CNN interview with Miguel Angel Santos (ITFD ’11, ECON ’12) on the crisis in Venezuela

Miguel Angel Santos was interviewed on CNN’s Global Portfolio where he shared his analysis of the economic crisis in Venezuela.

Master’s alum Miguel Angel Santos was interviewed on CNN’s Global Portfolio where he shared his analysis of the economic crisis in Venezuela. From his post on LinkedIn:

“The collapse of Venezuela has a magnitude never before seen: it is the only country in the top ten of falls in GDP in five years in history (ninth, 45%), of falls in imports (third, 75%), and is also projected as one of the most intense hyperinflations in history, comparable only to Germany and Zimbabwe. There is no country on those three lists which has suffered collapses in imports, production, and hyperinflation at this level of intensity. It’s unprecedented.”

 

Miguel Angel is a graduate of both the Barcelona GSE Master’s Program in International Trade, Finance, and Development and the Master’s Program in Economics. He is now Adjunct Lecturer in Public Policy at Harvard Kennedy School, and Senior Research Fellow at the Center for International Development (CID) at Harvard University.

Brazil: from boom to bust?

Post by Facundo Abraham ’16 and Alberto González de Aledo Pérez ’16, current master’s students in the Barcelona GSE International Trade, Finance, and Development Program.

brazil

In 2001 it was widely predicted that in a decade’s time, Brazil, Russia, India and China (dubbed the BRICs) would become leading economies in the world, reshaping the global economy and international institutions. Now, more than a decade later, with the BRICs economies slowing down, these countries have lost momentum and there is doubt whether the BRICs’ will actually take over the world economy. The most paradoxical case is perhaps Brazil. Once seen as the country of the future and put forward as an example of economic success, it has now sunk into recession, high inflation and corruption scandals. So, what happened to Brazil? How did the country go from being the pampered child of international investors to a pariah in just a decade? What we argue is that when the figures are examined, they reveal that since 2001 the economic performance of Brazil was far from spectacular and, in fact, rather disappointing. Thus, the negative shift in expectations towards Brazil should come as no surprise.

We will focus on a simple growth accounting exercise. Simply stated, we assume that output in an economy is produced under a Cobb-Douglas production function in which capital and labour are used as inputs together under a certain technology/productivity. Mathematically:

equation

Then, to eliminate the effect of country size on output, we can define output per worker as:

equation

In this way, we can see that growth can be derived from two sources: technological progress and capital accumulation such that:

equation

Did Brazil keep up pace with the other BRICs?

The first question we need to answer is whether Brazil was experiencing high growth rates like the rest of the BRICs. The data shows that after 2001, the economy of Brazil lagged behind the other BRIC countries. Between 2002 and 2011 output per worker grew on average only 1.2%, far behind the 8.5% in Russia, 7.3% in China and 6.9% in India. Comparing the growth rates year by year clearly shows the sluggish performance of Brazil among the BRICs.

figure

Going further, we can ask ourselves how did Brazil perform related to capital accumulation and productivity growth. In the period 2002-2011 capital accumulation in Brazil was low with the capital per worker ratio growing on average by 2.3%. This figure is far less than the 11.4% in China and 8.6% in India. Yes, Brazil did better than Russia where the ratio increased by 1.9% yearly. However, Russia beat Brazil by far in productivity growth. While in Russia productivity grew on average 7.7% per year, in Brazil it grew by only 0.2%. Brazil was the BRIC country with lowest productivity growth being also behind India (2.5%) and China (0.4%).

figure 2

But was Brazil doing better than before?

Even though Brazil could have been doing worse than the rest of the BRICs, maybe Brazil was experiencing an economic boom compared to the previous years, which motivated the positive change in investor sentiment. However, again the data shows that Brazil performed worse since 2001 than in the 90s. Between 1990 and 2001 the Brazilian output per worker grew at 3.9% on average per year, with capital per worker growing at 4.5% and productivity at 1.8%. As shown below, these figures are better than the ones from 2002 onwards.

table

An interesting observation comes from analysing the capital intensity ratio, measured as capital stock over output. In the growth literature, as an economy moves towards its steady state, the growth rate of the capital to output ratio diminishes and eventually becomes zero in the steady state. Thus, the growth rate of capital to output is called “transitional growth” while the growth rate of productivity is the long-term growth. Looking at the data, the growth of the capital intensity ratio in Brazil dropped over recent years, being near to zero. This behaviour is more consistent with an economy that is exhausting its growth rather than with an economy entering a period of high growth.

