Export Incentives, Financial Constraints, and the (Mis)Allocation of Credit: Micro-Level Evidence from Subsidized Export Loans

Abstract

The provision of subsidized credit to exporting firms is widespread in emerging markets. To what extent are such incentives useful in alleviating financial constraints and promoting firm growth? In terms of efficiency, are more financially constrained firms allocated a greater share of credit? This paper combines an exogenous shock to the supply of subsidized credit with unique loanlevel data from the export sector in Pakistan to identify the impact and allocation of such financial incentives. The removal of subsidized credit causes a significant decline in the exports of privately owned firms, while the exports of large, publicly listed, and group network firms are unaffected. Publicly listed firms make no significant adjustments to their balance sheets, and only their profits are reduced, indicating that they are financially unconstrained. Nearly half of all subsidized loans are assigned to such firms, implying a substantial misallocation of credit. Real economic costs of this misallocation in terms of output loss to privately owned firms are estimated to be at least 0.75% of GDP. The analysis also shows that productivity differences cannot explain the heterogeneous effects across firms.