World Development. Vol. 66. 2015:237–253.
Posted by Clara Langevin
Lazzarini, Musacchio, Bandeira de Melo and Marcon (forthcoming) examine the role of state owned development banks by analyzing Brazil’s national development bank known as the BNDES. The efficacy of state owned development banks and their extension of long term credit for industrialization, infrastructure projects and other development mechanisms-- is still somewhat of a mystery to some economists and neoliberal economics advocates. Unlike multilateral development banks, state development banks have an additional mandate of prioritizing domestic industry. Lazzarini, et al. seek to add to the literature exploring state development banks by studying what they claim is the mission of these development banks, namely “to spur industrial development” through “specialized competencies.” The BNDES was chosen by the authors because of its size (it is one of the largest development banks in the world) and the fact that it supplies 20% of the total credit to the Brazilian private sector. My review examines two specific factors: the efficacy of targeting local firms and how the BNDES selects said firms for investment.
Lazzarini et al. perform their analysis of 286 publicly listed companies that received funding from the BNDES by focusing on three variables. They first compared companies with BNDES loans and those with BNDES equity. The second variable was to measure the logarithmic value of these loans and equity positions. Thirdly they also take into account the political environment of Brazil during the time frame because there is “significant association between campaign donations for Brazilian politicians and firm-level profitability, preferential finance, and access to government contracts (pp. 240).
Through this analysis Lazzarini et al. found that there were no consistent effects on firm level performance and investment, except for a reduction in financial expenditures due to the subsidies accompanying these loans. Regarding firms that received loans from the BNDES, Lazzarini et al. report that from a cross-sectional standpoint it seems “that BNDES loans are associated with superior operation performance. Firms receiving loans also appear to have a larger proportion of fixed assets (pp. 244).” However when it came to firms with BNDES equity, the relationship was not so clear for these firms had lower EBITDA/Assets, yet they were larger firms with a higher proportions of fixed assets. This led to the conjuncture that BNDES does not systematically lend to underperforming firms and that BNDES subsidizes firms that could find their lending elsewhere.
This article provides an interesting perspective on development banks because it revealed a more nuanced picture of state owned development banks based on the BNDES case study. The results of this study are contrary to policy critics of public finance for the private sector. Rather these authors suggest than the BNDES did not lend or support failing firms during the period studied, but rather cherry picked firms that were already successful on their own. Lazzarini et al. also found that the BNDES equity allocations and loans did not have a consistent effect on firm performance and investment decisions, which diverges from much of the industrial policy literature which finds that “development banks [are] mechanisms to unlock productive investments through state-led credit (pp. 250).” The BNDES practice of lending to low risk firms ultimately leaves private institutions to lend to high risk firms. It will be interesting to see if Lazzarini et al. can continue their study of state-owned development banks and expand their analysis to other cases and countries.