figure 3

More Latin American, less BRIC

A final analysis consists in comparing the economic performance of Brazil to the other two big Latin American economies: Argentina and Mexico. Brazil’s output per worker growth of 1.2% per year was less than the 4.2% in Argentina and 1.5% in Mexico. In addition, comparing the growth rates for each year shows that the behaviour of the three economies was very similar and, moreover, Brazil performed worse than Argentina.

figure 4

This simple comparison could support the view that Brazil does not seem to have behaved like the other BRICs, being closer in performance to its Latin American neighbours. This observation is important considering that while Brazil was a star in the international markets, Mexico and Argentina were viewed with far more pessimism.

Concluding remarks

This growth accounting exercise is useful in providing simple insights that help us understand more clearly what has happened to Brazil over the last decade. There are many reasons behind the rise and fall of the Brazilian economy and it is not the aim of this article to account for them all. The results are enlightening because they show that, after being included in the BRICs and brought into the spotlight of financial markets, Brazil’s economic performance was modest compared to the other BRIC countries and even to its own past performance. Thus, even before the start of the crisis, the Brazilian economy showed some weaknesses that should have raised red flags early on.

About the authors

FacundoFacundo is a current student at the International Trade, Finance and Development program. Previously he worked in consulting projects on financial regulation and supervision in Latin America. He graduated in Economics from Universidad Torcuato di Tella. Connect with Facundo on Linkedin.

Alberto Alberto is a current student at the International Trade, Finance and Development program. He is a former Economist in BBVA’s Economic Research Department. He holds a BSc in Economics from Universidad Carlos III de Madrid. Connect with Alberto on Linkedin or follow him on Twitter.

The Persistent Effect of Exposure to Civil Conflict on Political Beliefs and Participation: Evidence from the Peruvian Civil War

This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2015.

photo“No teníamos culpa de nada… ¿o sí?” © 2006 Mauricio Delgado Castillo


Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2015. The project is a required component of every master program.


Authors: 
Benjamin Anderson and Ramiro Antonio Burga

Master’s Program:
Economics of Public Policy

Paper Abstract:

This paper provides empirical evidence of the persistent effects of exposure to civil conflict on political beliefs and participation. We exploit the variation in geographic incidence of conflict and birth cohorts to identify the long-term effects of exposure to violence on belief in democracy, trust in institutions, opinions in support of civil rights, voting turnout and casting of blank ballots, and participation in civic organizations. Conditional on being exposed to violence, the average person exposed to violence during certain sensitive stages of life still holds slightly more negative opinions about the value of democracy and are less likely to participate in civic / political organizations in the long-run.

Presentation Slides:

About the paper

Motivation:

Political preferences heavily dictate the role of the government, the policy making processes that emerge, and potentially even the institutional framework, itself (Besley and Case, 2003; Aghion et al., 2004). Furthermore, consequential effects of various forms of political institutions is a primary focus of Political Economy, and justifiably so, for the array of welfare implications encompassed within, including, economic growth, inequality, health outcomes, and many others (Acemoglu et al., 2001; 2002). In countries where citizens have been exposed to violence during sensitive periods of life, it may be more difficult for governments to gain trust and build support for democratic processes and good institutions.

Pathways/mechanisms:

There are many logical pathways which one could speculate that civil conflict might affect citizens’ political beliefs; perhaps the most conspicuous of which being trust. Lack of protection, safety, and government accountability could lead to a decrease or lack of trust in the government, while exposure to violence, fear tactics, and other criminal behavior could result in distrust toward other members of society (Jaeger and Paserman, 2008; Rohner et al., 2013). Secondarily, residual effects of civil conflict in the form of fear, in particular for safety, could dissuade citizens from various forms of political participation (Salamon and Evera, 1973).

Summary of findings:

We examine the effect of exposure to conflict during sensitive developmental periods of life on persistent changes to various measures of political beliefs and participation. The results show that the average person exposed to conflict during the age range 13 to 17 will have slightly more negative opinions about democracy well over a decade after the conclusion of the violence. Very minor long-term effects are also present for participation in civic organizations. Our results show that the average person exposed to conflict during the age range of 7 to 12 has a decreased likelihood of participating in civic organizations of approximately 3% to 6% for each additional year that the individual experienced violence in his/her district during this period of life. While these effects are economically small, it is notable that any long-term effect is detected given the likely presence of strong attenuation bias as discussed in our threats to identification. We find that the most sensitive stages of life for the formation of political beliefs, with respect to exposure to conflict, are the pre-teen and teenage years. Contrary to the effects of violence exposure on human capital and labor market outcomes, we do not find effects occurring at the earliest life stages.

