1) All countries require effective risk management through knowledge, insurance, and coping mechanisms to allow agents to take opportunities while developing. 2) Financial markets play an important role in risk management by providing liquidity buffers through deposits and credit to help agents access funds during difficult times. They also provide insurance. 3) With well-functioning financial markets, agents are more able to take risks and access opportunities through external funding, as seen with early Microsoft. However, financial repression through uncertain property rights and credit rationing can limit entrepreneurship and trap populations in poverty.

1. RISK, OPPORTUNITY AND FINANCIAL
REPRESSION

2. RISK MANAGEMENT
• All countries need adequate risk management
– Evolving
• Knowledge
• Protection
• Insurance
• Coping
– Ideal risk management should be strong enough in
order to assure that agents will overtake the
opportunity to develop

3. OBSTACLES TO RISK MANAGEMENT
• Incentives
• Information
• Behaviors
• Resources
• Role of Uncertainty of Risk

4. ROLE OF FINANCIAL MARKETS
• Provide liquid buffers, as deposits, to help the agents to
use their savings in bad times
• Provide credit, in case of shortage of funds
• Provide insurance
– If there is a good and functional financial markets, the
agents will be more likely to get good opportunities, in
spite of assuming some risks.

5. Entrepreneurship depends on assuming risks and getting the
resources.
When financial markets work well, it is much easier.
Good ideas usually receive external funding.
Microsoft, 1978

6. But there are obstacles …
If the property rights are not so well defined, and financial
claims recovery in case of default is uncertain, that can lead
to financial repression…
Credit rationing does not allow entrepreneurs to get
funding…
And so, poverty traps emerge.
Draught in Brazilian Northeast

7. Brazil underwent some reforms in the last 25 years
1994 – Economic reform (Plano Real) ended chronical very
high inflation rates

8. Macroeconomic stability allowed Brazilian Governments to
underwent another reforms and programs
Bolsa Escola/Bolsa Família – gave resources to extremely
poor households

9. 2003 – Changes in credit regulation
Brazil used to have chronical low credit to households
- Difficulties to get collateral in a case of default
- This leads to very high interest rates for
personal loans
Change in Legislation – Personal loans with repayments
doing by direct discount in the borrowers’ payroll .
Main Beneficiaries
- Stable Public Servants
- Retirees and Pensioners

10. Effects on Credit Markets
Large growth on personal loans
Source: Arrigoni, de Mello and Funchal,
"The Payroll Lending Experiment", 2011

11. Payroll Lending is associated to:
-Better health conditions to the
retirees (Sousa, 2011)
- Increase in entrepreneurship in
families with retirees and
pensioners (Sousa, 2011;
Mendes, 2014)

12. IMPACT ON ENTREPRENEURSHIP
• It's a very interesting result, with linkages with aspects
discussed in this course.
– Retirees takes credit to help its relatives in the
household to open a business
• Good example of how risk management is done in the
household level
– A small reform in credit market allowed na increase
on entrepreneurship
• Importance to governments to design the correct regulation
of financial markets in order to help credit be conceded under
good collateral.

13. REFERENCES
• "The Brazilian Payroll Lending Experience" – Coelho, De
Mello, Funchal -
https://ideas.repec.org/a/tpr/restat/v94y2012i4p925-
934.html
• "Essays on Banking" – Sousa – http://www.econ.puc-
rio.br/biblioteca.php/trabalhos/show/1044
• "Consumer Credit Expansion in Open Economies –
Mendes - http://www.econ.puc-
rio.br/biblioteca.php/trabalhos/show/1044