The views and interpretations expressed in this paper are those of the authors and do not necessarily represent the views and policies of the World Bank or of its Executive Directors or the countries they represent, or of the Center for the Economic Analysis of Law.

 

        This paper was written by Heywood Fleisig, Director of Research at the Center for Economic Analysis of Law. It is part of a larger project on the framework of secured transactions being undertaken under the broad supervision of Vicente Fretes-Cibils (LA3C1), Jonathan Parker (LA3NR), and Steven N. Schonberger (LA1NR). The author thanks Nuria de la Peña, Lance Girton, Ken Kletzer, Stephen Salant, and the participants in a seminar organized by L. Alan Winters for their extensive and helpful comments.  Any errors, however, entirely remain the responsibility of the author.

 

 

        © 1996 by Heywood W. Fleisig

        All Rights Reserved

        Printed in the United States of America

 

             

EXECUTIVE SUMMARY

             

1.         Deficiencies in the framework for secured transactions lead to higher interest rates for loans on movable property.  These higher interest rates make it less profitable for producers to hold capital; therefore, they produce less.  How much less?  This annex examines that question.  It shows, under plausible assumptions, that Argentina could lose between 4% and 8% of GDP as a result of these defects, amounting to about $12 billion to $24 billion.   Using different techniques, it estimates a similar percentage loss for Bolivia -- between 3 percent and 9 percent of Bolivian GDP -- amounting to $230 million to $690 million annually. By contrast, the comprehensive legal and regulatory changes that are needed could be studied and implemented for well under $1 million and a complete overhaul of the registries would cost under $10 million.

             

2.         While these are only rough estimates, the benefits potentially outweigh the gains by so much and the gains are so large that they support the importance of placing the solution to this problem high on the policy agenda for government.

             

3.         This paper first shows how the interest rate determines the total amount of capital in use.  Then it discusses how differences in the quality of collateral will lead lenders to charge higher interest rates for movable property and reduce the amount of such property in use.  Examining the problem from the perspective of the demand for capital, it then uses some conventional properties of production functions to estimate the impact on Argentina of the higher interest rates of movable property. In the case of Bolivia, the paper examines the problem from the perspective of the sources of funds and the structure of debt.  It compares lending for movable property in Bolivia with lending for movable property in the United States, where movable property is considerably better collateral. 

             

 4.        The use of both Bolivia and Argentina as comparators is important.  Despite their wide economic differences, and the substantially greater investment in human capital in Argentina, the two counties have nearly identical legal regimes for lending against movable property.  Bolivia adopted the Argentine framework in 1952.  The finding of similar problems and costs despite the other economic differences makes more robust the overall estimate of the economic cost of defects in the framework for secured transactions.