How did you come to focus your doctoral studies on financial development and international trade?
The first subject, financial development, is part of a research agenda that I started developing before joining the Institute. By contributing with academic and policy research studies, I have explored the role of financial access in enabling households and firms to achieve medium- and long-term projects and buffering adverse shocks in the short term. For my doctoral studies, I went one step further to study the interlinkage between access to finance and labour markets and between credit markets and exports.
The second topic came up as part of an interest in delving into the study of globalisation and the internationalisation of the economies. Living in Geneva, a city with rich and highly technical discussions on international economics, particularly on international trade, facilitated my learning and exchanging with academics, policy advisors, and policymakers. Thus, I delved into the study of the features of exporter-importer relationships and their role in shaping international trade outcomes.
Can you describe each of your three PhD essays?
Let me say first that although I used Colombian data in all three papers because the quality and granularity of the databases are outstanding, the addressed topics are relevant for other developing economies, and the analysis allows to discern further the characteristics and mechanisms observed in emerging economies.
The first essay, titled “The Effect of Informal Employment on Household Bank Indebtedness in Colombia”, studies the impact of borrowing constraints on household financial planning. Mainly, I analyse the effect of informal employment on access and participation of households in the bank credit market in Colombia. Furthermore, I quantify the impact of informal employment on the household’s level of bank indebtedness. Since the level of indebtedness is only observable when the household has a loan, I follow a two-step correction to fix potential sample selection bias. I contribute to the literature on households’ borrowing constraints by exploring the less-studied role of informal employment as a determinant of household credit demand and by implementing an identification at a higher level of granularity to fix the sample selection issue. I find that informal employment makes a household less likely to have access to credit and also to take out a bank loan, vis-a-vis a household with formal employment. Furthermore, the results suggest that a Colombian household with an informal employee has between 15% to 33% less bank debt than a household with formal employment.
The second essay, “Sectoral Dynamics of Colombian Exports during the Financial Crisis”, is jointly written with Camilo Bohorquez-Penuela, a researcher at the Colombian Central Bank. We address the question of whether Colombian exports were affected by the bank credit shock during the 2008 financial crisis. Since the magnitude of the impact for exporters can be proportional to their dependence on bank loans and the availability of non-bank financing alternatives, we test whether the financial shock differently affected manufacturing and commodity exports. We identify the impact of credit on exports by instrumenting loan supply with the exogenous shock in the banks’ foreign financing. We find evidence that the downturn of credit supply affected the value and volume of manufacturing exports and increased the likelihood of a manufacturing exporter leaving a product-destination market. Mainly, a decrease of 10% in bank credit supply reduced the value and volume of manufacturing exports by 2.5% and increased the likelihood that a manufacturing exporter leaves a product-destination market by 0.6%. We don’t find evidence that the downturn in credit supply reduced the amount of exports in commodities, suggesting to some extent that the banking system is not a critical financial provider for non-manufacturing exporters vis-à-vis manufacturing exporters.
Finally, the third essay is titled “The Role of Match Age on the Reduction of Penetration Costs: A Trade Network Approach” and is jointly written with Felipe Bahamondes, a PhD candidate at the Institute. We explore the role of relationships among exporters and importers, shaping international trade outcomes. First, we test whether relationships duration affects the intensive and extensive trade margins. Our empirical estimations use an outstanding database at the exporter–importer level, including all imports to Colombia for 2005–2018. We show that exporter–importer relationships follow a life cycle pattern: relationships start with an exploration stage in which both importer and exporter learn about each other and the market’s general conditions. Over time, the learning and increasing trust deepens linkages and boosts trade within the relationship. Then, after a period of consolidation, fractures in the commitment between the counterparts start a decline and eventually break up the relationship. We also find that older relationships hold larger market shares of the varieties. Because the evidence consistently suggests the critical role of relationship duration, we propose a theoretical model of the entrance to a foreign market in which the relationship duration favours the exporter by lowering penetration costs. The model predicts that the exporter will decrease their penetration costs by trading with an importer with whom it has been previously dealing in other goods.
