In this paper, we investigate a neglected aspect of financial systems of many countries around the world: government ownership of banks. We assemble data which establish four findings. First, government ownership of banks is large and pervasive around the world. Second, such ownership is particularly significant in countries with low levels of per capita income, underdeveloped financial systems, interventionist and inefficient governments, and poor protection of property rights. Third,

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... t ownership of banks is associated with slower subsequent financial development. Finally, government ownership of banks is associated with lower subsequent growth of per capita income, and in particular with lower growth of productivity rather than slower factor accumulation. This evidence is inconsistent with the optimistic "development" theories of government ownership of banks common in the 1960s, but supports the more recent "political" theories of the effects of government ownership of firms. 5 Gerschenkron considers government financing of industrialization in Russia a great success. The government can participate in the financing of firms in a variety of ways: it can provide subsidies directly, it can encourage private banks through regulation and suasion to lend to politically desirable projects, or it can own financial institutions --completely or partially -itself. The advantage of owning banks --as opposed to regulating banks or owning all projects outright --is that bank ownership gives the government extensive control over the choice of projects being financed while leaving the implementation of these projects to the private sector. Ownership of banks thus promotes the government's goals in both the "development" and the "political" theories. In the development theories, ownership of banks enables the government both to collect savings and to direct them toward strategic long term projects. Through such project finance, the government overcomes institutional failures undermining private capital markets, and generates aggregate demand and other beneficial externalities fostering growth. In the political theories, ownership of banks enables the government to finance the inefficient but politically desirable projects. In both theories, the government finances projects that would not get privately financed. In the development theories, these projects are socially desirable. In the political theories, they are not. Using data on government ownership of banks from 92 countries around the world, we address four related questions. First, how significant is government ownership of banks in different countries? Second, what types of countries have more government ownership of banks? Third, does government ownership of banks promote subsequent financial development? Fourth, does government ownership of banks promote subsequent economic growth and, relatedly, how does it effect factor accumulation, savings, and growth of productivity? 6 Both the development and the political view imply that government ownership of banks should be more prevalent in poorer countries, countries with less developed financial markets, and more generally, countries with less well functioning institutions. The development theories also imply that, other things equal, government ownership of banks should benefit subsequent financial and economic development, factor accumulation, and especially productivity growth. The political theories, in contrast, imply that, other things equal, government ownership of banks should displace (crowd out) the growth of private financing. Moreover, while government financing through its banks can encourage savings and capital accumulation, the projects the government finances are likely to be inefficient and have an adverse effect on productivity growth. By looking at financial development and productivity growth, we can thus attempt to distinguish the two theories of government ownership of banks. Although our results support some elements of the development view, they are overall more favorable to the political view. We show, first, that government ownership of banks is common around the world: in an average country, 42 percent of equity of the 10 largest banks was still owned by the government in 1995. We also show that government ownership of banks is especially common in poor countries, as well as in countries with poorly defined property rights, heavy government intervention in the economy, and underdeveloped financial systems. The latter findings are consistent with Gerschenkron's idea of where governments are likely to own banks. However, our results on the effects of government ownership of banks on financial and economic development do not support Gerschenkron's optimism. We find that higher government ownership of banks is associated with slower subsequent development of the financial system, lower economic growth, and in particular lower growth of productivity. These results --