficient in identifying profit 
opportunities in the manufacturing industry. Column 4 suggests that what really matters for the 
performance of firms demanding external sources of funds is that those funds are provided by 
private institutions. Higher levels of state-owned banking does not increase the performance of 
these sectors. The same can be said for sectors that have less tangible assets to pledge as 
collateral, as shown by column 5. What matters for these sectors is the development of private 
credit markets, which apparently are better at identifying profit opportunities while looking 
beyond collateral availability.  Finally, column 6 shows that both results remain when analyzed 
simultaneously. In summary, private banks appear to be much more efficient than their state-
owned counterparts in the provision of financial services to manufacturing sectors that require 
external finance and to those that have less collateral. 
 
                                                       
9 The development of credit bureaus or other forms of information sharing mechanisms as described in Jappelli and 
Pagano (2001) is an example.  
  8Table 1.  Baseline Results 
Dependent variable: Annual value added growth
a  
(Average 1970-1980) (1) (2) (3) (4) (5) (6)
Industry's share in (t-1)
b -0.195 -0.180 -0.196 -0.198 -0.181 -0.200
(0.042)*** (0.040)*** (0.042)*** (0.042)*** (0.040)*** (0.043)***
Total Credit to Private Sector
c * External dependence 0.072 0.070
(0.027)*** (0.027)***
Total Credit to Private Sector * Intangible Index 0.010 0.008
(0.004)** (0.004)*
 Credit from Private Banks  * External Dependence 0.081 0.078
(0.028)*** (0.028)***
Credit from State Owned Banks * External Dependence 0.045 0.046
(0.037) (0.037)
Credit from Private Banks * Intangible Index 0.013 0.011
(0.005)*** (0.004)**
Credit from State Owned Banks * Intangible Index -0.003 -0.004
(0.007) (0.007)
Observations 652 652 652 652 652 652
Number of countries 34 34 34 34 34 34
Country Year Dummies Yes Yes Yes Yes Yes Yes
Country Industry Dummies Yes Yes Yes Yes Yes Yes
Robust t-statistics in parenthesis
* Significant at 10%, ** Significant at 5%, *** Significant at 1%
a. The dependent variable is the average of annual real value added growth for each ISIC industry in each country.
b. The industry's share of total value added in manufacturing in 1970.
c. Total credit to the private sector, credit from private banks, and credit from state owned banks are as a percentage of GDP  
 
As a test of robustness we repeat the exercises above for a different sample period (in 
Table 2). The dependent variable in this case is computed for the 1970-1990 sample. Results are 
virtually the same, though slightly weaker for the intangibility measure. 
 
Table 2. Robustness Checks 
Dependent variable: Annual value added growth
a  
(Average 1970-1990) (1) (2) (3) (4) (5) (6)
Industry's share in (t-1)
b -0.172 -0.159 -0.173 -0.175 -0.160 -0.176
(0.027)*** (0.025)*** (0.027)*** (0.028)*** (0.026)*** (0.028)***
Total Credit to Private Sector
c * External dependence 0.042 0.041
(0.018)** (0.018)**
Total Credit to Private Sector * Intangible Index 0.005 0.004
(0.003)* (0.003)
 Credit from Private Banks  * External Dependence 0.052 0.051
(0.019)*** (0.019)***
Credit from State Owned Banks * External Dependence -0.016 -0.015
(0.026) (0.026)
Credit from Private Banks * Intangible Index 0.006 0.005
(0.003)** (0.003)*
Credit from State Owned Banks * Intangible Index -0.004 -0.003
(0.005) (0.005)
Observations 613 613 613 613 613 613
Number of countries 33 33 33 33 33 33
Country Year Dummies Yes Yes Yes Yes Yes Yes
Country Industry Dummies Yes Yes Yes Yes Yes Yes
Robust t-statistics in parenthesis
* Significant at 10%, ** Significant at 5%, *** Significant at 1%
a. The dependent variable is the average of annual real value added growth for each ISIC industry in each country.
b. The industry's share of total value added in manufacturing in 1970.
c. Total credit to the private sector, credit from private banks, and credit from state owned banks are as a percentage of GDP  
  9Our results support the view that government ownership of banks is noxious because it 
politicizes lending decisions, softens budget constraints and diverts funds towards politically 
attractive projects, instead of economically viable ones.
10 From this perspective, state-owned 
banks are assumed to respond to political incentives rather than to economic ones. Private banks, 
on the other hand, seem to improve financing opportunities for firms that require them the most 
and have lower collateral, and in the process promote economic growth. Clearly we find no 
evidence in favor of the claim of supporters of state owned banking who suggest that it can be 
growth promoting since it allows the mobilization of savings towards strategic sectors that 
cannot access external funds.
11  
 
