RISK, OPPORTUNITY AND FINANCIAL REPRESSION

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

OBSTACLES TO RISK MANAGEMENT• Incentives• Information• Behaviors• Resources• Role of Uncertainty of Risk

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.

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

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

Brazil underwent some reforms in the last 25 years

1994 – Economic reform (Plano Real) ended chronical very high inflation rates

Macroeconomic stability allowed Brazilian Governments to underwent another reforms and programs

Bolsa Escola/Bolsa Família – gave resources to extremely poor households

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

Effects on Credit Markets

Large growth on personal loans

Source: Arrigoni, de Mello and Funchal, "The Payroll Lending Experiment", 2011

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)

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.

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