Enhancing Social Capital in Latin America

Since its formation, the Latin America Research Center (LARC) has worked to enhance intellectual capital creation by working with academics as well as business leaders in the region.

Programs in this area, supported by the LARC include:

The Colloquium on Participant-Centered Learning (CPCL), is an HBS course for faculty at business schools in emerging economies who are trained in interactive methods of teaching and learning.

The Social Enterprise Knowledge Network (SEKN), a consortium of eleven business schools that research and develop teaching cases on social enterprise in leading Latin American business schools.

In August 2008 the SEKN hosted a colloquium, Challenges and Opportunities of Inclusive Businesses.

Latin America

2009

Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930

Martínez Fritscher, André C., and Aldo Musacchio
October 2009

There is a large amount of literature that aims to explain what determines country risk (defined as the difference between the yield of a sovereign's bonds and the risk-free rate). In this paper, we contribute to the discussion by arguing that an important explanatory factor is the impact that commodities have on the capacity to pay. We use a newly created database with state-level fiscal and risk premium data for Brazil states between 1891 and 1930 to show that Brazilian states with natural endowments that were allowed to export commodities high in demand (e.g., rubber and coffee) ended up having higher revenues per capita and, thus, lower cost of capital. We also explain that the variation in revenues per capita was both a product of the variation in natural endowments (i.e., the fact that states cannot produce any commodity they want) and a commodity boom that had asymmetric effects among states. These two effects generated variation in revenues per capita at the state level thanks to the extreme form of fiscal decentralization that the Brazilian government adopted in the Constitution of 1891, which gave states the sole right to tax exports. We end by running instrumental variable estimates using indices of export prices for each state to instrument for revenues per capita. Our instrumental variable estimates confirm our results that states with commodities that had higher price increases had lower risk premia.

Harvard Business School Working Paper, No. 10-027

Government Advertising and Media Coverage of Corruption Scandals

Di Tella, Rafael, and Ignacio Franceschelli
October 2009

We construct measures of the extent to which the four main newspapers in Argentina report government corruption on their front pages during the period 1998-2007 and correlate them with the extent to which each newspaper is a recipient of government advertising. The correlation is negative. The size is considerable: a one standard deviation increase in monthly government advertising (0.26 million pesos of 2000) is associated with a reduction in the coverage of the government's corruption scandals by almost half of a front page per month, or 37% of a standard deviation in our measure of coverage. The results control for newspaper, month, and individual corruption scandal fixed effects.

Harvard Business School Working Paper, No. 10-029, October 2009;
NBER Working Paper Series, No. 15402, October 2009

Medium Term Business Cycles in Developing Countries

Comin, Diego, Norman Loayza, Farooq Pasha, and Luis Serven
October 2009

We build a two-country asymmetric DSGE model with two features: (1) a product cycle structure determines the range of intermediate goods used to produce new capital in each country and (2) there are investment flow adjustment costs in the developing economy. We calibrate the model to match the Mexico-U.S. trade and FDI flows. The model is able to explain (1) why U.S. shocks have a larger effect on Mexico than in the U.S. and hence why the Mexican economy is more volatile than the U.S.; (2) why U.S. business cycles lead over medium-term fluctuations in Mexico; and (3) why Mexican consumption is not less volatile than output.

American Economic Review

Small and Medium Firm Lending in Mexico: Lessons and Current Issues

Canales, Rodrigo, and Ramana Nanda
July 2009

Mexico is often cited as one of the world's most entrepreneurial countries in terms of the percentage of its population that has started or is in the process of starting a business venture. Yet Mexico does not seem to be very friendly to entrepreneurs, as confirmed by the fact that a large portion of new businesses is created in the informal sector. The authors identify the main obstacle to this area as the country's insufficient access to credit for small entrepreneurs. The chapter is devoted to assessing recent programs adopted in Mexico to foster SME competitiveness (including programs to increase capital availability) and draws some important conclusions for policymakers in their efforts to improve the micro-components of national competitiveness.

