Political connection, bank credits and growth: evidence from Turkey

Abstract

The pervasive existence of government-owned banks in emerging economies is often justified by their provision of access to credit in remote and underdeveloped regions that are ignored by private banks. This paper analyses whether credits provided by government-owned and private banks have a significant role in regional growth and whether this role changes in politically connected areas in Turkey. Our findings imply that private banks significantly improve the economic well-being in all Turkish provinces regardless of their development level or their political connection with the ruling party. However, credits by government-owned banks are found to be positively related to the per capita growth rate only in the less developed provinces that are advocates of the ruling political party and also developed but not politically connected provinces. These results suggest that government-owned bank credits, as implied by the political view, are used for funding politically desirable projects or politically connected borrowers.