Financial liberalization and the middle-income trap: What can China learn from the cross-country experience?

Should China accelerate financial liberalization in order to avoid the middle-income trap? And, if the answer is yes, which specific reform steps should the government undertake? In this study we attempt to shed light on these questions by examining experiences of 80 countries during the period 1980-2010. Empirical analyses reveal that the growth effect of financial repression is insignificant among low-income economies, significantly negative among middle-income economies and significantly positive among high-income economies. Furthermore, for the middle-income group, repressive policies on credit, bank entry, securities market and the capital account significantly inhibit economic growth. In the meantime, law and order promotes growth among all income groups, while democracy has no impact whatsoever. We also validate these findings through a range of robustness checks. These findings offer important policy implications for China.