Mexico Competitiveness Report 2009

The Return of State-Owned Enterprises: Should We Be Afraid

Musacchio, Aldo, and Francisco Flores-Macias
July 2009

The global financial crisis of 2008-2009 has prompted many industrialized states worldwide to increase their stakes in private corporations. This wave of partial nationalizations has come amidst full-scale expropriations in developing countries such as Venezuela, Bolivia, and Ecuador. Does this signal a return of "state capitalism"? If so, what should we expect of the state-owned enterprises (SOEs) that spring back into economic life? Should we be afraid that this return to state capitalism will bring back the practices of the large, inefficient SOEs that countries privatized during the 1980s and 1990s? From a look at the popular press, one certainly gets the impression that there is a return of "state capitalism," as if state intervention in industrial activity actually went away for a significant period of time. Moreover, many observers of the recent wave of nationalizations and government-backed bank capitalizations are afraid that a return to the wasteful state-owned enterprises of the past is imminent. In this essay we propose two alternative views. First, we stress the resilience of state-owned enterprises, which have been around for more than one hundred years in the world's capitalist economies. In fact, state interventions similar to those of today were seen in the pre-World War I period, an era known by some economic historians as "the first big wave of globalization." Second, we argue that there is no reason to believe that the SOEs of the twenty-first century will be as inefficient as those of the 1970s and 1980s. The world has changed much since former British Prime Minister Margaret Thatcher first began implementing large-scale privatizations. In fact, we document some cases of present-day competitive SOEs and explain some of the conditions that made them efficient, even in comparison to their private counterparts. We do not argue that all SOEs are efficient or that it is optimal to have government ownership of banks and other companies. What we aim to show is that the return of state capitalism is likely to be different this time since, we believe, the environment is different and many SOEs have learned the lessons of the past.

Harvard International Review (March 2009)

The Geography of Trade in Online Transactions: Evidence from eBay and MercadoLibre

Hortacsu, Ali, Francisco de Asís Martínez-Jerez, and Jason Douglas
April 2009

We analyze geographic patterns of trade between individuals using transactions data from eBay and MercadoLibre, two large online auction sites. We find that distance continues to be an important deterrent to trade between geographically separated buyers and sellers, though to a lesser extent than has been observed in studies of non-Internet commerce between business counterparties. We also find a strong "home bias" for trading with counterparties located in the same city. Further analyses suggest that location-specific goods such as opera tickets, cultural factors, and the possibility of direct contract enforcement in case of breach may be the main reasons behind the same-city bias.

American Economic Journal: Microeconomics 1, no. 1 (February 2009): 53-74

What T. R. Took: The Economic Impact of the Panama Canal, 1903-1937

Mauer, Noel, Carlos Yu
March 2009

The Panama Canal was one of the largest public investments of its time. In the first decade of its operation, the canal produced significant social returns for the United States. Most of these returns were due to the transportation of petroleum from California to the East Coast. The United States also succeeded in leveraging the threat of military force to obtain a much better deal from the Panamanian government than it could have negotiated otherwise.

Journal of Economic History 68, no. 3 (September 2008)

When Does Domestic Saving Matter for Economic Growth? (pdf)

Comin, Diego, Philippe Aghion, Peter Howitt, and Isabel Tecu
January 2009

Can a country grow faster by saving more? We address this question both theoretically and empirically. In our theoretical model, growth results from innovations that allow local sectors to catch up with frontier technology. In poor countries, catching up requires the cooperation of a foreign investor who is familiar with the frontier technology and a domestic entrepreneur who is familiar with local conditions. In such a country, domestic saving matters for innovation, and therefore growth, because it enables the local entrepreneur to put equity into this cooperative venture, which mitigates an agency problem that would otherwise deter the foreign investor from participating. In rich countries, domestic entrepreneurs are already familiar with frontier technology and therefore do not need to attract foreign investment to innovate, so domestic saving does not matter for growth. A cross-country regression shows that lagged savings is positively associated with productivity growth in poor countries but not in rich countries. The same result is found when the regression is run on data generated by a calibrated version of our theoretical model.