4. Conclusions 
 
Even if market distortions are in place, government intervention through public banking is not 
necessarily the best way to deal with them. Our empirical evidence suggests that state-owned 
banks do not promote the growth rates of manufacturing industries that rely on external sources 
of funding for their operation, nor do they promote the growth rates of manufacturing industries 
that, due to reduced access to collateral, face tighter financial constraints. On the contrary, the 
development of a private banking industry appears to have a significant effect on such types of 
industries. 
 
                                                       
10 For a discussion see Shleifer and Vishny (1994). 
11 Examples of this literature can be found in Lewis (1950) and Myrdal (1968). 
  105. References 
 
Beck, T., R. Levine and N. Loayza. 2000. “Finance and the Sources of Growth.” Journal of 
Financial Economics 58: 261-300. 
Claessens, S., and L. Laeven. 2002. “Financial Development, Property Rights, and Growth.” 
Washington, DC, United States: World Bank. Mimeographed document. 
Coco, G. 2000. “On the Use of Collateral.” Journal of Economic Surveys 14(2): 191-214. 
Fry, F. 1985. Money, Interest, and Banking in Economic Development. Baltimore, United States: 
Johns Hopkins University Press. 
Jappelli, T., and M. Pagano. 2001. “Information Sharing in Credit Markets: Theory and 
Evidence.” In: M. Pagano, editor. Defusing Default: Incentives and Institutions. 
Baltimore and Washington, United States: Johns Hopkins University Press/Inter-
American Development Bank. 
King, R., and R. Levine. 1993a. “Finance, Entrepreneurship and Growth: Theory and Evidence.” 
Journal of Monetary Economics 32: 513-542. 
----. 1993b.  “Finance and Growth: Schumpeter May Be Right.” Quarterly Journal of Economics 
108, pp. 717-737. 
La Porta, R., F. López-de-Silanes and A. Shleifer. 2000. “Government Ownership of Banks.” 
Cambridge, United States: Harvard University. Manuscript. 
La Porta, R., F. López-de-Silanes, A. Shleifer and R. Vishny. 1997. “Legal Determinants of 
External Finance.” Journal of Finance 52(3): 1131-1150. 
---. 1998.  “Law and Finance.” Journal of Political Economy 106(6): 1113-1155. 
Levine, R., N. Loayza and T. Beck. 2000.  “Financial Intermediation and Growth: Causality and 
Causes.” Journal of Monetary Economics 46(1): 31-77. 
Lewis, A. 1950.  The Principles of Economic Planning. London, United Kingdom: G.Allen & 
Unwin. 
Myrdal, G. 1968. Asian Drama. New York, United States: Pantheon. 
Rajan, R., and L. Zingales. 1998. “Financial Dependence and Growth.” American Economic 
Review 88: 559-586. 
Shleifer, A., and R. Vishny. 1994. “Politicians and Firms.” Quarterly Journal of Economics 109: 
995-1025.  
  11Stiglitz, J., and A. Weiss. 1981. “Credit Rationing in Markets with Imperfect Information.” 
American Economic Review 71(3): 393-410. 
  12

Asian Drama.

Credit Rationing in Markets with

Finance and Growth: Schumpeter May Be Right.”

Finance and the Sources of

Finance, Entrepreneurship and Growth: Theory and Evidence.”

Financial Development, Property Rights, and Growth.” Washington, DC, United States: World Bank. Mimeographed document.

Financial Intermediation and Growth: Causality and Causes.”

Information Sharing in Credit Markets: Theory and Evidence.”

Law and Finance.”

Money, Interest, and Banking in Economic Development.

On the Use of Collateral.”

The Principles of Economic Planning.

¿Fomentan el desarrollo los bancos propiedad del Estado? Elementos de juicio de las industrias manufactureras de una muestra de países

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¿Fomentan el desarrollo los bancos propiedad del Estado? Elementos de juicio de las industrias manufactureras de una muestra de países

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