Inferences:

  1. The detection of effects in both belief and action variables not only helps to validate one another, but it also suggests that beliefs indeed translate to actions. This connection provides some evidence that changes in political perception also corresponds with political behavioral change.
  2. Even though the effects we detect are relatively small, they might have been severe during and shortly following the civil war.
  3. Although we are unable to further analyze heterogeneous effects, the effects could be quite large for certain individuals who may have been exposed to more extreme amounts or types of violent acts.

Policy Implications:

Knowledge of the size and temporality of these consequential effects of civil conflict on political beliefs and participation as well as mechanisms which drive these changes would be invaluable. This would allow policy makers to develop targeted strategies to help combat the destructive effects of violence on citizens’ political beliefs and behavior that could undermine the healthy growth, development, and stability of society.

On the experience:

The thesis was almost certainly the most fun and rewarding assignment of the year, despite the imposing time constraint. Having received rigorous training to acquire the tools needed for such a project, and having discovered and nurtured our own interests via exposure to a multitude of prominent literature in various applied topics throughout the year, it was exciting to unleash the knowledge we had gained and apply some of our empirical techniques to a new and interesting research question of our own.

Throughout the program, but especially during the thesis, we were fortunate to have access to the knowledge and support of professors. Aided by some enthusiastic and accomplished mentors, we evolved our expectations of ourselves. Their expertise in areas related to those of our paper – conflicts, violence and political economy – optimized the quality of feedback and constructive critique we received in the process. The final presentation to our directors, professors and peers was another valuable component. It served as a welcome challenge that exercised essential communication skills, not only for conveying complex ideas to an audience, but adroitly and favorably reacting to questions and criticism.

The feeling of accomplishment derived from materializing a quality piece of empirical work is great motivation to build on for the future. Just one year ago, not only would this project have been impossible to execute, even the vision of it coming together was unfathomable. By the final term, we knew that we were prepared; now, we carry forth these tools, creativity, and confidence in our abilities.

On working with a coauthor:

At the outset, the thought of working with a coauthor for the thesis did not sound ideal, but ultimately, it had many advantages. It offered another opportunity to gain from the international and cultural diversity of one another and to develop these working and personal relationships; it was an invaluable intangible experience for which we will be forever thankful. Our complimentary skillsets and working styles prevented this beast from ever becoming a burden. We are proud of what we were able to achieve given the constraints, and ended up with a final project that far surpassed anything that we could have done independently within the same amount of time.

Riding the barrel: How commodity exporters can maneuver through price rapids

Master project by Martin Aragoneses, Mario Giarda, and Nikolas Schöll. Barcelona GSE Master’s in Economics

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2015. The project is a required component of every master program.


Authors: 
Martin Aragoneses, Mario Giarda, and Nikolas Schöll

Master’s Program:
Economics

Paper Abstract:

We develop a multi-sector small open economy DSGE model with government and exogenous sources of income, in particular where the country is a commodity producer such that income from commodity exports provides a large proportion of government revenue, making international uncertainty about the future commodity price matter. The objectives of this paper are to study the differences between level shocks and uncertainty shocks to commodity prices in terms of how they affect the economy, and to analyze the convenience of different fiscal rules when we allow the income processes to have moving uncertainty.

In an application, we estimate the parameters of a stochastic volatility model for Angola and Chile and we feed them to the model to see different economic responses to uncertainty shocks. Then, we investigate whether the fiscal rule should depend on the type of income process in general. In our evaluation, we focus on the short term implications of the rule in reducing volatility, wondering if it is better to spend the resources in the present than have an insurance against the cycles? Finally, we discuss some policy implications regarding the implementation of those rules. Can the rule be tractable by the agents on the model? Are the best rules sufficiently simple to be followed by the public and finally credible as an anchor of the expectation

Presentation Slides:

Mexican Energy Reform: A trigger for competition in the Mexican energy sector – Antonio Massieu ’13

Editor’s note: The following post was written by Barcelona GSE alumnus Antonio Massieu (Competition and Market Regulation ’13). Antonio is Senior Associate at Santamarina & Steta S.C. in Mexico City. 