Harvard Business School Working Paper, No. 09-080, January 2009

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2008

Is There a Better Commitment Mechanism than Cross-Listings for Emerging Economy Firms? Evidence from Mexico

Siegel, Jordan I.
December 2008

The last decade of work in corporate governance has shown that weak legal institutions at the country level hinder firms in emerging economies from accessing finance and technology affordably. To attract outside resources, these firms must often use external commitments for repayment. Research suggests that a common commitment mechanism is to borrow U.S. securities laws, which involves listing the emerging economy firm's shares on a U.S. exchange. This paper uses a quasi-natural experiment from Mexico to examine the conditions under which forming a strategic alliance with a foreign multinational firm is actually a superior mechanism for ensuring good corporate governance.

Journal of International Business Studies (forthcoming).

Reality versus Propaganda in the Formation of Beliefs about Privatization

Di Tella, Rafael, Sebastian Galiani, and Ernesto Schargrodsko
November 2008

Argentina privatized most public utilities during the 1990s but re-nationalized the main water company in 2006. We study beliefs about the benefits of the privatization of water services amongst low and middle-income groups immediately after the 2006 nationalization. Negative opinions about the privatization prevail. These are particularly strong amongst households that did not benefit from the privatization and amongst households that were reminded of the government's negative views about the privatization. A person's beliefs of the benefits of the water privatization were almost 30% more negative (relative to other privatizations) if his/her household did not gain access to water after the privatization. Similarly, a person's view of the water privatization (relative to other privatizations) was 16% more negative if he/she was read a vignette with some of the negative statements about the water privatization that Argentina's President expressed during the nationalization process. Interestingly, the effect of the vignette on households that gained water is insignificant, while it is largest (and significant) amongst households that did not gain water during the privatization. This suggests that propaganda was persuasive when it had a basis on reality.

NBER Working Paper Series, No. 14483, November 2008

Laws versus Contracts: Legal Origins, Shareholder Protections, and Ownership Concentration in Brazil, 1890-1950

Musacchio, Aldo
November 2008

This article examines some of the institutional conditions that facilitated the development of equity markets in Brazil. A critical factor was the addition of protections for investors to corporate bylaws, which enabled relatively large corporations in Brazil to attract investors in large numbers. By availing themselves of this strategy, the firms generated a relatively low concentration of ownership before 1910. Archival evidence, such as company statutes and shareholder lists, reveals that the addition of voting rights to their bylaws, particularly maximum vote provisions and graduated voting scales (which stipulated that less-than-proportional votes increase in parallel with shareholdings), allowed many Brazilian corporations to balance the relative voting power of their small and large investors. In companies that made such arrangements, the concentration of ownership and control was sharply lower than in the average company. Judging by the Brazilian companies examined for this article, it also appears that the concentration of control was significantly lower before 1910 than it is today.

Business History Review 82, no. 3 (fall 2008)

Credit-reporting Agencies in Argentina: A Historical Exploration of Information Sharing Mechanisms in Credit Markets, 1892-c.1935

Lluch, Andrea M.
July 2008

During the last decades, economic theory has devoted considerable attention to the role of information asymmetry in credit markets and problems connected with this phenomenon. However, institutional aspects-particularly, how information is gathered and shared-have not been studied as thoroughly. Only recently has research been conducted on the origins of credit-reporting agencies and on the different responses lenders designed to minimize the impact of information asymmetries. As far as Latin America is concerned, there is no previous historical research available. In that sense, this paper aims to depict some of the mechanisms used within the Argentine business community at the beginning of the twentieth century to generate and disclose information about borrowers, with particular emphasis on Argentina's first credit-reporting agencies.

Investigaciones de Historia Económica (forthcoming)

Bank Structure and the Terms of Lending to Small Businesses (pdf)

Canales, Rodrigo and Ramana Nanda
June 2008

Using loan-level data from Mexico, we study the relationship between the organizational structure of banks and the terms of lending to small businesses. We find that banks with decentralized lending structures-where branch managers have autonomy over the terms of lending-give larger loans to small firms and those with more "soft information"-particularly in states with weak legal enforcement of financial contracts. However, decentralized banks are also more responsive to the competitive environment when setting loan terms. They are more likely to restrict credit and to charge higher interest rates when they have market power, more so to smaller firms that have fewer outside options for external finance. These findings highlight a "darker side" to decentralized banks and suggest that the relative benefit of a decentralized bank structure for small business lending depends critically on the nature of the competitive environment in which banks are located.

