risk, opportunity and financial repression
TRANSCRIPT
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RISK, OPPORTUNITY AND FINANCIAL REPRESSION
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RISK MANAGEMENT• All countries need adequate risk management
– Evolving• Knowledge• Protection• Insurance• Coping
– Ideal risk management should be strong enough in order to assure that agents will overtake the opportunity to develop
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OBSTACLES TO RISK MANAGEMENT• Incentives• Information• Behaviors• Resources• Role of Uncertainty of Risk
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ROLE OF FINANCIAL MARKETS• Provide liquid buffers, as deposits, to help the
agents to use their savings in bad times• Provide credit, in case of shortage of funds• Provide insurance
– If there is a good and functional financial markets, the agents will be more likely to get good opportunities, in spite of assuming some risks.
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Entrepreneurship depends on assuming risks and getting the resources. When financial markets work well, it is much easier.Good ideas usually receive external funding.
Microsoft, 1978
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But there are obstacles …If the property rights are not so well defined, and financial claims recovery in case of default is uncertain, that can lead to financial repression…Credit rationing does not allow entrepreneurs to get funding…And so, poverty traps emerge.
Draught in Brazilian Northeast
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Brazil underwent some reforms in the last 25 years
1994 – Economic reform (Plano Real) ended chronical very high inflation rates
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Macroeconomic stability allowed Brazilian Governments to underwent another reforms and programs
Bolsa Escola/Bolsa Família – gave resources to extremely poor households
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2003 – Changes in credit regulationBrazil used to have chronical low credit to households
- Difficulties to get collateral in a case of default
- This leads to very high interest rates for personal loans
Change in Legislation – Personal loans with repayments doing by direct discount in the borrowers’ payroll .Main Beneficiaries
- Stable Public Servants- Retirees and Pensioners
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Effects on Credit Markets
Large growth on personal loans
Source: Arrigoni, de Mello and Funchal, "The Payroll Lending Experiment", 2011
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Payroll Lending is associated to:-Better health conditions to the retirees (Sousa, 2011)- Increase in entrepreneurship in families with retirees and pensioners (Sousa, 2011; Mendes, 2014)
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IMPACT ON ENTREPRENEURSHIP• It's a very interesting result, with linkages with
aspects discussed in this course. – Retirees takes credit to help its relatives in the
household to open a business• Good example of how risk management is done in
the household level– A small reform in credit market allowed na
increase on entrepreneurship• Importance to governments to design the correct
regulation of financial markets in order to help credit be conceded under good collateral.
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REFERENCES• "The Brazilian Payroll Lending Experience" –
Coelho, De Mello, Funchal - https://ideas.repec.org/a/tpr/restat/v94y2012i4p925-934.html
• "Essays on Banking" – Sousa – http://www.econ.puc-rio.br/biblioteca.php/trabalhos/show/1044
• "Consumer Credit Expansion in Open Economies – Mendes - http://www.econ.puc-rio.br/biblioteca.php/trabalhos/show/1044