The Impact of Government Size on Financial Development: A Global Perspective
DOI:
https://doi.org/10.14738/assrj.1304.20234Keywords:
Government Size, Financial Development, Panel DataAbstract
This study investigates the linear effects of government size on financial development using a balanced panel of 71 countries from 1995 to 2021. Government size was measured using the commonly used general government final consumption expenditure as percentage of GDP (%), while financial development is proxied by private credit and deposit money bank assets (each as % of GDP). The estimation in this study relies on a dynamic system generalized methods of moments (GMM). The main result indicates that government size does not have a statistically significant impact on financial development at the global level. This study concludes that one-size-fits-all approach may not be effective. The results provide no conclusive support for either the political view or the development view.
References
REFERENCES
[1]. Andrianova, S. (2012). Public banks and financial stability. Economics Letters, 116(2012), 86–88.
[2]. Andrianova, S., Demetriades, P., & Shortland, A. (2008). Government ownership of banks, institutions, and financial development. Journal of development economics, 85(1-2), 218-252.
[3]. Andrianova, S., Demetriades, P. O., & Shortland, A. (2009). Is government ownership of banks really harmful to growth? (Economics and Finance Working Paper Series). London, Brunel University.
[4]. Baltagi, B. H., Demetriades, P. O., & Law, S. H. (2009). Financial development and openness: Evidence from panel data. Journal of development economics, 89(2), 285-296.
[5]. Baltagi, B. H., Demetriades, P. O, & Law, S. H. (2007). Financial development, openness and institutions. University of Leicester discussion paper in economics, 5.
[6]. Barth, J. R., Caprio Jr., G., & Levine, R. (1999). Financial regulation and performance: Cross-country evidence (World Bank Policy Research Working Paper No. 2037). Santa Monica, Calif.: Milken Institute.
[7]. Beck, T. (2013). Finance, growth and fragility: The role of government. International Journal Banking. Accounting and Finance, 5(1-2), 49–77.
[8]. Bertay, A. C., Demirguc-Kunt, A., & Huizinga, H. (2015). Bank ownership and credit over the business cycle: Is lending by state banks less procyclical? Journal of Banking and Finance, 50, 326–339.
[9]. Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of econometrics, 87(1), 115-143.
[10]. Caprio, G., &Peria, M.S.M. (2002). Avoiding disaster: Policies to reduce the risk of banking crises. Chapter 7 In E. Cardoso & A. Galal (Eds.), Monetary policy and exchange rate regimes: Options for the Middle East (pp. 193–230). Cairo, Egypt: The Egyptian Centre for Economic Studies.
[11]. Carvalho, D. R. (2014). The real effects of government owned banks: Evidence from an emerging market. Journal of Finance, 69, 577–609.
[12]. Cho, Y. J. (2010). Crisis resolution, policies, and institutions: Empirical evidence. In P. Honohan & L. Laeven (Eds.), Systemic financial distress: Containment and resolution (pp. 169–196). Cambridge: Cambridge University Press.
[13]. Cole, S. (2009). Financial development, bank ownership, and growth: Or, does quantity imply quality? The Review of Economics and Statistics, February 2009, 91(1), 33–51.
[14]. Coleman, N., & Feler, L. (2015). Bank ownership, lending and local economic performance during the 2008–2010 financial crisis. Journal of Monetary Economics, 71 (April), 50–66.
[15]. Cornett, M. M., Guo, L., Khaksari, S., & Tehranian, H. (2010). The impact of state ownership on performance differences in privately-owned versus state owned banks: An international comparison. Journal of Financial Intermediation, 19(1), 74–94.
[16]. Cull, R., & Martinez Peria, M. S. (2013). Bank ownership and lending patterns during the 2008–2009 financial crisis: Evidence from Latin America and Eastern Europe. Journal of Banking and Finance, 37(12), 4861–4878.
[17]. De Haas, R., Korniyenko, Y., Pivovarsky, A., & Tsankova, T. (2015). Taming the herd? Foreign banks, the Vienna initiative and crisis transmission. Journal of Financial Intermediation, 24(3), 325–355.
[18]. Demetriades, P. O., & Hussein, K. A. (1996). Does financial development cause economic growth? Time-series evidence from 16 countries. Journal of development Economics, 51(2), 387-411.
[19]. Demirguc-Kunt, A. (2014). Presidential address: Financial inclusion. The Atlantic Economic Journal (2014), 42,349-356.