Harvard Business School Working Paper, No. 08-101, June 2008

Political Instability and Untimely Dissolution: Partnerships, Corporations, and the Mexican Revolution, 1910-1929 (pdf)

Musacchio, Aldo, Aurora Gómez-Galvarriato, and Rodrigo Parral
May 2008


Harvard Business School Working Paper, No. 08-092, April 2008

Synchronicity and Firm Interlocks in an Emerging Market

Khanna, Tarun, and Catherine Thomas
April 2008

Stock price synchronicity has been attributed to poor corporate governance and a lack of firm-level transparency. This paper investigates the association between different kinds of firm interlocks, control groups, and synchronicity in Chile. A unique data set containing equity cross holdings, common individual owners, and director interlocks is used to map out firm ties and control groups in the economy. While there is a correlation between synchronicity and shared ownership and equity ties, synchronicity is more strongly correlated with inter-locking directorates. The presence of shared directors is associated with either reduced firm-level transparency or increased correlation in firm fundamentals, for example, due to joint resource allocation within the group. In this way, the results are consistent with models where firm interlocks facilitate coordination across firms and are also consistent with models where relationships affect capital allocation.

Journal of Financial Economics (forthcoming)

Bank Accounting Standards in Mexico. A Layman's Guide to Changes 10 Years after the 1995 Bank Crisis(pdf)

Del Angel, Gustavo A., Stephen Haber, and Aldo Musacchio
April 2008

After the 1995 crisis, the Mexican banking system experienced significant changes in bank accounting standards. Most of these changes took place between 1996 and 2001, and had a significant impact in the structure and interpretation of financial information of banks. This document explains the major changes on bank accounting, their purpose and structure, and discusses their impact on financial information reported by Mexican banks. It also provides the English equivalent of the major accounting terms used by Mexican banks. The main purpose of this document is to provide a standardized guide to better understand financial information produced before and after the crisis, within the current context of internationalization of Mexican banks' ownership.

Harvard Business School Working Paper, No. 08-090, April 2008

Cost Reductions, Cost Padding and Stock Market Prices: The Chilean Experience with Price Cap Regulation

Di Tella, Rafael, and Alexander Dyck
February 2008

We study the Chilean electricity distribution industry and find that costs (the ratio of reported costs to revenues) have fallen since price caps were introduced. Cost reductions are U-shaped since 1989: Strong initial cost reductions reverse every four years, coinciding with regulatory reviews. A possible explanation is that firms are behaving strategically. We then use stock market data to complement our study. We construct a measure of cumulative abnormal returns for regulated firms around their quarterly announcements, and a measure of "naive" cost expectations which excludes any indication of the occurrence of review periods. In general, cost reports in excess of naive cost expectations have a negative effect on returns, even after we control for company fixed effects. The exception is cost "surprises" that happen during review periods, which increase abnormal returns. The estimated effects fall over time. This is consistent with the hypothesis of strategic firms and that the regulatory regime translates these "games" into higher rates in a way that is not completely anticipated by the market. More generally, the results suggest there may be value in complementing regulatory procedures with stock market information.

Economia (forthcoming)

Learning Processes in Environmental Policy Making and Implementation

Ebrahim, Alnoor S.
February 2008

This paper explores how "learning" occurs in the context of environmental policy formulation and implementation. Rather than viewing policy learning as a rational and technocratic process, the emphasis here is on the political and institutional contexts within which opportunities for policy learning emerge. In particular, opportunities for policy learning are examined with respect to (a) agenda or priority-setting on environmental issues, (b) stakeholder access and representation in policy formulation, and (c) accountability in implementation. Examples are drawn from the experiences of South Africa and Brazil. Several preliminary factors are identified that may enhance policy learning, while acknowledging the constraints of bounded rationality and relationships of power.

