II Foro Estados Unidos-Uni

1
II Foro Estados Unidos-Unión Europea de la
Fundación EuroaméricaThe role of financial
system in economic and social developmentMiami
Dade College, Wolfson CampusJose Juan Ruiz,
2014, May 15th 16th
2
Bancos circa 1934 the ephor of the exchange
economy.

• The banker...has become the capitalist par
  excellence. He stands between those who wish to
  form new combinations and the possessors of
  productive means. He is essentially a phenomenon
  of development, though only when no central
  authority directs the social process. He makes
  possible the carrying out of new combinations,
  authorizes people in name of society as it were,
  to form them. He is the ephor of the exchange
  economy.
• J.A. Schumpeter, The Theory of Economic
  Development (1934)

He claimed he had set himself three goals in
life to be the greatest economist in the world,
to be the best horseman in all of Austria and the
greatest lover in all of Vienna
3
Bancos circa 2014 If a change would cost the
financial sector, say, one billion a year () it
just means that there is an extra billion for the
other sectors

• The literature indicates that some tasks of the
  financial sector are beneficial, some attributes
  of financial institutions matter, and others
  matter less so or not at all. ()
• Without doubt, various proposed changes in
  regulation will be costly for the financial
  sector and make it more difficult for the sector
  to perform some activities.
• But that is not necessarily a bad thing.
• If a change would cost the financial sector, say,
  one billion a year but does not affect the total
  amount being produced, then it just means that
  there is an extra billion for the other sectors.
• Wouter den Haan, 24 October 2011,
  http//www.voxeu.org/article/why-do-we-need-financ
  ial-sector

4
Quien se ha quemado con leche... ve una vaca y
llora
https//www.imf.org/external/pubs/ft/fandd/2004/09
/pdf/carstens.pdf
5
Back to the era of the ephor of the exchange
economy
6
Epur si muove Productivity Growth and Financial
sector development are closely correlated
Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
7
LAC Low levels financial intermediation , even
controlling for GDP per capita
Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
8
LAC Real Convergence falters due to to low TFP
growth
Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
9
LAC growth is back to Normal
Source WEO, IMF. April 2014
10
and there are high downside risks
Source WEO, IMF. April 2014
11
Relative Low Growth and Middle Class Expectations
Reduzimos drasticamente a pobreza ea
desigualdade. Conquistas são importantes, mas é
completamente natural que os jovens,
especialmente aqueles que tem coisas que seus
pais nunca tiveram, como mais "
12
Back to the era of the ephor of the exchange
economy
13
The Role of the Financial Sector Why do we need
to do more?

• If small credit markets resulted from low demand
  for investable funds due to limited investment
  opportunities, the financial sector would not be
  a bottleneck to economic development.
• However, there is evidence that small credit
  markets in Latin American countries are also due
  to distortions and bottlenecks in the supply of
  credit, which explains high and heterogeneous
  lending rates. At about 8 percent, the Region has
  average real lending rates which are much higher
  than those of most developing regions (only
  sub-Saharan Africa has higher average lending
  rates). Interest rates are especially high for
  small firms. High lending rates tend to be
  associated with credit rationing cutting off
  supply at low levels of credit.
• Beck et al. (2000) estimations suggest that an
  increase in financial development that had
  brought Latin Americas financial depth from its
  1965-2003 average of 31 percent of GDP to the
  East Asian average of 70 percent of GDP would
  increase the Regions annual average productivity
  growth by 1 percentage point, corresponding to a
  60 percent reduction in the difference between
  average productivity growth in the two regions.
• Besides stimulating growth, well-working
  financial markets can reduce income inequality
  and promote social mobility. In countries with
  poorly developed financial markets, initial
  wealth is more important than entrepreneurial
  talent and potentially productive projects may
  not be implemented because of lack of financing.
  Financial markets that reallocate capital from
  less to more productive firms can jointly
  increase productivity and, by limiting the
  economic power of the elites, democratize
  market economies (Rajan and Zingales, 2003).

Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
14
RethinkingProductive DevelopmentSound Policies
and Institutions for Economic Transformation
Rethinking Productive DevelopmentSound Policies
and Institutions for Economic Transformation
15
Urgent need for growth policies

• Most successful growth experiences around the
  world are associated with active productive
  development policies (PDPs)
• Low and slow productivity in the region calls for
  fresh policy action to break stagnation
• Macro stabilization and structural market reforms
  not enough
• Industrial policy of the past misguided
• Countries are quite actively searching for PDP
  solutions
• Not always with analytical clarity
• They spend important resources, not always well
• Multilaterals also dedicate sizable resources to
  support them

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There is a great variety of PDPs

• Matching grants for business innovation projects
• Reduction of number of days to start a business
• Incubation services for start-ups
• Training to close the skills gap for mining
  industry
• Cluster development policies
• Provision of cold storage facilities for fresh
  flowers
• Opening offices abroad for export promotion
• Tax exemptions for tourism
• Strategic policies to attract medical devices
  sector

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How to make sense of this diversity?

• We need a conceptual framework to think about
  PDPs
• We emphasize two dimensions
• Scope of the interventions (horizontal or
  vertical).
• Type of interventions public goods / public
  inputs, or market interventions (subsidies, tax
  exemptions, protection).
• These two dimensions define a 2x2 matrix which we
  find useful, because every quadrant raises
  different public policy considerations.

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How to make sense of this diversity?
H
V
To provide public inputs that favor certain
sectors. May involve collective inputs that can
financed by the private sector. State may be
needed to help solve coordination problems.
Public-private interaction is key Phytosanitary
control Cold storage for fresh flowers
Public inputs
Reduce number of days to start a business
Strategic bets in specific sectors. Under certain
conditions for example, coordination failures in
sectors with competitive potential-- may be
justified on a temporary basis Tax exemptions
for tourism

• Interventions that stimulate certain activities
  (not sectors). What market failures do we seek to
  address? Not all of these policies are justified.
  Instruments need to be designed so as to target
  the type of activities that do generate them and
  to address market failures as precisely as
  possible
• RD subsidies, job training subsidies, subsidies
  for investment in capital equipment.

Market interventions
Bringing sterilization Equipment to Costa Rica
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Best matches, not best practices

• Prevailing practice in institutional and policy
  reform is to identify best practices and adopt
  them
• Problem 1 policies not applied in a vacuum, but
  in specific contexts rich in behavioral norms and
  tacit working rules
• Problem 2 countries differ with regards to
  existing capabilities
• Rather than best practices, countries should
  focus on best matches between policies and
  capabilities, taking institutional context into
  account.
• Policies beyond existing capabilities may be best
  left for the future (once capabilities are
  developed)

20
Back to the era of the ephor of the exchange
economy
21
The Role of the Financial Sector Why do we need
to do more?

• Market Failures and the Rationale for
  Interventions
•  
• Intertemporal contracts can only exist in the
  presence of a proper institutional set-up and a
  well-working legal system that can enforce
  contracts promptly and at a low cost.
• Market failures associated with the presence of
  asymmetric information and the costs associated
  with collecting and managing information.
• Easier financial conditions for high social
  return projects whose benefits are external to
  the contracting parties and therefore not valued
  by the market.
• Financial Policies How and where to intervene
•  
• Public Inputs can improve productivity through
  better access to finance include setting
  transparent and enforceable ground rules for
  supervision and regulation of financial markets,
  lowering barriers to entry in financial markets,
  reducing asymmetries that distort the allocation
  of capital or lead to credit rationing, and
  establishing (or improving) the legal basis for
  credit bureaus, secured transactions, land
  registries, registries of moveable property, and
  bankruptcy laws. The ability to pledge collateral
  is key and problems related to the lack of
  pledgeable collateral are amplified by insolvency
  laws that do not establish clear priority rights
  and do not allow for quick restructuring of going
  concerns in the case of default.
• Market interventions are policies that attempt to
  counteract market failures by altering the market
  conditions under which financing can be obtained.
  Some of these policies are hybrid, blending
  public and private participation. Contractual
  arrangements in which a third party guarantees
  the repayment of a specific loan can be effective
  instruments for promoting access to credit for
  constrained firms and sectors. Multilateral
  reciprocal guarantee schemes (MGS) are
  cooperative arrangements in which certain
  partners (participating members) receive and
  offer guarantees, while other partners
  (sponsoring members) only offer guarantees.
•  
•  

Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
22
The Role of the Financial Sector Why do we need
to do more?

