Measuring financial constraints of Brazilian industries: Rajan and Zingales index revisited

Fatma Bouattour

The Journal of International Trade & Economic Development, 2020, vol. 29, issue 6, 677-710

Abstract: This paper investigates the inter-sectorial capital misallocation in Brazil over 2000–2012. In this regard, I first propose Brazilian specific sector-level indicators of dependence on external finance, using the methodology of the pioneering work of Rajan and Zingales (1998, RZ). In order to assess capital misallocation, I perform correlation tests between the Brazilian and the original RZ indicators. I also compute measures of the wedge of capital for Brazilian industries, following Marconi and Upper (2017). I then examine the role of the level of financial development as well as the state-bank BNDES in driving capital misallocation in Brazil, and in explaining sector-level growth. Results show that the credit expansion in the 2000s has been less beneficial to manufacturing sectors with high dependence on external finance. This suggests that the development of the financial system in Brazil does not permit to ensure a better allocation of capital. BNDES credits are found to improve sectors’ growth of output, but their effects are reduced in sectors that highly depend on external finance. BNDES loans are also found to increase capital misallocation in Brazil.

Date: 2020
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DOI: 10.1080/09638199.2020.1718745

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