State Support of Export Credit Insurance: Trade Distortion or Creation?
|Author:||PhDr. Ing. Tomáš Barči, Ph.D.|
|Year:||2004 - summer|
|Leaders:|| doc. Ing. Karel Půlpán CSc.
|Work type:|| Dissertations
|Awards and prizes:|
|Abstract:||The thesis analyses an export credit insurance. The objective of this paper is to identify and evaluate the main opportunities and challenges for state support in export credit insurance.
There have been important and indeed probably unprecedented changes internationally in the export credit business across all market segments in recent time. Against the backdrop of globalization – fuelled by trade and investment liberalization, privatization and deregulation in emerging markets – the export credit insurance has seen more dramatic change in the last five to ten years than ever before.
For the purposes of this thesis, export credit insurance mainly covers two market segments: short-term business and medium&long-term business. Government involvement in these market segments varies considerably across these businesses and country-by-country and private involvement in certain of these market segments has been developing significantly.
There is no single or perfect model for an Export Credit Agency (a government institution dealing with export credits), as the extent of Government involvement reflects national circumstances. However, every government-supported export credit scheme must consider international regulations on the provision of export credit. These agreements and understandings within different frameworks are: the Subsidy Code of the WTO, the Arrangement on Officially Supported Export Credits (Consensus OECD), and the EC.
The first part of the thesis therefore is devoted to an assessment whether there is a market failure justifying government intervention, whether public sector provision is the most efficient solution to that failure and whether there is a rationale for subsidizing that provision. As it is shown government intervention seems to be justified in theory for reinsurance of macro or systematic risks. The government is the only agent that is able to provide dynamic macro insurance. As for all insurance contracts moral hazard problems arise. Further results show that export credit insurance will require high profit margin and high capital requirements. These effects lead to high premiums, which may cause adverse selection of risks.
The second key part of the work deals with the problem of adverse selection in export credit insurance and its consequences for trade. It is argued that, under certain conditions, subsidizing a public insurance system is the second-best policy to remove the inefficiency of unexploited trade opportunities stemming from trade activities involving uncertainty. The thesis illustrates this by concentrating on the risk of default and official export insurance. The WTO Subsidy Code explicitly rules out export insurance subsidization because such a practice is believed to distort trade. It is shown that insurance contracts can be designed to prevent premium subsidies from distorting competition. What is more, they induce trade creation instead.
The specific design of these insurance products, which corresponds to the market situation with asymmetric information, is the main assumption which the above mentioned conclusion rests upon and is critically discussed. Finally, the presence of adverse selection problem in the credit insurance market is analysed. If this is not the case, then the main role of Export Credit Agencies is seen in providing sufficient insurance capacity that commercial insurance/reinsurance markets are unable to offer.
|Downloadable:|| Dissertation Thesis - Barči