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The Impact of Directed Lending on Long-run Growth in Belarus

Listed author(s):
  • Dzmitry Kruk

The study deals with a specific form of financial repression peculiar to Belarus – a mechanism of directed loans. Under selective or directed credit programs, banks are required to allocate certain percentages of their asset portfolios for loans to priority sectors at subsidized loan rates of interest. In order to hedge against possible risks associated with directed loans, banks can offer higher interest rates or ration credit to non-favored borrowers. As a result, the flexibility of the financial system is decreased, while its fragility is increased. Under directed loans the economy may benefit from more rapid capital accumulation, but faces losses in efficiency. Directed lending may be justified until additional gains in capital accumulation compensate losses in. efficiency. This may be true in case of definitely high elasticity of output on capital, which might happen within a transitory period. Nevertheless, the practice of directed lending may not be recognized as effective tool for a longer time period. First, gains in capital gradually decline and losses in efficiency might exceed them. Moreover, when the economy reaches its balanced growth pass, only losses will be associated with the mechanism of directed lending. Second, the mechanism of directed lending may be a source of shocks and high-magnitude fluctuations in the economy. Finally, we show that in Belarus the mechanism of directed lending may result in the decline of growth rates of the economy in the long run.

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Paper provided by Belarusian Economic Research and Outreach Center (BEROC) in its series BEROC Working Paper Series with number 14.

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Length: 26 pages
Date of creation: Aug 2011
Handle: RePEc:bel:wpaper:14
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  1. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 195-209.
  2. Gorton, Gary & Winton, Andrew, 1998. "Banking in Transition Economies: Does Efficiency Require Instability?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 621-650, August.
  3. Berglof Erik & Roland Gerard, 1995. "Bank Restructuring and Soft Budget Constraints in Financial Transition," Journal of the Japanese and International Economies, Elsevier, vol. 9(4), pages 354-375, December.
  4. David Hendry & Carlos Santos, 2010. "An Automatic Test of Super Exogeneity," Economics Series Working Papers 476, University of Oxford, Department of Economics.
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