Harvard Business School Working Paper, No. 08-071, February 2008

Crime and Beliefs: Evidence from Latin America

Di Tella, Rafael, Javier Donna, and Robert MacCulloch
February 2008


Economics Letters (forthcoming)

Laws vs. Contracts: Legal Origins, Shareholder Protections, and Ownership Concentration in Brazil, 1890-1950 (pdf)

Musacchio, Aldo
January 2008

The early development of large multidivisional corporations in Latin America required much more than capable managers, new technologies, and large markets. Behind such corporations was a market for capital in which entrepreneurs had to attract investors to buy either debt or equity. This paper examines the investor protections included in corporate bylaws that enabled corporations in Brazil to attract investors in large numbers, thus generating a relatively low concentration of ownership and control in large firms before 1910. Archival evidence such as company statutes and shareholder lists document that in many Brazilian corporations voting rights provisions, in particular, maximum vote provisions and graduated voting scales (that provided for less than proportional votes as shareholdings increase), balanced the relative voting power of small and large investors. In companies with such provisions the concentration of ownership and control is shown to have been significantly lower than in the average company. Overall, from the sample of Brazilian companies studied it seems like the concentration of control was significantly lower before 1910 than what it is today.

Harvard Business School Working Paper, No. 08-053, January 2008

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2007

The Country Effect: Leveraging the Origin of a Brand for the Global Markets (El efecto país: cuándo capitalizar el origen de una marca en los mercados globales)

Deshpandé, Rohit
November 2007

Entre los consumidores más jóvenes, la procedencia de una marca no hace tanta diferencia. De hecho, un estudio reciente de Samsung descubrió que la imagen país no exhibe ningún impacto significativo en la imagen de marca ni en la intención de compra, al menos cuando se trata de una marca establecida. ¿Pero qué pasa cuando la marca es nueva o relativamente desconocida en el mercado? El profesor de Harvard Business School Rohit Deshpandé responde que en esos casos el efecto país puede tener un impacto primario en la evaluación de la marca mientras se vuelve parte integrante de la imagen de marca. Por ello es que existen casos (como los que usa como ejemplo: Lan Airlines, Corona, Café Colombia, SIA, entre otros) en los que una empresa puede ganar acceso a los mercados globales si escoge la forma adecuada de lidiar con su origen: ya sea matizándolo, ocultándolo o realzándolo para crear la imagen con la que desea llegar a los consumidores del mundo. Para afrontar adecuadamente esta decisión, el autor hace cuatro recomendaciones:
• La mejor estrategia de ingreso no es necesariamente la mejor estrategia para el desarrollo de mercado.
• El desarrollo económico de un país no siempre se correlaciona con la etapa de desarrollo del mercado para los productos.
• Conocimiento del marketing (relacionado con el producto) y conocimiento del mercado (relacionado con el territorio) son dos cosas distintas.
• Pocos clientes se benefician del marketing globalizado, pero las empresas de marketing sí lo hacen. Si, como muchas empresas latinoamericanas, su empresa quiere dejar de vender productos de bajo costo y saltar a los productos premium en el mercado global, debe poner atención al afecto país.

Harvard Business Review - America Latina (August 2007): 2-6.

El fin del imperialismo corporativo

C.K. Prahalad y Kenneth Lieberthal Con comentario de Gustavo Herrero

En su búsqueda de crecimiento, las empresas multinacionales no tendrán más alternativa que competir en los grandes mercados emergentes de China, India, Indonesia y Brasil. Aunque todavía es común preguntarse cómo esas empresas cambiarán la vida en esos mercados, sus ejecutivos harían bien en dar vuelta la pregunta y preguntarse cómo esos mercados transformarán a sus multinacionales. Para ser exitosas deberán repensar cada elemento de sus modelos de negocios, sostienen los autores en este influyente artículo de HBR publicado en 1998.

Harvard Business Review - America Latina (November 2007)

Can Civil Law Countries Get Good Institutions? Lessons from the History of Creditor Rights and Bond Markets in Brazil

Musacchio, Aldo
November 2007

Does a legal tradition adopted in the distant past constrain a country's ability to provide the protection that investors need for financial markets to develop? This paper contributes to the literature that studies the connection between law and finance by looking at the relationship between legal origin and the development of bond markets. The paper shows that there is too much variation over time in terms of bond market size, creditor protections, and court enforcement of bond contracts to assume that the adoption of a legal system can constrain future financial development. The paper examines in detail the evolution of bond markets in Brazil, a French civil law country, and provides preliminary results of similar variation for a small cross-section of countries.

