Rethinking Fogape – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Rethinking Fogape: An Evaluation of Chile’s Partial Credit Guarantee Scheme

Authors:

Margarita Armenteros, Niccolò Artellini, Andreas Hoppe, Marco Urizar, and Bernard Yaros

Master Program:

International Trade, Finance and Development

Paper Summary:

Small-and-medium enterprises (SMEs) often find themselves credit constrained due to a lack of collateral, limited credit history, and informational asymmetries that entail high monitoring costs for lenders. Governments around the world have introduced partial credit guarantee schemes (PCGS) to overcome these constraints and ease financial access for SMEs. These schemes aim to relieve credit-constrained firms by providing public collateral that reduces the risk borne by private lenders in the event of a default. In recent years, PCGS have been utilized as a way to protect SME lending in the backdrop of the global credit crunch.

Why are SMEs important? Any economy is dependent on the innovation, technological change, and job creation that new enterprises introduce, and in most cases, such firms are small in size. The role of SMEs in Chile is no exception. By 2009, the SME sector in Chile contributed to 20% of GDP, and the percentage of workers employed in SMEs stood at 56.4% in 2011. Nevertheless, Chilean SMEs have pointed to the fact that their difficulties in obtaining a formal loan rest with a lack of guarantees and high financial costs.

In 2000, Chile relaunched its public guarantee fund Fogape (Fondo de garantías para pequeños empresarios) with the goal of providing public guarantees for loans taken out by SMEs with private financial institutions. In 2007 and 2009, the government re-capitalized the fund by $10 million and $130 million respectively as a direct countercyclical response to the international financial crisis. Fogape is unique in the way by which it disseminates its guarantees into the credit market; it does so through an auctioning system that is designed to reduce moral hazard on the part of participating banks that bid for Fogape’s guarantees.

To assess econometrically the impact of Fogape on eligible firms, we used firm-level data obtained from two longitudinal surveys undertaken by the Ministry of Economy. We employed the strategy of regression discontinuity design (RDD) in which receipt of the treatment depends discontinuously on the value of one or more observable characteristics of the subjects. In our case, we exploited an arbitrary threshold of eligibility by which only firms with reported sales less than $750,000 are eligible for Fogape’s guarantees.

We estimated the intention-to-treat, or the effect of eligibility to Fogape on eligible firms vis-à-vis ineligible ones. In keeping with the literature on RDD, we restricted our sample of interest to only those enterprises whose reported sales fall within a distance h on either side of the sales cutoff of eligibility. Our robustness checks confirmed that eligible and ineligible firms at the margins on either side of the cutoff were not systematically different in key baseline characteristics.

We selected the following outcome variables in which we expected to observe a change due to Fogape’s presence: the log difference of sales from 2007 to 2009; debt-to-equity ratio in 2009; profit margin in 2009; and long-term debt over total debt in 2009.

Log Sales Growth

 

We did not obtain any statistically significant results, suggesting that the effect of eligibility is neither positive nor harmful to the various performance indicators of the eligible enterprises in our sample of interest. We found that eligible firms within our bandwidth h, ceteris paribus, experienced less proportional change in their sales from 2007 to 2009 than ineligible ones. We had expected to see firms that are eligible for credit guarantees to have higher sales growth because of the investment in working capital and productive assets that such access to credit would allow for. The finding from our RDD analysis that eligible firms had less debt-to-equity in 2009 than non-eligible ones was equally puzzling. We expected eligibility to have increased their debt-to-equity ratio vis-à-vis similar ineligible firms because of the loans they are getting through Fogape. Finally, the result that eligible, surveyed firms had less long-term to total debt in 2009 than ineligible ones within our bandwidth h was also contrary to our expectations. Fogape has put emphasis on its allocation of guarantees to long-term credit, which led us to believe that there would be a corresponding increase in the long-term over total debt ratio of eligible firms.

We started with the premise that SMEs are credit constrained, which validates Fogape’s raison d’être in the economy as a provider of credit. We also assumed that this guaranteed credit would be used for productive investments, which would then be reflected in firm profitability and sales growth. Why do we find no evidence of Fogape’s impact during the period of 2007 to 2009? Are firms receiving Fogape-guaranteed loans not truly credit constrained? Or are lenders substituting Fogape guarantees for private ones? Do these firms have the expertise or productivity to undertake successful investments? In the survey used in our study, it is possible to identify 369 firms that received Fogape guarantees for a secondary loan in 2009. Out of these firms, 40% obtained their primary loan using physical collateral and 18% using private guarantees, thereby hinting at a substitutability problem. However, it is still not possible to say that Fogape users, which already had access to the fund or other sources of credit, were not credit constrained to begin with. We suggest more research be carried out and that the portfolio of participating lenders be reviewed to determine whether lenders have been substituting private for public guarantees and if Fogape beneficiaries were truly credit constrained. We find evidence that firms also face difficulties besides credit constraints. In the 2010 World Bank Enterprise Survey, Chilean firms identify an inadequately educated workforce as their second largest constraint. Furthermore, 25% of small and 22% of medium-sized firms identify this very constraint as their main obstacle. To address productivity concerns as well as competitiveness issues facing SME’s, we propose more complementarity between Fogape and other pro-SME institutions and public programs.

