Public ownership of banks and economic growth

The impact of country heterogeneity


  •  We thank Philippe Aghion, Daniel Baumgarten, John Bonin (the Editor), Hans Degryse, Christoph Engel, Hendrik Hakenes, Martin Hellwig, Alfredo R. Paloyo, Jörg Rocholl, Christoph M. Schmidt and Christian Traxler for their valuable comments and suggestions. We also benefited from comments by participants of the RGS Workshop at RWI Essen, the Brown Bag Seminar at University of Mainz, the 7th Workshop on Money, Banking and Financial Markets in Düsseldorf, the Barcelona GSE Banking Summer School 2009, and the Annual Congress of the Verein für Socialpolitik 2009 in Magdeburg. Financial support from the Leibniz Association through RGS Econ is gratefully acknowledged.


In an influential article, La Porta et al. (2002) argue that public ownership of banks is associated with lower GDP growth. We show that this relationship does not hold for all countries, but depends on a country's initial conditions, in particular its financial development and political institutions. Public ownership is harmful only if a country has low financial development and low institutional quality. The negative impact of public ownership on growth fades quickly as the financial and political system develops. In highly developed countries, we find no or even positive effects. Policy conclusions for individual countries are likely to be misleading if such heterogeneity is ignored.