DO LENDERS F A VOR POLITICALLY教师节开场白
CONNECTED FIRMS?
RENT PROVISION IN AN EMERGING FINANCIAL MARKET
Asim Ijaz Khwaja and Atif Mian
April2005
Abstract
Corruption by the politically connected is often blamed for economic ills,particularly in less developed economies.Using a loan-level data t of more than90,000…rms that reprents
the univer of corporate lending in Pakistan between1996and2002,we investigate rents to
politically connected…rms in banking.Classifying a…rm as“political”if its director participates
in an election,we examine the extent,nature,and economic costs of political rent provision.
We…nd that political…rms borrow45percent more and have50percent higher default rates.
Such preferential treatment occurs exclusively in government banks-private banks provide no
political favors.Using…rm…xed e¤ects and exploiting variation for the same…rm across lenders
or over time allows for cleaner identi…cation of the political preference result.We also…ndyuo
that political rents increa with the strength of the…rm’s politician and whether he or his
party is in power,and fall with the degree of electoral participation in his constituency.We
provide direct evidence against alternative explanations such as socially motivated lending by
government banks to politicians.The economy wide costs of the rents identi…ed are estimated
to be0.3to1.9percent of GDP every year.
I.Introduction
Rent-eking and corruption are thought to be pervasive around the world,and there is increasing
recognition that they impo substantial economic costs.Yet,despite a rich theoretical literature1 ther
e is limited empirical work.While cross country studies are uful in relating subjective mea-sures of corruption to poor economic outcomes,they do not identify the prence of,or channels through which corruption and rent provision occurs.
This paper us a unique loan level data t from Pakistan to establish the prence of political rents in banking,identify the means of rent provision focusing on the role of the public ctor, and estimate the economy wide costs this impos.The scope and depth of the data ud in this study provides veral advantages.First,instead of relying on subjective proxies,we have direct measures of a…rm’s political connections,de…ned as the…rm having a politician on its board.We can therefore test at the individual…rm level if political status obtains preferential lending.Second, by using…rm…xed-e¤ects and hence only exploiting variation within the same…rm over time or across lenders,we can account for unobrved…rm speci…c factors that do not vary over time or across lender types.This allows cleaner identi…cation of the impact of political status on rent provision.Third,using measures of political strength and electoral participation,we can examine the extent to which rents are a¤ected by the local political environment.Finally,given we have the univer of corporate lending in the country,we can u our micro-level estimates to back out tentative economy-wide costs of political corruption.
Our results show that politically connected…rms receive substantial preferential treatment.Not only do such…rms receive45percent larger loans,but they also have50percent higher default rates on the loans.Moreover,this preferential treatment is entirely driven by loans from government banks.Private banks show no such political bias.
The preferential treatment to politically connected…rms is not just a result of government banks lecting…rms with wor default rates.Using…rm…xed e¤ects and hence exploiting only variation within the same…rm borrowing from both government and private banks,we…nd that government banks di¤erentially favor politically connected…rms by providing them greater access to credit. This preferential access is even higher for politically connected…rms that are bigger and have a higher propensity to default.
We also…nd that the local political environment matters:Firms with“stronger”politicians
1For example,Krueger[1974],Ro-Ackerman[1978],Shleifer and Vishny[1993,1994],Banerjee[1997],Bliss and Di Tella[1997],Ades and Di Tella[1999],and Acemoglu and Verdier[2000].
on their boards—as measured by votes obtained,electoral success of the politician or political party—
obtain even greater preferential access to credit from government banks.Also…rms who politicians run from constituencies with greater voter turnout receive lower preferential treatment, hinting at checks impod by electoral participation and political accountability.
The same politically connected…rm also receives greater preferential treatment from government banks when either its politician or his political party wins.Taking advantage of the time dimension of our data,we u…rm and quarter level…xed-e¤ects to show that as a politician goes from losing to winning an election,the…rm he is a¢liated with receives(even)greater access to credit from government banks.We…nd a similar e¤ect if the politician’s political party wins the elections. Both winning or being in the winning party increa preferential treatment,suggesting that our …ndings indeed re‡ect the exerci of political power.