Flickr / CC
Mexico City illuminated at night / Flickr / CC

The energy industry in Mexico is experiencing the biggest paradigm shift in the past seven decades, since the oil expropriation in the late 30’s. The energy reform that was recently enacted will dramatically change the way the energy sector is developed in Mexico, meaning the most significant economic happening since the execution of NAFTA, in 1994. Said reform will shake the Mexican energy industry vigorously, transforming a monopolistic sector operated by two state companies that performs the vast majority of the productive sector activities, into an open-market industry where players can freely participate through clear and transparent rules, under the regulation of operators and agencies endowed with broad powers. The profound changes brought by the reform occurred both in the substantive areas of the industry and in the institutional structures that shape the energy sector. In one hand, the new legal framework redefined the way the activities that constitute the productive chains of the hydrocarbons and electricity sectors are carried out; in the other hand, the institutions responsible for supervising and regulating the market performance were considerably strengthened.

Naturally, as a new market emerges, market problems also emerge. Therefore, it will be essential that the new Mexican energy market is wrapped by rules and institutions that seek to correct eventual market failures that arise, and that through their actions, establish an appropriate competitive process that yields benefits to competitors, to final consumers, and of course, to the Mexican State.

Oil&Gas

Modifications made to the Mexican Oil&Gas sector meant undoubtedly, the most important change in the whole energy industry, as a result of the energy reform. Said sector becomes an open market, where Petroleos Mexicanos (Pemex) –formerly the State-owned company that carried out all Oil&Gas exploration and exploration (E&E) activities, will compete against other players from the private sector. This competitive process is implemented through tenders conducted by the federal government, where both the private sector and Pemex will freely participate, in order to be granted with contracts for substantive E&E activities. Transparency will be an element of the utmost importance during the bidding rounds, since it will secure that Pemex and the private sector compete on equal grounds; in other words, a fair and clean competition process will only be possible as long as the federal government does not favor Pemex –which despite its participation in the open market, will remain as a state owned company- or any other bidder in the development and further resolution of the aforementioned bidding rounds, or allow any anti-competitive practices to take place (such as collusive behaviors among the bidders).

pemex
A fair and clean competition process will only be possible as long as the federal government does not favor Pemex / Flickr / CC

As for midstream activities, the energy reform introduced a new market dynamic that will foster a more effective and fair competition process. Currently, the activities of transport, storage and distribution that are developed through the pipeline grid will be operated and managed by a new government agency, the National Center for Control of Natural Gas (CENAGAS). This entity will assume control and ownership of all pipeline infrastructure that today belongs to Pemex[1] – which, due to its economic features, constitutes a natural monopoly-, and administer the activities carried out there. The CENAGAS will operate as a figure internationally known as an “ISO” (independent system operator), and will be obliged to fulfill important mandates, such as granting open and non-discriminatory access to the grid to all participants (including Pemex) and avoid problems of vertical integration in regulated activities, among others.

[1] More the 75% of the pipelines in Mexico belong to Pemex.

Electricity

The electricity sector in Mexico will also be transformed significantly by means of the energy reform, since it will stop being a vertically integrated industry where a State-owned company (Federal Electricity Commission “CFE”) conducts all activities of the productive chain industry, in order to be transformed into a liberalized sector where undertakings (both public and private) will compete against each other in an open market, aiming to satisfy the needs of consumers.

For such purpose, a wholesale spot market will be put into place. Said spot market will seek to replicate international models in order to foster competition among different companies that will be able to generate, trade and supply energy to final users. Domestic supply will be carried out by CFE –at a regulated tariff-, acquiring energy through tender processes, while industrial supply will happen through a free competition process, where generators, suppliers and consumers will complete transactions at market, non-regulated prices. In order to regulate the new market structure, the Government created the National Center of Energy Control (CENACE), which will serve as an ISO, aiming to operate and control the electric grid.

CENACE will be in charge of different relevant tasks, such as the granting of open access to undertakings participating in the electric industry, controlling the allocation of power into the grid (both demand and supply), surveilling the continuous bids posed by market participants into the spot market (in order to avoid coordinated anti-competitive effects) and coordinating the transactions executed by the market players, as well as the configuration of the market, in terms of possible vertical integration in the performance of activities by companies. This market will be particularly interesting in terms of competition policy, since CENACE will be in charge of regulating the operation of a natural monopoly –the electric grid- which is owned by one of the participants of the market, the CFE, which will compete against other undertaking in the activities of generation and supply of power; this represents a very unique case in the world, and will be added as one of the main challenges that Mexican authorities will face with the implementation of the energy reform.