Journal of Economic History (forthcoming).

Related Lending and Economic Performance: Evidence from Mexico

Maurer, Noel, and Stephen Haber
October 2007

Related lending, a widespread practice in LDCs, is widely held to encourage bankers to loot their banks at the expense of minority shareholders and depositors. We argue that neither looting nor credit misallocation are necessary outcomes of related lending. On the contrary, related lending often exists as a response to high information and contract enforcement costs. Whether it encourages looting depends on other institutions, particularly those that create incentives to monitor directors. We examine Mexico's banking system, 1888-1913, in which there was widespread related lending. We find little evidence of credit misallocation despite a financial crisis and government-organized rescue.

Journal of Economic History 67, no. 3 (September 2007): 551-581.

Interdisciplinary Research Within a Modified Competing Values Model of Organizational Performance: Results from Brazil

Deshpande, Rohit
August 2007

An interdisciplinary model of firm performance based on a modified and extended Competing Values Model of Organizational Culture combines elements drawn from three different research traditions--organizational culture and climate from organizational behavior, innovativeness from economics, and market orientation from marketing. The model has been used to analyze firm performance in business-to-business markets in a number of countries in the industrial and the industrializing worlds. In general, successful firms are found to be innovative, market oriented, and to have organizational cultures and decision-making climates which are externally oriented. In most countries, there are also identifiable national culture-specific patterns. In this paper, we focus on the inter-relationships among the streams of research upon which the model is built. Using Brazil, previously unstudied in this context, we attempt to identify a structure among the model elements to test hypotheses about (1) the inter-relationships of the explanatory variables, and (2) the relationships of the explanatory variables to each other and to firm performance. We find that the contributing disciplines produce interpretable results, and that performance is improved by achieving good results simultaneously along several inter-related dimensions.

Journal of Global Marketing 20, nos. 2/3 (2007): 5-16

Comercio y Credito Agrario: Un estudio de caso sobre las practicas y logicas crediticias de comerciantes de campana a comienzos del siglo XX en el Territorio Nacional de La Pampa

Lluch, Andrea M.
January 2007

Durante la segunda mitad del siglo XIX y el primer tercio del XX la expansion agraria desempeñó un papel central en la formación del capitalismo argentino. Articulando este proceso se desarrollaron una serie de mecanismos de intermediación, encargados de canalizar la producción de la campaña hacia los puertos además de proveer una serie de insumos, maquinarias, alimentos y financiación a los productores. Los almacenes de ramos generales -surgidos de la adaptación que implicó la reconversión de los anteriores comercios o pulperías- fueron unos de los más significativos empresarios comerciales y desempeñaron múltiples funciones en el proceso de incorporación de las economías locales al mercado internacional. En este artículo se presentan nuestras conclusiones alrededor de los mecanismos crediticios -directos e indirectos-, los costos, prácticas y lógicas halladas en el estudio del ejercicio habilitador de los intermediarios comerciales. Para avanzar en el análisis de estos temas fue necesario reducir la escala de observación y concentrarse en estudios de caso de empresas dedicadas al ejercicio minorista en áreas rurales.

Bolet­ín del Instituto de Historia Argentina y Americana Doctor Emilio Ravignani 29 (2006)

Normas Contables Bancarias en Mexico

Del Angel, Gustavo, Stephen Haber, and Aldo Musacchio
January 2007

Una guía de los cambios para legos diez años después de la crisis bancaria de 1995.

