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Koen Schoors, Gent University and Bofit
Finance and Growth: A Counter-Example from the Origins of Banking in Russia

Daniel Berkowitz, University of Pittsburgh; Mark Hoekstra, Texas A&M University and
Koen Schoors, Gent University and Bofit: Finance and Growth: A Counter-Example from the Origins of Banking in Russia
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‖ in the last years of the Soviet Union  (1988-1991). Consistent with the qualitative work of Hellman [1993] and Johnson [2000], we show that these reforms generated an ideal natural experiment in that the concentration of specialized banks is jointly uncorrelated with predictors of future growth, including pre-banking income, unemployment, anti-market sentiment, institutional quality, and government interference in the economy. Results indicate that while the presence of one additional specialized bank per million inhabitants increased total within-state lending to private firms and individuals by 10 to 20 percent in the early 2000s, it had no effect on investment or per capita income, though it did modestly reduce unemployment. Data on lending suggest this ineffectiveness may be due to lower risk-taking and greater government connections. Thus, evidence here suggests that private ownership in the context of a competitive market may not be sufficient to transform socialist institutions. Instead, it indicates that the political origins of banking are important in determining whether finance affects growth

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