The results o¤er a particular mechanism of political rent eking consistent with the institu-tional environment of Pakistan’s banking and political system.Politically powerful…rms obtain rents from government banks by exercising their political in‡uence on bank employees.The more powerful and successful a politician is,the greater is his ability to in‡uence government banks. This in‡uence stems from the organizational design of government banks that enables politicians to threaten bank o¢cers with transfers and removals,or reward them with appointments and promotions.Government
banks survive such high levels of corruption becau of the soft-budget constraints that often characterize state institutions[Kornai1979,1986].
We argue that our results provide evidence of political corruption and prent evidence against alternative interpretations.One such alternative is“social lending”under which government banks lend to socially e¢cient but high risk projects,and…rms with politicians on their boards under-take such socially e¢cient projects.While it is unlikely that social lending by the government will be carried out through loans to private…rms(our results exclude loans to government…rms), we nevertheless prent direct evidence against the social lending view:When we distinguish be-tween government banks that have an explicit social objective2versus tho meant to run on pure …nancial pro…tability,the political preference results only appear within the latter“non-social”government banks.Social government banks,while facing high overall defaults,display no political bias whatsoever.Similarly,the preferential treatment by government banks remains as strong when we examine…rms located in a completely di¤erent state from their politician’s constituency.Such distant…rms are unlikely to generate legitimate social value for the politician’s constituents.
2Examples include banks t up for small and medium enterpris,women’s welfare,and agricultural development.
Since our data forms the univer of corporate lending in Pakistan,we can u our estimates to provide a n of economy wide costs impod by the political rents.While there are a variety of costs,we will only focus on the two for which we can provide estimates.First,as a lower bound, the defaulted amounts due to corrupt lending can be thought of as transfer payments from tax payers.The dead weight loss from this is estimated between0.15-0.30percent of GDP each year. Second,there is an additional direct cost of such lending if the money is poorly invested or not invested at all.The evidence supports this as we…nd politically connected…rms borrowing from government banks have relatively poor real output and productivity.Given the market to book value of investment in Pakistan,we estimate that an additional1.6percent of GDP is lost each year due to such investment distortions from corrupt lending.
Our paper broadly relates to the empirical literature on corruption and more speci…cally,to the role of political actors and state owned institutions in earning and providing such rents in …nancial markets.Cross country or cross region studies such as Mauro[1995,1997],Keefer and Knack[1996],Hall and Jones[1999],La Porta et.al.[1999],and Glaer and Saks[2004]study the impact of corruption on aggregate outcomes such as growth and investment rates.Sapienza [2003],Dinc[2004],and Cole[2004]exploit variation across countries or regions within a country and,lik
e our paper,identify how political favors ari through government banks,either in the form of cheaper lending in politically preferred regions or incread lending in election years.Studies such as Fisman[2001],Johnson and Mitton[2003],and Faccio[2004]share our focus in identifying connections between politicians and individual…rms and how the connections increa…rm value.
Our study both complements and adds to the literatures.Since we link a…rm to a politician and directly obrve measures of preferential treatment to the…rm,we can identify both the preci level,and speci…c manner in which rents are provided.Moreover,this level of disaggregation enables us to exploit variation for the same…rm across lenders and over time,providing cleaner estimates of the rents.Our results also highlight the role of state institutions in providing political rents but,in addition,suggest that the rents may be checked by political competition and electoral participation.Finally,since we have the univer of corporate loans we can provide suggestive estimates on some of the signi…cant costs the rents impo on the economy.
The paper is organized as follows.Section II outlines the institutional environment with a focus on political rents.Section III describes the data and methodology.Sections IV-VI prent the main results.Section VII provides evidence against alternate explanations such as social lending. Section VIII estimates the economy-wide costs of rent provision and Section IX concludes.
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II.Politics and Lending:The Institutional Environment
A.Politicians and Corruption in Pakistan
Politics in Pakistan has been cloly linked to clientelism,rent-eking and corruption.The factors are often cited as the main problems facing the Pakistani economy.Transparency International, an international non-government organization that ranks countries on corruption bad on survey data from business,has consistently ranked Pakistan very high on their corruption index.
