Economy-Wide Effects of Improving Small Firms Access to Capital Markets: An Applied General Equilibrium Assessment

Abstract

Is it possible to increase GDP, reduce unemployment and improve income distribution by giving small firms better access to capital markets? This paper argues that an answer to that question could be affirmative. However, it also shows that self-exclusion of small firms from programs of access to capital markets conditional on higher formalization is a plausible scenario. Formalization could be expensive for them in terms of higher effective taxes and costs of compliance with norms and standards. The paper gives also estimates of the required gains in productivity that could induce firms to become more formal and access the capital markets at a lower cost of capital. To address those issues we use a general equilibrium approach for the Argentine economy to have the economy wide impacts and costs, i.e. including the effect on other sectors of the reallocation of resources to small firms.