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The economic challenges countries face may vary with their level of development, but low productivity growth is definitely one of the main shortcomings hindering long-run growth in many developing economies, including Latin American ones. In his book “The Age of Diminishing Expectations: U.S. Economics Policy in the 1990s”, Paul Krugman describes the crucial role of productivity growth as follows:
"Productivity isn’t everything, but in the long-run it’s almost everything ….. Compared with the problem of slow productivity growth, all our other long-term economic concerns - foreign competition, the industrial base, lagging technology, deteriorating infrastructure and so on - are minor issues."
Considering the importance of productivity growth for economic development, our paper “Relaxing Credit Constraints in Emerging Economies: The Impact of Public Loans on the Performance of Brazilian Manufacturers” tries to shed some light on whether government support is able to boost productivity growth by removing firms’ credit constraints. The paper looks at the effect of funding by one of the main development banks in the world: the Brazilian Development Bank, known by its acronym BNDES. Its size is remarkable not only domestically but also internationally. In 2012 BNDES’s disbursements reached the value of R$ 156 billion (or US$ 76 billion), representing 20% of aggregate investment. For international comparison, the World Bank and the Inter-American Development Bank disbursed 19.8 and 6.9 billion dollars respectively in 2012, which jointly represent only 1/3 of BNDES’s disbursements.
Our analysis for the period 1996 to 2006 reveals that, before receiving BNDES support, granted firms were indeed more credit constrained than comparable non-granted firms. It also finds that BNDES support allowed granted firms to achieve the same level of performance as similar non-granted firms that did not face any credit restriction to start with. However, the beneficial role of BNDES support did not go as far as allowing granted firms to outperform similar non-granted ones.
A possible reason for these findings may be the broad scope of BNDES financial support, which makes little distinction among projects at different distances from the technology frontier. If so, a policy implication is that government support designed to remove credit restrictions without explicitly targeting the introduction and the adoption of advanced technologies may allow supported firms to converge to the performance of non-credit-restricted firms but may not provide any extra boost. In this regard, government policy should focus more on projects that are technologically advanced (especially on those with relevant R&D investments in their budget) as these have a higher potential to contribute to long-run productivity growth.
Note: The views expressed in this blog article are those of the author(s) and do not necessarily represent those of the BNDES.
Krugman, P. (1992) “The Age of Diminishing Expectations: U.S. Economic Policy in the 1990s” Cambridge MA: MIT Press.
Ottaviano, Gianmarco I.P. and Lage de Sousa, Filipe (2014) “Relaxing Credit Constraints in Emerging Economies: The Impact of Public Loans on the Performance of Brazilian Manufacturers” Centro Studi Luca d'Agliano Development Studies Working Paper No. 369, June. Available at SSRN: http://ssrn.com/abstract=2462195