CENACE  operates and controls Mexico's electric grid. / photo
CENACE operates and controls Mexico’s electric grid. / photo credit

Regulators and entities of the energy sector

One of the great challenges of the reform is to establish an institutional framework capable of operating the new emerging energy markets in Mexico, in which various companies (public and private) will interact in a competitive environment, hitherto unknown for the country. Of course, in order to accomplish this goal, it is imperative to create strong institutions, with high degrees of independence, able to issue clear regulations and impose heavy penalties to regulated undertakings.

Both regulatory agencies[1] and ISO’s will need to follow closely the development of the energy markets, and make sure that competition is achieved. Unlike what happened with the IFETEL, which is the independent body responsible for regulating the telecommunications market in Mexico, regulators and ISO’s in the energy sector were not endowed with broad powers in competition policy matters. In this sense, and despite some of its powers seek to create conditions of competition, these institutions will have to interact closely with the Federal Competition Commission, in order to timely detect and punish anti-competitive practices in the industry, in order to correct market failures and increase consumer welfare.

[1] Regulatory Commission of Energy and National Hydrocarbons Commission

Conclusions

Energy reform emerges as a great opportunity for Mexico to join the global trailblazers in the sector. At first glance, the work has been done satisfactorily, as sufficient legal and institutional conditions for implementing competitive markets were generated, where agents will interact correctly, generating consumer welfare. However, the correct development of the industry will depend not just on the rules and the institutions itself, but on the right behavior of both authorities and undertakings. Possibly the only advantage that Mexico has to be the second-to-last country in the world to undertake an opening process of this nature, is that it had the opportunity to study similar processes, and learn from positive and negative experiences in other countries. Now the challenge is to test that knowledge, and build a successful energy sector that can boost growth in the country.

Listen to a radio interview with Antonio Massieu on hydrocarbons in the Mexican energy sector (in Spanish, September 2014)


1 More than 75% of the pipelines in Mexico belong to Pemex.

2 Regulatory Commission of Energy and National Hydrocarbons Commission

Rethinking Fogape – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


Rethinking Fogape: An Evaluation of Chile’s Partial Credit Guarantee Scheme

Authors:

Margarita Armenteros, Niccolò Artellini, Andreas Hoppe, Marco Urizar, and Bernard Yaros

Master Program:

International Trade, Finance and Development

Paper Summary:

Small-and-medium enterprises (SMEs) often find themselves credit constrained due to a lack of collateral, limited credit history, and informational asymmetries that entail high monitoring costs for lenders. Governments around the world have introduced partial credit guarantee schemes (PCGS) to overcome these constraints and ease financial access for SMEs. These schemes aim to relieve credit-constrained firms by providing public collateral that reduces the risk borne by private lenders in the event of a default. In recent years, PCGS have been utilized as a way to protect SME lending in the backdrop of the global credit crunch.

Why are SMEs important? Any economy is dependent on the innovation, technological change, and job creation that new enterprises introduce, and in most cases, such firms are small in size. The role of SMEs in Chile is no exception. By 2009, the SME sector in Chile contributed to 20% of GDP, and the percentage of workers employed in SMEs stood at 56.4% in 2011. Nevertheless, Chilean SMEs have pointed to the fact that their difficulties in obtaining a formal loan rest with a lack of guarantees and high financial costs.

In 2000, Chile relaunched its public guarantee fund Fogape (Fondo de garantías para pequeños empresarios) with the goal of providing public guarantees for loans taken out by SMEs with private financial institutions. In 2007 and 2009, the government re-capitalized the fund by $10 million and $130 million respectively as a direct countercyclical response to the international financial crisis. Fogape is unique in the way by which it disseminates its guarantees into the credit market; it does so through an auctioning system that is designed to reduce moral hazard on the part of participating banks that bid for Fogape’s guarantees.

