The effect of the BNDES on investments – 06/27/2023 – Bernardo Guimarães

What is the relationship between BNDES disbursements and the level of investments? There are three possibilities:

1. BNDES credit expansion raises interest rates and reduces investments financed by the private sector. Thus, $100 of investments financed by the BNDES lead to an increase in the level of investment in the country of less than $100. In an extreme case, investment would not even increase.
2. BNDES credit expansion does not affect other investments. Thus, each $100 of BNDES loans leads to a $100 increase in the level of investment.
3. BNDES credit expansion stimulates private investment, so that $100 of BNDES loans leads to more than $100 increase in total investments.

In a column previously published here at SheetI argued in favor of the first possibility, explaining the mechanism that would lead to this effect.

On Monday (26), the BNDES released a study on the relationship between its loans and the level of investments. Nelson Barbosa, director of the bank, used the study to argue that, “in most cases, when the BNDES disburses more, investment increases, and the private sector also disburses more. They go together. There is more evidence of complementation than of substitution between one and the other”.

He seems to have argued for the third possibility.

However, the BNDES study does not lead to this conclusion, and the existing literature goes against this point.

The study shows correlations between the level of investments and BNDES disbursements each year. Yes, correlation does not imply causality, but even disregarding this issue, this correlation would not allow us to separate among the three possibilities listed.

To understand this point, suppose that the only thing that changes investment in the economy is the BNDES. In this case, it does not matter if $100 of BNDES credit generates $20, $100 or $150 in total investments: the correlation between BNDES disbursements and investment will always be 100%.

Correlations indicate the importance of a relationship between two variables relative to the importance of the relationship with other variables. We are not told about effect sizes.

There are, however, several studies, with different methodologies, that seek to estimate the effect of BNDES credit on investment.

Some find that the effect of the BNDES on investment is null or close to it. Examples include the influential articles by Bonomo, Brito and Martins; and Lazzarini, Musacchio, Bandeira de Melo and Marcon. Others find a positive effect, such as Cavalcanti and Vaz and Barboza and Vasconcelos.

But how big is the effect?

The article by Barboza and Vasconcelos, cited in the BNDES study as evidence in favor of the bank, estimates that an additional $100 of BNDES credit leads to an increase of $46 in investments—there would therefore be an estimated reduction of $54 in investments that would occur in the absence of the expansion of this credit.

And this is a work with optimistic conclusions about the BNDES.

In short, even though we do not know the magnitude of the effects, it seems clear that BNDES credit reduces investments financed by the private sector. The evidence points to the first scenario I mentioned.

Again, this in itself does not mean that BNDES actions are harmful. But we must keep in mind that, by directing loans to some activities, we will be making credit more expensive for companies without access to BNDES resources and consumers who want to buy cars and refrigerators in installments.

PRESENT LINK: Did you like this text? Subscriber can release five free hits of any link per day. Just click the blue F below.