Read the full paper or view slides below:

Multimarket Contact and Collusion in the Ecuadorian Pharmaceutical Sector – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Multimarket Contact and Collusion in the Ecuadorian Pharmaceutical Sector

Authors:

Jerónimo Callejas and Igne Grazyte

Master Program:

Competition and Market Regulation

Paper Abstract:

The paper analyses the effects of multimarket contact on prices in the Ecuadorian pharmaceutical sector and its capacity to serve as a tool to facilitate collusion. We estimate the effect that the multimarket contact has on firms’ price setting behaviour by applying multimarket contact models and simple econometric techniques. Our findings show that multimarket contact has a positive effect on multivitamin prices in Ecuador and could indeed be helping to sustain collusion between firms.

Conclusions:

We have tried to estimate the possible effect that multimarket contacts might have on prices and collusion in the Ecuadorian pharmaceutical industry. For the purposes of this paper we have chosen to limit our analysis and only focus on the market for multivitamins defined at the 4th ATC level. To test our predictions we tried to replicate simple techniques used by Ciliberto and Williams (2013), Evans and Kessides (1994) and Coronado (2010). We have constructed a multimarket contact index and estimated its effect on prices by using IV and then Panel Data with fixed effects estimations and also correcting for endogeneity.

As seen in section 5, our model gives robust results and provides a reasonable confirmation of our expectations: the coefficients predicted by the two models (IV and panel data with fixed effects) have the correct sings and are highly significant. Our results show that the IV estimation alone is insufficient to successfully solve all endogeneity issues, however we find that using panel data with fixed effects and also instrumenting endogenous variables (MMC) we can successfully remove the endogeneity problem from the proposed regression and obtain unbiased estimates. Our analysis shows that average multimarket contact index has a significant positive effect on price, thus confirming our predictions that the contacts between firms in different product markets can lead to higher prices for pharmaceutical products. Although we believe that this result could be indicative of possible collusive practices in the sector, the actual existence of collusion could only be confirmed by direct evidence, such as direct contacts between firms with the aim of setting prices or sharing markets.

Due to time constraints we were only able to conduct our analysis in one market and using only simple estimations and models of multimarket contact index. Therefore possible future extensions to this paper could include estimating the effect of the multimarket contact index in other markets, possibly taking into account both private and public markets; or to estimate the effect of multimarket contact by using more complex models, such as nested logit model used in Ciliberto and Williams (2013).

Read the full paper or view slides below:

Developing a Fairtrade Cocoa Sector in Nicaragua – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.

Developing a Fairtrade Cocoa Sector in Nicaragua

Authors:

Giuliano J. Bandeen, Armen Khederlarian, Edmund Moshammer, Tommaso Operto, and Christoph Sponsel

Master Program:

International Trade, Finance and Development

Project Summary:

This is a policy proposal directed at the Government of Nicaragua. Nicaragua’s cocoa industry achieves a very low export unit value in comparison to global competitors in West Africa, South East Asia and Latin America. Given the promising prospective growth of the cocoa world market and the higher price paid for Fairtrade cocoa, the aim of the present policy memo is to examine whether Nicaragua could benefit if farmers were to switch to certified cocoa production standards. We show that under perfect market conditions this would indeed result in higher profits. However we also identify that there are currently several obstacles preventing farmers from switching. These obstacles include minimum quantity requirements of international buyers, price information asymmetries, a low negotiation power in the supply chain, and financial and technological constraints. We propose three policies targeting these obstacles which consist of a provision of storage facilities, a credit guarantee and an educational campaign. All of them rely on group forming of farmers with mutual liability agreements.

Comparing the net present value profit of selling conventional cocoa with an investment in our proposed policies, which allows selling Fairtrade cocoa, we calculate an internal rate of return. This rate varies between both potential clients, European chocolate manufacturers Ritter Sport and Zotter and is 129% and 20% respectively. This hence encourages our policy proposal. By comparing different scenarios of government intervention we find that the highest average welfare gain results from an intermediate level of intervention. In this scenario the government would pay for warehouse construction and an educational campaign, and would provide a credit line guarantee to avoid that cooperatives pay a high risk premium. Additionally we include several robustness checks where we allow for changes in investment horizon, fertilizer effectiveness, government interest rate, farmers’ risk premium and most importantly international cocoa prices. We show that implementing our policies promises high potential gains from switching for individual farmers and the entire economy under a wide range of scenarios.

Read the full project report or view slides below:

The Aftermath of the Latin American Boom?

Throughout this academic year, we have learned about European policy making, immigration issues in the United States, OECD´s effort to put up with the current crisis, Spain’s unemployment and labor market and why Northern countries engage in intra-industry trade. My contribution to this blog is oriented towards the Southern Cone of the globe, and is a personal assessment of some of the challenges that Latin America in particular, faces as a region today.

While many countries in the north confront one of the worst financial crisis in history, the ability that Latin American countries have had to adapt to the recent crisis has been remarkable. Nevertheless, what was first called as the Latin American boom now appears to be coming to an end.

Continue reading “The Aftermath of the Latin American Boom?”