Financial Liberalization and Urbanization

This paper analyzes the relationship between financial liberalization and urbanization. We conjecture that liberalizing financial policies enables the process of economic structural change and that this change results in an increased demand for labor in the predominantly urban service industry, Using different identification strategies and a large country sample, we find that financial liberalization is positively associated with urbanization. When controlling for the robustness of determinants as well as potential endogeneity, financial liberalization is still significantly and positively related to urbanization. We also identify the individual financial policies that are most strongly associated with urbanization, namely interest rate liberalization, strengthening of competition in the banking sector, credit control liberalization, and a decrease in the entry barriers to the domestic financial industry. Our findings have implications for countries such as China, where policymakers hope that urbanization will be a key driver of future economic growth.