By Aldo Musacchio and Sergio Lazzarini
On May 28 Márcio Garcia posted an article here arguing that there is scant evidence of the impact of the BNDES, the government-owned development bank, on the Brazilian economy. He provided a chart showing that, in the last decade, the bank has substantially expanded its credit activity while country-level investment to GDP has barely moved above 18 per cent. Luiz Carlos Ferraz of the BNDES replied on June 2 with a different chart depicting an apparent association between investment and BNDES disbursements. Ferraz wrote that “evaluations, assessments, and opinions must be made on technically sound analysis.” In this post we would like to contribute to this virtual debate by presenting some results of our own work, summarised in our latest book, Reinventing State Capitalism.
We concur with Ferraz that the BNDES had an important role in the industrialisation of Brazil, especially during the 1960s and 1970s. In fact, in our book, we provide a historical account of the role of BNDES and then present the results of a series of quantitative studies using firm-level data on the impact of recent BNDES activities.
A paper that we wrote with Carlos Inoue, for instance, shows that equity investments by BNDESPAR, the investment arm of the BNDES, improved the performance and investment activity of firms during the 1990s. We found that firms subject to what we call constrained opportunity – that is, firms with a valuable market opportunity but that, at the same time, were constrained in their ability to use their cash to fund new projects – used funds received from BNDESPAR to increase capital expenditures and showed higher profitability in the long run. Yet these positive effects disappeared when we restricted our sample to the period 2002 to 2009.
In another paper, we collected fine-grained data on BNDES loans to and equity investments in large firms during the period 2002-2009. We looked exclusively at large publicly-traded firms because, under bank secrecy laws, the BNDES does not disclose detailed, firm-level data on loans.
Using data for over 300 firms we did not find any effect of BNDES loans or equity investments on firm-level profitability or investment. The only consistent effect we found is that firms that get BNDES loans faced significantly lower cost of capital due to the subsidies that accompany such loans. Thus, our micro-level data provides support to Garcia’s claim that large Brazilian firms are getting subsidies without necessarily increasing investment. In this same paper, however, we found that the BNDES is not systematically lending to underperforming firms; thus, the BNDES is not a “hospital for ailing corporations”. On the contrary, the bank appears to be targeting the most profitable firms in Brazil.
These results unveil a paradox. By targeting firms with sufficient cash to repay their credit, the BNDES sharply reduces its rate of non-performing loans. Yet those are precisely the firms that are supposed to be less financially constrained because they can get loans or issue equity abroad.
We are aware that our research is not representative of the entire Brazilian economy. In fact, large, publicly-traded corporations are expected to depend less on BNDES credit than smaller firms. As independent researchers, we would love to get access to a more comprehensive database that allows us to look at the effect of BNDES loans on smaller firms, but the bank refuses to share its data. Still, our findings raise the question: Why does the bank continue to support large firms that are not apparently constrained in their ability to get capital? Around 60 per cent of BNDES credit targets large firms, more or less similar to the firms that are in our database of publicly listed enterprises.
It is likely that the BNDES is having an impact on smaller, credit-constrained firms that were not part of our study; and that its loans and equity are generating other externalities that we have not been able to measure. However, this still has to be demonstrated with rigorous research. For the moment, one thing is clear: the BNDES is not following selective criteria guaranteeing that only those companies facing harsh credit constraints are the ones getting subsidised loans.
The late Alice Amsden, one of the leading global authorities on industrial policy, wrote in her book The Rise of the Rest that “the major weakness of development banks… was not to spend on the wrong industries but to spend too much overall.” For the time being, we have reason to believe that the recent expansion of the BNDES may well be another illustration of the concern raised by Professor Amsden.
Aldo Musacchio is an associate professor at Harvard Business School. Sergio Lazzarini is a professor at Insper, Brazil.