More concretely, how might this model help exporters and importers in their activities?
Information frictions are a pervasive feature in international trade. Recent literature has highlighted their relevance in determining global markets’ trade dynamics, prices, and local economies’ consumer welfare. Some studies even find that information frictions may hinder international trade in the same way gravity variables do. To overcome information frictions, firms acquire market knowledge by investing resources, observing their competitors, and relying on partners in their networks.
Our findings underline the relevance of long-standing relationships among exporters and importers and shed light on the critical role of relationship duration in trading dynamics. Furthermore, our theoretical model shows that long-standing relationships alleviate information frictions by reducing penetration costs when an exporter enters a variety market.
What could be the social and political implications of your thesis?
The evidence regarding the negative impact of informal employment on access to and use of bank loan facilities and on the amount borrowed from banks reasserts the link between credit and labour markets. This relationship is a critical issue in developing economies with little financial depth and a recent record of policies to deregulate the financial system. A well-intended programme to boost financial access and promote the use of the credit market may be hindered if it is not accompanied by labour reforms to promote formalisation and vice versa.
On the one hand, informal employees face challenges to meet the bank’s requirements for proving repayment capacity and collateral assets. In this case, the target population may not meet the minimum conditions to access credit. On the other hand, if informality in labour markets is seen as an outcome from agents maximising their decisions on the benefits and costs of being informal, an improvement in the conditions to access bank services should increase the costs of being an informal employee and create incentives for formalisation.
As a Colombian economist, what do you think of the tax reform and the protests it aroused in Colombia?
The Colombian government’s tax reform presented to the Senate last month was the spark that lit the current crisis of protests. However, it is not the only reason to explain why people are in the streets. Colombia has a set of structural and social drawbacks that the pandemic has exacerbated. To answer your question on the tax reform, it is good to start by saying that the government urges resources for the upcoming years. The pandemic has strongly decreased the government's revenue and increased its expenditures. As a result, the government and private analysts expect a fiscal deficit of 9% of GDP in 2020 and project a level of 8% of GDP in 2021. It is a significant increase in the fiscal deficit compared to the average of 3% over 1990–2019.
Additionally, it seems that the government will face unfavorable conditions in the international debt markets. The current level of sovereign debt is above 60% of GDP, and due to the strong drop in the GDP, it signals some external vulnerability. Furthermore, the credit rating agency Standard & Poor’s downgraded the sovereign debt to the so-called “junk bonds” level in the past weeks.
Therefore, Colombia urges a tax reform to alleviate the current and upcoming financial constraints of the government. The challenge is to design a project that can collect resources according to the increasing needs of the government and be structured so that the most vulnerable population does not end up suffocated with additional charges. The withdrawn tax reform project had interesting elements of simplicity, long-term view, and green taxes. However, many components, such as increases in the value-added tax and the personal income tax, are sensitive topics amid the enormous economic crisis we live in today.
Are you still doing research in your post-PhD life?
I am a consultant for the Investment Climate Unit of the International Finance Corporation (IFC), a member institution of the World Bank Group. I contribute with applied research like the one I performed in my doctoral dissertation to advise emerging markets governments on policies to facilitate integration with global markets and foster sustainable investments.
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Mauricio Alejandro Pinzon Latorre defended his PhD thesis in Development Economics in March 2021. Professor Cédric Tille presided the committee, which included Professor Jean-Louis Arcand and Professor Ugo Panizza, co-supervisors, and Mr Arturo Galindo, Member of the Board of Governors, Central Bank of Colombia.
Full citation of the PhD thesis:
Pinzon Latorre, Mauricio Alejandro. “Three Essays on Development Economics.” PhD thesis, Graduate Institute of International and Development Studies, Geneva, 2021.
For access, please contact Dr Pinzon Latorre.
Good to know: members of the Graduate Institute can download the PhD thesis from this page of the Institute’s repository.
Banner image: excerpt from a picture by RUBEN M RAMOS/Shutterstock.com.