اثربخشی قانون، توسعه مالی و رشد اقتصادی در سرکوب مالی اقتصاد : شواهدی از چین

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.

Financial development is a key factor to promote economic growth (Beck et al., 2000 and Levine, 1997). Recent research identifies the written law as a prominent determinant of financial development and economic growth (Beck et al., 2003, Beck et al., 2004, La Porta et al., 1998, Levine, 1998 and Levine, 2003). However, this view has been challenged by Berkowitz et al., 2003, Pistor et al., 2000 and Pistor, 2002 who have found that the effectiveness of law is more important than the written law in promoting financial development in transition and developing countries. While these studies focus on the gross effect of the law on financial development, this paper aims at moving the study one step forward to decompose the channels by which the effectiveness of law influences financial development when financial repression is a significant characteristic of the economy. Financial repression widely exists in developing and transition countries (McKinnon, 1973, McKinnon, 1993 and Shaw, 1973). One consequence of financial repression is the creation of a privileged sector and an unprivileged sector with the former having access to cheap credits and the latter being rationed out. Under this situation, the relationship between the legal system and financial development may be more complicated than what it first looks like.

Our empirical endeavor has established the following robust results: improving the effectiveness of law alone in an economy with financial repression does not lead to overall financial development; instead, it has a fairly large negative effect on economic growth by reducing the share of private investment in the economy. We have found that this negative effect comes from the law’s adverse impact on the leakage effect that moves financial resources from the inefficient state sector to the efficient private sector. While our results provide a partial explanation to the paradoxical co-existence of weak law and rapid economic growth in China, we do not mean to refute the proposition that the effectiveness of law promotes economic growth. Less so do we mean to diminish the role of the rule of law. Rather, our results are best interpreted as evidence showing the complexity of the interplay of the formal legal system and informal self-helping arrangements in a distorted environment characterized by financial repression. This is consistent with the conclusion reached by McMillan and Woodruff, 1999 and McMillan and Woodruff, 2002 that informal relations are important for private enterprises to flourish in transition economies. On another front, our results show that law is but one factor in the institutional nexus. For the legal system to work properly, improvements in other complementary institutions are needed.17 This finding echoes the findings of Berkowitz et al. (2003) who find that the social and economic context is important to make transplanted laws work in the recipient country. But we have gone one step further to conduct a structural analysis of how and under what conditions the legal system works for or against financial development.