Is Government Ownership of Banks Really Harmful to Growth?

We show that previous results suggesting that government ownership of banks is associated with lower long run growth rates are not robust to adding more ‘fundamental’ determinants of economic growth, such as institutions.  We also present new cross-country evidence from a more recent period (1995-2007) which suggests that, if anything, government ownership of banks has been robustly associated with higher long run growth rates, conditioning for institutions and other variables suggested by the growth literature.   We therefore conclude that on average government ownership of banks appears not to have been harmful to long run growth.  While acknowledging that cross-country results like these may not imply causality, we nevertheless provide a conceptual framework, drawing on the global financial crisis of 2008-09, which explains why under certain circumstances government owned banks could be more conducive to economic growth than privately-owned banks.