El Trimestre Economico 73, no. 4 (October/December 2006)

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2006

El Mundo del Fiado. Crédito, Comerciantes y Productores Rurales. 1897-1930

Lluch, Andrea M.
August 2006

Anuario IEHS 20, no. 20 (2006)

Bankers, Industrialists, and their Cliques: Elite Networks in Mexico and Brazil During Early Industrialization (pdf)

Musacchio, Aldo, and Ian Read
May 2006

Enterprise & Society (forthcoming)

Natural Resources, Institutions, and Civil War: Lessons from Mexico

Maurer, Noel
April 2006

A growing literature in economics and political science argues that natural-resource-abundant countries are more likely to be governed by corrupt governments and experience political instability. The experience of Mexico during 1880-1930 casts doubt on this hypothesis. Mexico's mining industry grew rapidly under a very corrupt dictatorship. When that dictatorship fell and the polity lapsed into civil war, the mining industry was barely affected. The Mexican case suggests that extractive industries may be remarkably insensitive to changes in economic institutions or political instability. Causality may run from corrupt government or civil disorder to an economy relatively dependent on natural resource extraction, rather than the other way around.

Harvard Business School Working Paper No. 06-044, 2006

Related Lending and Economic Performance: Evidence from Mexico, 1888-1913 (pdf)

Maurer, Noel
April 2006

There is a consensus among academics and policy makers that related lending, a widespread practice in most LDCs, should be discouraged because it provides a mechanism through which bankers can loot their own banks at the expense of minority shareholders and depositors. We argue that neither looting nor credit misallocation are necessary outcomes of related lending. On the contrary, related lending often exists as a response by bankers to high information and contract enforcement costs. Whether it encourages looting crucially depends on the other institutions that support the banking system, particularly those give depositors and outside shareholders incentives and mechanisms to monitor directors, and that give directors incentives to monitor one another. We operationalize this argument by examining an LDC banking system in which there was widespread related -- Mexico from 1888 to 1913. We find little evidence, during this 25 year period, of tunneling or credit misallocation-even in the midst of a major, externally caused financial crisis that occasioned a government-organized rescue. The banking system was, in fact, remarkably stable and manufacturing enterprises that received related loans performed at least as well as their competitors.

Harvard Business School Working Paper No. 06-045, 2006

Was NAFTA Necessary? Trade Policy and Relative Economic Failure since 1982 (pdf)

Maurer, Noel
April 2006

Mexico signed NAFTA in 1994. NAFTA's primary importance was not in providing market access to the United States. Rather, its primary importance was in providing investor protections to foreign direct investment. NAFTA succeeded in its instrumental goal of increasing foreign direct investment. Increased FDI, however, was limited mostly to manufacturing and has had relatively little impact on the bulk of the economy. Without reforms in the finance and energy sectors, and greater security of property rights for domestic investors, Mexico will be doomed to continuing subpar economic performance.

Harvard Business School Working Paper No. 06-043, 2006

What Roosevelt Took: The Economic Impact of the Panama Canal, 1903-29 (pdf)

Maurer, Noel
April 2006

The Panama Canal was one of the largest public investments of its time. In the first decade of its operation, the Canal produced significant social returns for the United States. Most of these returns were due to the transportation of petroleum from California to the East Coast. Few of these returns, however, accrued to the Panamanian population or government. U.S. policy deliberately operated to minimize the effects of the Canal on the Panamanian economy. The major exception to this policy was the American anti-malarial campaign, which improved health conditions in the port cities.

Harvard Business School Working Paper No. 06-041, 2006

'Plata o Plomo': Bribe and Punishment in a Theory of Political Influence (pdf)

Dal Bó, Ernesto, Pedro Dal Bó, and Rafael Di Tella
February 2006

We present a model where groups attempt to exert influence on policies using both bribes (plata, Spanish for silver) and the threat of punishment (plomo, Spanish for lead). We then use it to make predictions about the quality of a country's public officials and to understand the role of institutions granting politicians with immunity from legal prosecution. The use of punishment lowers the returns from public office and reduces the incentives of high ability citizens to enter public like. Cheaper plomo and more resources subject to official discretion are associated with more frequent corruption and less able politicians. Moreover, the possibility of punishment changes the nature of the influence game, so that even cheaper plata can lower the ability of public officials. Protecting officials from accusations of corruption (immunity) will decrease the frequency of corruption and may increase the quality of politicians if the judiciary is weak. These predictions are the opposite to those emerging from a model where only bribes are used.

American Political Science Review 100, no.1 (February 2006): 41-53

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