To assess econometrically the impact of Fogape on eligible firms, we used firm-level data obtained from two longitudinal surveys undertaken by the Ministry of Economy. We employed the strategy of regression discontinuity design (RDD) in which receipt of the treatment depends discontinuously on the value of one or more observable characteristics of the subjects. In our case, we exploited an arbitrary threshold of eligibility by which only firms with reported sales less than $750,000 are eligible for Fogape’s guarantees.

We estimated the intention-to-treat, or the effect of eligibility to Fogape on eligible firms vis-à-vis ineligible ones. In keeping with the literature on RDD, we restricted our sample of interest to only those enterprises whose reported sales fall within a distance h on either side of the sales cutoff of eligibility. Our robustness checks confirmed that eligible and ineligible firms at the margins on either side of the cutoff were not systematically different in key baseline characteristics.

We selected the following outcome variables in which we expected to observe a change due to Fogape’s presence: the log difference of sales from 2007 to 2009; debt-to-equity ratio in 2009; profit margin in 2009; and long-term debt over total debt in 2009.

Log Sales Growth

 

We did not obtain any statistically significant results, suggesting that the effect of eligibility is neither positive nor harmful to the various performance indicators of the eligible enterprises in our sample of interest. We found that eligible firms within our bandwidth h, ceteris paribus, experienced less proportional change in their sales from 2007 to 2009 than ineligible ones. We had expected to see firms that are eligible for credit guarantees to have higher sales growth because of the investment in working capital and productive assets that such access to credit would allow for. The finding from our RDD analysis that eligible firms had less debt-to-equity in 2009 than non-eligible ones was equally puzzling. We expected eligibility to have increased their debt-to-equity ratio vis-à-vis similar ineligible firms because of the loans they are getting through Fogape. Finally, the result that eligible, surveyed firms had less long-term to total debt in 2009 than ineligible ones within our bandwidth h was also contrary to our expectations. Fogape has put emphasis on its allocation of guarantees to long-term credit, which led us to believe that there would be a corresponding increase in the long-term over total debt ratio of eligible firms.

We started with the premise that SMEs are credit constrained, which validates Fogape’s raison d’être in the economy as a provider of credit. We also assumed that this guaranteed credit would be used for productive investments, which would then be reflected in firm profitability and sales growth. Why do we find no evidence of Fogape’s impact during the period of 2007 to 2009? Are firms receiving Fogape-guaranteed loans not truly credit constrained? Or are lenders substituting Fogape guarantees for private ones? Do these firms have the expertise or productivity to undertake successful investments? In the survey used in our study, it is possible to identify 369 firms that received Fogape guarantees for a secondary loan in 2009. Out of these firms, 40% obtained their primary loan using physical collateral and 18% using private guarantees, thereby hinting at a substitutability problem. However, it is still not possible to say that Fogape users, which already had access to the fund or other sources of credit, were not credit constrained to begin with. We suggest more research be carried out and that the portfolio of participating lenders be reviewed to determine whether lenders have been substituting private for public guarantees and if Fogape beneficiaries were truly credit constrained. We find evidence that firms also face difficulties besides credit constraints. In the 2010 World Bank Enterprise Survey, Chilean firms identify an inadequately educated workforce as their second largest constraint. Furthermore, 25% of small and 22% of medium-sized firms identify this very constraint as their main obstacle. To address productivity concerns as well as competitiveness issues facing SME’s, we propose more complementarity between Fogape and other pro-SME institutions and public programs.

Read the full paper or view slides below:

Multimarket Contact and Collusion in the Ecuadorian Pharmaceutical Sector – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.


pills

Multimarket Contact and Collusion in the Ecuadorian Pharmaceutical Sector

Authors:

Jerónimo Callejas and Igne Grazyte

Master Program:

Competition and Market Regulation

Paper Abstract:

The paper analyses the effects of multimarket contact on prices in the Ecuadorian pharmaceutical sector and its capacity to serve as a tool to facilitate collusion. We estimate the effect that the multimarket contact has on firms’ price setting behaviour by applying multimarket contact models and simple econometric techniques. Our findings show that multimarket contact has a positive effect on multivitamin prices in Ecuador and could indeed be helping to sustain collusion between firms.

Conclusions:

We have tried to estimate the possible effect that multimarket contacts might have on prices and collusion in the Ecuadorian pharmaceutical industry. For the purposes of this paper we have chosen to limit our analysis and only focus on the market for multivitamins defined at the 4th ATC level. To test our predictions we tried to replicate simple techniques used by Ciliberto and Williams (2013), Evans and Kessides (1994) and Coronado (2010). We have constructed a multimarket contact index and estimated its effect on prices by using IV and then Panel Data with fixed effects estimations and also correcting for endogeneity.