[20]. Dinc, S. (2005). Politicians and banks: political influences on government owned banks in emerging markets. Journal of Financial Economics, 77(2), 453-479.
[21]. Dreher, A. (2006). Does globalization affect growth? Evidence from a new index of globalization. Applied economics, 38(10), 1091-1110.
[22]. Farhi, E., & Tirole, J. (2012). Collective moral hazard, maturity mismatch, and systemic bailouts. American Economic Review, 120,60–93.
[23]. Fraccaroli, N., Sowerbutts, R., & Whitworth, A. (2020). Does regulatory and supervisory independence affect financial stability?.
[24]. Freixas, X., & Mayer, C. (2011). Banking, finance, and the role of the state. Oxford Review of Economic Policy, 27(3), 397-410.
[25]. Gerschenkron, A. (1962). Economic backwardness in historical perspective (1962). The Political Economy Reader: Markets as Institutions, 211-228.
[26]. Gerschenkron, A. (1962). On the concept of continuity in history. Proceedings of the American Philosophical Society, 106(3), 195-209.
[27]. Giannetti, M., & Simonov, A. (2013). On the real effects of bank bailouts: Micro evidence from Japan. American Economic Journal: Macroeconomics, 5(1), 135–167.
[28]. Gupta, N., & Mahakud, J. (2020). Ownership, bank size, capitalization and bank performance: Evidence from India. Cogent Economics & Finance, 8(1), 1808282.
[29]. Hryckiewicz, A., Kryg, N., Tsomocos, D. P., & Zadorozhna, O. (2025). Unveiling the power of state activism in times of distress. Economic Analysis and Policy, 86, 1346-1376.
[30]. Iannotta, G., Nocera, G., & Sironi, A. (2013). The impact of government ownership on bank risk. Journal of Financial Intermediation, 22(2), 152–176.
[31]. Khwaja, A., & Mian, A. (2005). Do lenders favor politically connected firms? Rent provision in an emerging financial market. Quarterly Journal of Economics, 120(4), 1371–1411.
[32]. La Porta, R., Lopez‐de‐Silanes, F., & Shleifer, A. (2002). Government ownership of banks. The journal of finance, 57(1), 265-301.
[33]. Laeven, L., & Valencia, F. (2013). The real effects of financial sector interventions during crises. Journal of Money, Credit and Banking, 45(1), 147–177.
[34]. Lind, J. T., & Mehlum, H. (2010). With or without U? The appropriate test for a U‐shaped relationship. Oxford bulletin of economics and statistics, 72(1), 109-118.
[35]. Luo, J., & Wen, Y. (2015). Institutions do not rule: Reassessing the driving forces of economic development. FRB St. Louis Working Paper, (2015-1).
[36]. Panizza, U. (2012). Finance and economic development. International Development Policy, 3, 141–160.
[37]. Patrick, H. T. (1966). Financial development and economic growth in underdeveloped countries. Economic development and Cultural change, 14(2), 174-189.
[38]. Rajan, R. G., & Zingales, L. (2003). The great reversals: the politics of financial development in the twentieth century. Journal of financial economics, 69(1), 5-50.
[39]. Sapienza, P. (2004). The effects of government ownership of bank lending. Journal of Financial Economics, 72(2), 357–384.
[40]. Trad, K. (2026). Does institutional quality matters in the relationship between banks’ ownership and banking stability? Evidence from the MENA region. International Journal of Islamic and Middle Eastern Finance and Management, 19(2), 519-541.
[41]. Xiao, S., & Zhao, S. (2012). Financial development, government ownership of banks and firm innovation. Journal of International Money and Finance, 31(4), 880-906.
[42]. Yang, Y. P. (2018). Government ownership of banks: A curse or a blessing for the United States. Wm. & Mary Bus. L. Rev., 10, 667.
[43]. Zou, Y., Xu, J., & Panizza, U. (2026). Comparing financial returns: National development banks vs commercial banks. Pacific-Basin Finance Journal, 103171.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2026 Arunnan Balasubramaniam, Chin Lee, Siong Hook Law
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors wishing to include figures, tables, or text passages that have already been published elsewhere are required to obtain permission from the copyright owner(s) for both the print and online format and to include evidence that such permission has been granted when submitting their papers. Any material received without such evidence will be assumed to originate from the authors.
