Financial Repression: a Positive Approach

Many emerging countries have actively applied financial repression, despite the possible negative consequences of this policy for the economy. This paper provides a political economy explanation for why financial repression and the creation of interest groups in the form of partially state-owned entities can be an optimal policy for a populist state which is concerned with creating of electoral support and with increasing of state revenues. Non-market debt allocation leads to a higher loan interest rate resulting in financial underdevelopment. Therefore, firms, which are more sensitive to external financing, suffer, and the partially state-owned entity gets higher profit due to restricted competition. Thus, the state raises revenues from higher dividends and provides itself with political support by increasing revenues of interest groups.