As seen in section 5, our model gives robust results and provides a reasonable confirmation of our expectations: the coefficients predicted by the two models (IV and panel data with fixed effects) have the correct sings and are highly significant. Our results show that the IV estimation alone is insufficient to successfully solve all endogeneity issues, however we find that using panel data with fixed effects and also instrumenting endogenous variables (MMC) we can successfully remove the endogeneity problem from the proposed regression and obtain unbiased estimates. Our analysis shows that average multimarket contact index has a significant positive effect on price, thus confirming our predictions that the contacts between firms in different product markets can lead to higher prices for pharmaceutical products. Although we believe that this result could be indicative of possible collusive practices in the sector, the actual existence of collusion could only be confirmed by direct evidence, such as direct contacts between firms with the aim of setting prices or sharing markets.

Due to time constraints we were only able to conduct our analysis in one market and using only simple estimations and models of multimarket contact index. Therefore possible future extensions to this paper could include estimating the effect of the multimarket contact index in other markets, possibly taking into account both private and public markets; or to estimate the effect of multimarket contact by using more complex models, such as nested logit model used in Ciliberto and Williams (2013).

Read the full paper or view slides below:

Developing a Fairtrade Cocoa Sector in Nicaragua – Master Projects 2014

Editor’s note: This post is part of a series showcasing Barcelona GSE master projects by students in the Class of 2014. The project is a required component of every master program.

Photo credit: X. Scheldemann/Bioversity International
Photo credit: X. Scheldemann/Bioversity International

 Developing a Fairtrade Cocoa Sector in Nicaragua

Authors:

Giuliano J. Bandeen, Armen Khederlarian, Edmund Moshammer, Tommaso Operto, and Christoph Sponsel

Master Program:

International Trade, Finance and Development

Project Summary:

This is a policy proposal directed at the Government of Nicaragua. Nicaragua’s cocoa industry achieves a very low export unit value in comparison to global competitors in West Africa, South East Asia and Latin America. Given the promising prospective growth of the cocoa world market and the higher price paid for Fairtrade cocoa, the aim of the present policy memo is to examine whether Nicaragua could benefit if farmers were to switch to certified cocoa production standards. We show that under perfect market conditions this would indeed result in higher profits. However we also identify that there are currently several obstacles preventing farmers from switching. These obstacles include minimum quantity requirements of international buyers, price information asymmetries, a low negotiation power in the supply chain, and financial and technological constraints. We propose three policies targeting these obstacles which consist of a provision of storage facilities, a credit guarantee and an educational campaign. All of them rely on group forming of farmers with mutual liability agreements.

Comparing the net present value profit of selling conventional cocoa with an investment in our proposed policies, which allows selling Fairtrade cocoa, we calculate an internal rate of return. This rate varies between both potential clients, European chocolate manufacturers Ritter Sport and Zotter and is 129% and 20% respectively. This hence encourages our policy proposal. By comparing different scenarios of government intervention we find that the highest average welfare gain results from an intermediate level of intervention. In this scenario the government would pay for warehouse construction and an educational campaign, and would provide a credit line guarantee to avoid that cooperatives pay a high risk premium. Additionally we include several robustness checks where we allow for changes in investment horizon, fertilizer effectiveness, government interest rate, farmers’ risk premium and most importantly international cocoa prices. We show that implementing our policies promises high potential gains from switching for individual farmers and the entire economy under a wide range of scenarios.

Read the full project report or view slides below:

The Aftermath of the Latin American Boom?

Throughout this academic year, we have learned about European policy making, immigration issues in the United States, OECD´s effort to put up with the current crisis, Spain’s unemployment and labor market and why Northern countries engage in intra-industry trade. My contribution to this blog is oriented towards the Southern Cone of the globe, and is a personal assessment of some of the challenges that Latin America in particular, faces as a region today.

Cover for the book “Enough of Histories” of Andrés Oppenheimer by artist Alfredo Sabat (2010)

While many countries in the north confront one of the worst financial crisis in history, the ability that Latin American countries have had to adapt to the recent crisis has been remarkable. Nevertheless, what was first called as the Latin American boom now appears to be coming to an end.

Continue reading “The Aftermath of the Latin American Boom?”