Political events in Pakistan also show a repeated pattern of alleged political corruption leading to political instability.During the past decade and a half,no elected government has completed its…ve-year tenure,with four prime ministers and their asmblies dissolved by presidents or army generals on accusations of“maladministration,corruption,and nepotism”.Pakistan is therefore a good candidate to study the nature and conquences of political corruption.
B.A Mechanism for Political Rents唇亡齿寒翻译
How is political corruption carried out?The National Accountability Bureau(NAB),tup in 2000with the purpo of procuting tho involved in large scale corruption,states that“in terms of the amoun
t of corrupt money changing hands,taxation departments,state-owned banks and development…nance institutions,power ctor utilities,and civil works departments probably account for the lion’s share”.3The Guardian,a British newspaper,reports on the link between politics,corruption and banking in Pakistan:
“Pakistan’s ved to freeze the accounts of thousands
eipcThe move is en as the start of a crackdown on the endemic corruption in Pakistan’s
ilitary o¢cials have asked banks to provide lists of anyone who
has defaulted on a loan from a state bank—a notorious way of amassing funds by
成都学校politicians of all parties.”(October16th,1999)
The above quote suggests that one of the means to obtain rents is through the banking ctor, with politically connected…rms“willfully defaulting on(government bank)loans that are accumu-lated with the intention of not being returned.”4
Why are government banks more likely to be the source of political rents?First,they are simply the mcherish是什么意思
ore dominant domestic player in the banking ctor.While…nancial reforms in1991led to a 3Quoted from v.pk,June17th,2004.Emphasis added.
4National Accountability Bureau report on corruption,December2000.
sharp growth in the private ctor,the role of the public ctor has remained important constituting 64percent of domestic lending during our sample period.Second,soft budget constraints—a feature prevalent in government organizations all over the world[Kornai1979,1986]—lower the cost of capital for government banks and allows them to remain solvent despite high levels of default. Private banks face harder budget constraints making rent provision more di¢cult to sustain.英文邀请信
Finally,given the organizational structure of government banks,their lending decisions are particularly prone to political pressures.5The Banks Act of1974explicitly states that the top hierarchy of government banks—chairman,president and board members—is to be appointed by the government.The same Act states that the board“determin(es)(and)personnel policies of the bank,including appointment and removal of o¢cers and employees..(and)guidelines for entering into any compromi with borrowers and other customers of the bank.”In the published words of the current governor of the central bank:
“The recruitment,postings and transfers in all government ministries,departments and corporations are largely made either in exchange of outright pecuniary favours or on
purely (with)functionaries who are always trying to plea
their boss or political masters”6
Thus the politically appointed top tier bank management not only in‡uences the actions of bank o¢cers through a system of rewards(promotions,sought after assignments)and punishments (disciplinary action,transfers),but can also play a direct role in how,for example,defaulters are to be dealt with.
meanshiftPolitically connected…rms are therefore likely have an advantage over others eking rents,as they can u their political in‡uence in lieu of monetary bribes which in turn may have larger private costs.7However,such political in‡uence is not unbounded.For example,a loan o¢cer may only be willing to expo a certain fraction of his portfolio to political pressures so as not to rai suspicion and enquiry.Similarly,prudential regulations prevent banks from over-exposure to a single borrower.Perhaps more importantly,political favors and pressures may act like“gift exchanges”and politicians will be limited in how much and often they can call a friend for favors.
5All banks,government and private alike,face the same regulatory environment which is in-line with international banking practices(Bal accord).Moreover,all banks have access to the same centralized credit information bureau (CIB)databa that provides information on each borrower’s credit history.
6Dr.Ishrat Hussain.“Six Tentacles of Corruption”,published in the Dawn,a Pakistani newspaper,on November 21,1998.千与千寻下载
7Non-monetary bribes are not the exclusive domain of politicians and other actors such as the army and bureaucrats may also wield similar in‡uence.While links to the actors are not the focus of this paper,their prence in the data only makes our estimates of political rents a lower bound of the true rents.
