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

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  • Feng Lu, Susan
  • Yao, Yang

Abstract

Summary 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.

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  • Feng Lu, Susan & Yao, Yang, 2009. "The Effectiveness of Law, Financial Development, and Economic Growth in an Economy of Financial Repression: Evidence from China," World Development, Elsevier, vol. 37(4), pages 763-777, April.
    • Handle: RePEc:eee:wdevel:v:37:y:2009:i:4:p:763-777
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    9. Peter J Buckley & L Jeremy Clegg & Hinrich Voss & Adam R Cross & Xin Liu & Ping Zheng, 2018. "A retrospective and agenda for future research on Chinese outward foreign direct investment," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 49(1), pages 4-23, January.
    10. Li, Taoying & Peng, Mengyin & Zhang, Jianjiang & Zheng, Long & Chen, Qiang, 2024. "Legal environment and natural resource dependence: The role of fintech and green innovation in China," Resources Policy, Elsevier, vol. 90(C).
    11. Fungáčová, Zuzana & Weill, Laurent, 2017. "Trusting banks in China," BOFIT Discussion Papers 9/2017, Bank of Finland Institute for Emerging Economies (BOFIT).
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    13. Chien-Chiang Lee & Meng-Fen Hsieh, 2013. "Beyond Bank Competition and Profitability: Can Moral Hazard Tell Us More?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(1), pages 87-109, August.
    14. Fungáčová, Zuzana & Weill, Laurent, 2017. "Trusting banks in China," BOFIT Discussion Papers 9/2017, Bank of Finland, Institute for Economies in Transition.
    15. Ji Li, 2013. "Suing the Leviathan—An Empirical Analysis of the Changing Rate of Administrative Litigation in China," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 10(4), pages 815-846, December.
    16. Rui Mao, 2016. "Industry Clustering and Financial Constraints: A Reinterpretation Based on Fixed Asset Liquidation," Economic Development and Cultural Change, University of Chicago Press, vol. 64(4), pages 795-821.
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    18. Akinci, Gönül Yüce & Akinci, Merter & Yilmaz, Ömer, 2014. "Financial Development-Economic Growth Nexus : A Panel Data Analysis Upon Oecd Countries," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 55(1), pages 33-50, June.
    19. Linda Yueh, 2010. "The Economy of China," Books, Edward Elgar Publishing, number 3705.
    20. Fu, Junhui & Liu, Yufang & Chen, Rongda & Yu, Xiaojian & Tang, Wen, 2020. "Trade openness, internet finance development and banking sector development in China," Economic Modelling, Elsevier, vol. 91(C), pages 670-678.
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    22. Li, Xiao-Lin & Si, Deng-Kui, 2024. "Does financial market liberalization promote corporate radical innovation? Evidence from China," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    23. Yao, Yang & Yueh, Linda, 2009. "Law, Finance, and Economic Growth in China: An Introduction," World Development, Elsevier, vol. 37(4), pages 753-762, April.

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