Land titling and access to credit

It is widely believe that a key ingredient of economic development is the accessibility of credit. Indeed, entrepreneurs typically need credit to develop their business plans, and much of capital accumulation is performed through credit. But no one is going to grant credit on a promise, some collateral is needed. And that is a problem in many developing economies, as people hold little property and even land is communal or without clear property rights. Hence the idea that distribution of untitled land, with well-established property rights, should provide collateral to a large fraction of the population and make credit possible. How does this work in practice?



Caio Piza and Maurico Moura study the case of a major land titling initiative in Brazil. They use an interesting natural experiment. Two neighboring and very similar communities of the city of Corosco (correction: Osasco) were to get property titles for every inhabitant, but five year apart (2007 and 2012). This leads to a nice control group, which allows to overcome the problem of the endogeneity of ownership rights of a typical study by using a difference-in-difference approach. Indeed, the authors conducted a survey in 2007 before the titling, and another one in 2008. In addition, the context here is urban, which is unusual for a titling study. It appears access to credit increases by 22 percentage points, or about a half, within 18 months of titling. This is major. I do not think such large estimates have been found in rural studies. And given that developing countries become increasingly urbanized, this is very interesting.

Fiscal policy as insurance

The goal of fiscal policy is at the macroeconomic level to steer the economy towards efficiency and, depending on the country, to smooth somewhat economic fluctuations. It has long been debated whether this is desirable or possible at all, given the large delays in implementing public expenses. But changes to tax policies are quicker to put in place and implement. At the microeconomic level, the focus is more on the long term, again try to attain better efficiency as well to optimize some definition of fairness across economic agents, however this may be defined in the respective countries. These micro and macro aspects have largely been regarded as separate. This does need to be so.

Eduardo Engel, Christopher Neilson and Rodrigo Valdés look at the particular fiscal policy of Chile. This country is characterized, like many emerging economies, by wild fluctuations in economic activity. In this case this is triggered by changes in commodity prices, in particular for copper. The most important implication is that government revenue varies wildly (a macroeconomic impact) between 1 and 8% of GDP, which changes Chile's ability to redistributes across heterogeneous households (a microeconomic impact). Adhering to a balanced budget rule would have a dramatic effect, in terms of aggregate welfare it would be like renouncing to half of the copper revenue. The reason is that households' incomes is also correlated with copper revenue, and a countercyclical policy is then optimal. And to be the most effective, the poorest households are helped in hard times, both because they have the highest marginal utility from consumption and because they have the highest propensity to consume.

Chile has been pursuing so far something that is close to a balanced budget rule: expenses are related to a permanent income measure of income. This means expenses are relatively constant, except for the last years, where expenses grew significantly despite a reduction in copper prices. This appears to have worked well, in particular because the poor have been the target of this largesse, not the rich. That was stimulus spending done right. This paper shows how this can be done even better.