• Public credit guarantees can directly reach
  credit constrained firms whose realization of
  high returns investments is frustrated by lack of
  creditworthiness.
• Cheap funding of commercial banks by second-tier
  development banks is a method to induce financial
  institutions to reduce their lending rates
  without explicitly affecting the risk of the
  loan.  
• Both guarantees and funding presumably have
  (implicit or explicit) fiscal costs if they are
  conducted at below-market prices. Guarantees are
  better suited for tackling credit constraints,
  and are particularly efficient when private banks
  are excessively risk averse and the guarantor has
  superior enforcement capacity or information on
  collateral value. Cheap funding is ideal for
  targeting firms that generate positive spillovers
  but do not face tight credit constraints impeding
  borrowing, so that once the cost capital is low
  enough to match their private returns, investment
  will naturally follow at the appropriate scale.
• Special policies for small firms?
•  
• Some of the market failures previously reviewed
  hurt SMEs with more intensity and would thus
  justify special care for SMEs.
• For example, the range of assets that can be
  effectively used as collateral is particularly
  important to equity scarce SMEs and it could be
  expanded by developing registries of movable
  collateral that allow lenders to track what
  assets have been pledged and on what terms (IDB,
  2010).
• Recent changes in banking practices and
  regulation may also have had a negative effect on
  SMEs' ability to access credit (OECD, 2012), such
  as Basel II regulation increasing collateral
  requirements for SMEs.
• Banking regulations that unduly penalize SMEs
  ought to be reviewed, and in fact, access to
  credit for SMEs may be facilitated by the
  implementation of Basel III which, by classifying
  loans to SMEs as retail banking, reduces their
  risk weight (OECD, 2012).
•  

Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
23
The Role of the Financial Sector Why do we need
to do more?

• However, is there a case for special policies for
  SMEs beyond the generic justifications reviewed
  above?
• The fact that SMEs face more problems in
  accessing credit markets does not necessarily
  justify SME-specific interventions.
• Aside from social objectives, it is difficult to
  make a case for special policies for SMEs on
  productivity grounds based on this argument.
• Higher intermediation cost per unit lent is a
  real cost associated with operating small firms,
  a real cost to an economy based on small firms.
• Necessary financial intermediation costs are part
  of the productivity equation, and on this count
  SMEs are on average less productive than large
  firms (IDB, 2010), and therefore promotional
  policies that target small and medium enterprises
  may reduce overall productivity.
•  Special policies for SMEs could be justified if
  credit constraints prevent productive firms from
  achieving critical mass to grow on their own.
• However, it is not clear how relevant this case
  is in practice. Alternatively, a more fruitful
  policy approach may be to focus on new and young
  firms rather than small firms in general.
  Fledgling firms are more likely to be trapped in
  a credit constraint impeding their development to
  reach critical mass or even their emergence in
  the market.
•  

Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
24
Back to the era of the ephor of the exchange
economy
25
The Role of the Financial Sector The Experiences

• Relaxing collateral constraints through factoring
•  
• One way to access credit beyond available
  collateral is to sell accounts receivable to a
  factoring company.  
•  
• Cadenas Productivas (Productive Chains), a
  program put in place by the Mexican state-owned
  development bank Nacional Financiera (Nafin), is
  a successful example of a policy that creates the
  legal and logistic framework to facilitate
  factoring services to SMEs by creating chains
  between large buyers, including the government,
  and small suppliers. By using receivables from
  large creditworthy buyers to obtain cash, small
  suppliers implicitly enlarge their collateral
  (they borrow collateral from large,
  creditworthy firms), and in this way can
  effectively reduce their credit risk. Nafin
  provides the financial infrastructure for the
  program, a public input, ensuring competition
  among the lenders enrolled in the program giving
  national reach to regional banks. Nafin also acts
  as a second-tier bank and refinances the
  participating financial institutions.
  Furthermore, Nafin encourages the participation
  of large buyers in the program and provides
  training for SMEs enrolled in it. Importantly,
  Cadenas Productivas required critical public
  inputs of supporting laws which allow secure and
  legally binding factoring transactions.
• As of December 2012, Cadenas Productivas covered
  550 large buyers, more than 100,000 small and
  medium firms, and more than 50 domestic lenders.
  Since the inception of the program in September
  2001, Nafin has brokered more than 17 million
  transactions amounting to more than USD 131
  billion in financing.
•  

Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
26
The Role of the Financial Sector The Experiences
Credit guarantees   Credit Guarantee programs
crowd in" the private sector. By providing a
partial guarantee, the risk of lending by the
financial institution is reduced and this allows
currently credit constrained firms to obtain more
credit, effectively expanding collateral.
  Partial credit guarantees are potentially
effective and efficient instruments to counteract
other market failures By increasing the number
of firms with access to credit, a credit
guarantee program creates credit histories and
also expands the available information for
lenders to estimate and asses firms ability and
willingness to pay. More accurate credit scores
can be developed. A partial credit guarantee
program can have demonstration and
learning-by-doing effects as their expertise for
SME lending improves.   Using average rates
for Latin America, for every one dollar of fiscal
contribution a guarantee program generates 7.3
(the effective leverage rate) dollars of credit
to their target markets. However, these
guarantee schemes generate contingent
liabilities, whose size depends on how the
program design establishes incentives for prudent
risk analysis for guaranteed loans. The lower the
coverage, the greater the financial risk assumed
by the financial intermediary and, therefore, the
greater the incentive for safe loans.. The
Chilean FOGAPE (Fondo de Garantía para el Pequeño
Empresario) program, administered by Banco Estado
(a state-owned commercial bank), has an
innovative way to balance achieve increased
market participation. Rather than setting a
fixed coverage rate and guarantee fee, these
parameters are flexible. First, access to
guarantees is auctioned in such a way that
financial institutions bidding lower coverage
levels obtain larger quotas of guaranteed
amounts. The maximum coverage rate allowed is 80
but the average rate on the portfolio obtained
with this bidding process is currently 65.
Moreover, in order to ensure that the resulting
risks are internalized, under the FOGAPE program,
when the past due rate of the portfolio of a
financial institution exceeds an established
ceiling, the guarantee fee on its whole portfolio
is increased in line with its quality
deterioration. These mechanisms are factors that
have contributed to the FOGAPE schemes success
in terms of both high levels of credit
additionality as well as strong and sound
financial performance. Furthermore, the average
firm with a guarantee had both higher profits and
sales compared to similar non-participating firms
(Larrain and Quiroz, 2006)   
Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
27
The Role of the Financial Sector The Experiences

• Combining credit with non-financial services
  (NFS)
•  
• Credit programs are sometimes needed as a
  complement of the provision of NFS addressing
  market failures. For example, services that
  reduce information asymmetries, thereby altering
  the perception of risk associated with financing
  certain operations, would strengthen the need for
  credit. Clusters and value chains represent forms
  of industrial organization where financial
  services may also usefully accompany the
  provision of non-financial services. A proper
  analysis of a cluster and its firms requires a
  full understanding of the market, the
  interrelation with suppliers and clients,
  production and market cycles, the relevance of a
  firm within a chain, their associative capacity,
  etc. This is costly information. Public policies
  to ensure cluster financing imply additional
  credit risk evaluation whose cost may need to be
  defrayed.
•  
• A good example of this type of public
  intervention is the San Juan Province productive
  development Program in Argentina, which includes
  both financing and technical assistance
  components to support eleven identified value
  chains for a total amount of 53 million. These
  value chains represented 76 of the provinces
  exports and were responsible for 32 of the local
  economy. The program was coordinated by an agency
  created with the specific purpose (Agencia San
  Juan de Desarrollo de Inversiones) of
  facilitating the public-private linkages needed
  to alleviate the market failures preventing the
  financing of productive investments. Financing
  was funded through the Central Bank of Argentina
  operating as a second tier institution providing
  medium and long term financing. The funds were
  auctioned among private and public banks through
  a transparent process and beneficiaries of the
  program increased sales and exports by 69 and
  29 more than comparable non participant firms in
  the province.
•  
•  
• The experiences of partnership between agencies
  of innovation promotion and banks in Argentina
  and Colombia offer another example of synergy.
  Because of lack of technical expertise, banks may
  be unable to evaluate investment projects by
  firms that are interested in improving their
  technology. In these cases, banks delegate the
  task of carrying out the analysis of the
  technological risk involved in projects to public
  agencies (Rivas, et al 2010). The challenge for
  public policy for synergy to emerge is to make
  sure that these services are structured as to
  support the need of the financial intermediary to
  learn about the firms capacity of repayment.
•  

Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
28
The Role of the Financial Sector The Experiences

• Subsidized lending
•  
• Targeted subsidies to finance investments in
  energy efficiency (EE) and in the production of
  electricity from renewable primary sources can
  correct spillovers associated with pollution and
  CO2 emissions. EE has indirect social returns,
  which range from the local environment, workers
  health, lower aggregate costs associated with
  national energy intensity and balance of payments
  resilience in the case of energy-importing
  countries to global climate effects.
•  
• Development Banks can play a strategic role in
  overcoming barriers to finance EE and to capture
  their positive spillovers. For example, in order
  to address these barriers, BANCOLDEX developed a
  pilot program targeting the countrys
  fast-growing hotel and hospital/clinic industries
  with a US10 million Clean Technology Fund (CTF)
  loan to provide investment financing and
  technical cooperation.
• The program provides
• (i) an insurance policy to ensure the energy
  savings that the EE projects will deliver to the
  borrower (issued on the basis of a standardized
  Energy Performance contract, to be monitored and
  certified by a third-party technical expert), in
  order to address creditor and investor risks
• and (ii) a concessional financing line to enhance
  local demand for credit for green technologies
  and increase the participation of EE service
  providers.
• BANCOLDEX is coordinating these instruments and
  supporting commercial local financial
  institutions (first tier) and other market
  participants in structuring, financing,
  monitoring, and evaluating projects. Over time,
  the program may be replicated and expanded to
  other sectors including factories, businesses,
  schools and universities, among others.

Crespi, Gustavo, Eduardo Fernández-Arias, and
Ernesto Stein, eds. Forthcoming. Rethinking
Productive Development Sound Policies and
Institutions for Economic Transformation.
Development in the Americas Series. New York
Palgrave Macmillan and Washington, DC
Inter-American Development Bank.
29
Thank you!!
30
Quadrant MI / H
V
H
H
V
BP
BP
PI
IM
IM
MI

• Interventions that stimulate certain activities
  (not sectors).
• Examples RD subsidies, job training subsidies,
  subsidies for investment in capital equipment.
• The key question in this quadrant is what
  market failures do we seek to address? Not all
  of these policies are justified.
• RD vs. investment subsidies
• One should not assume automatic externalities.
• Some types of RD may generate more spillovers
  than others.
• Instruments need to be designed so as to target
  the type of activities that do generate them and
  to address market failures as precisely as
  possible.

31
Quadrant PI / V
V
H
H
V
BP
BP
PI
IM
IM
MI

• Should the State provide public inputs that favor
  certain sectors?
• Yes! most public inputs have differential effects
  on sectors
• phytosanitary control important for fruits and
  vegetables, not for garments.
• May involve collective inputs that can financed
  by the private sector State may be needed to
  help solve coordination problems.
• Typically addressed within cluster development
  programs
• How to decide which sectors to work with?
• How does the State identify their PI needs?
• Public-private interaction is key. But how to
  structure it?
• How should State organize itself to deliver
  needed PIs?
• Requires cooperation across different public
  agencies

32
Quadrant MI / V
V
H

• H

• V

• BP

PI

• IM

• IM

MI

• Most controversial. Lends itself to favoritism
  and rent-seeking.
• Includes interventions with different objectives
• Protect declining sectors, or sectors with no
  latent comparative advantage, but strong lobby
  capabilities (should be discouraged!)
• Example rice protection in Costa Rica
• Strategic bets in specific sectors. Under certain
  conditions for example, coordination failures in
  sectors with competitive potential-- may be
  justified on a temporary basis.
• Example tourism in Costa Rica (subsidies to
  several actors in the sector needed to coordinate
  investments)