FinancingSMEs:SomeempiricalevidenceintheWesternBalkansandTurkey1,2

MassimoCingolaniEuropeanInvestmentBank

AnaRosaGonzalez-MartinezCambridgeEconometrics

Introduction

I. SomekeyeconomicfactsonSMEsintheWesternBalkansandTurkeyII. TheconceptualframeworkIII. Empiricalfindings

ConclusionsReferences

Appendix:Datasource

0.IntroductionSMEsareamajorplayer in theproductive systemofmostEuropeaneconomies,withtheir contribution to employment ranging from 53% in Poland to 85% in Greece(Eurostat, 2016). Similarly, their share of value added represents comparablepercentages. Despite their unquestionable role as one of the main drivers ofemployment creation across European countries, it is well known that SMEs faceimportant constraints toaccesscredit (OECD,2016). In this context, this contributionseekstoimproveourunderstandingoftherelationshipbetweenSMEsandthebankingsystem. In doing so, we developed a conceptual framework that is rooted in themonetarytheoryofproductionasdevelopedbyGraziani(2003).Graziani(2003)describesthemonetarycircuitasasequentialprocessthatcanbesplitinseveralsteps,hereweretainedfive. First,banksgrantcredittofirms,thisisthesocalled ‘initial finance’, which permit them to initiate the production process. Beforestartingproduction firmshire theirworkers.Asa result, firmsdemand thevolumeofcredit that they need to pay the expectedwage bill,which, inmacroeconomic terms,correspondstoeffectivedemand.Oncethewagesarepaid,finalorintermediategoodsare produced. There is equivalence between thewage bill and the cost of the goods,whichareproduced.Inthisstep,banksandfirmsnegotiatethevolumeofcreditanditscost,i.e.theinterestrate.Inthesecondstep,wageearnersdecidetoutilizetheirincomeforseveralpurposes:consumption,bankdepositsoracquisitionof securities.Thirdly,consumer goods are purchased by wage earners. Investment goods are exchanged

1FIRSTDRAFTDATED05.10.2016.2Theviewsandopinionsexpressedinthisarticlearethoseoftheauthorsanddonotnecessarilyreflecttheviewsoftheinstitutionstowhichtheyareaffiliated.

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amongfirms.Theacquisitionofconsumergoodsandsecuritiespermitsmoneytoflowback to the companies, which use it to repay their initial debts. Money is destroyedwhendebtsarepaid,i.e.thecircuitisclosed.Moneycreationtakesplacewhenthebankingsectorgrantsnewloanstothecompanies,but there is a destruction ofmoneywhen the loan is repaid. Firms can also use theresources that they obtain from the sales of their production and the issue of theirsecuritiestostartthenewproductionprocessinsteadofrepayingtheirdebts,whichisequivalenttoarenewaloftheircredit.However,ifwageearnersdonotspendalltheirincomebecause theykeepcashbalances, firmsarenotable torepaycompletely theirdebtandthereisafractionofthemoneyinitiallycreatedthatisnotdestroyed.Inthatcase, the financing of a new production cycle means an increase in the total moneybalances.ThenextsectionintroducessomekeystructuraldataonSMEsintheWesternBalkansand Turkey. Then the conceptual framework is discussed with reference to the dataavailable.Subsequently,weproceedtotesteconometricallyourtheoreticalpropositionbyusingavailabledataonSMEsinthecaseoftheWesternBalkansandTurkey.

I.SomekeyeconomicfactsonSMEsintheWesternBalkansandTurkeyIn theWestern Balkans3, the data on the SME sector is scarce. Recently the OECD'spolicy index updated the standard information available for the year 2013 or for themostrecentavailableyear.ItshowsthatintheWB6SMEsemploy1.8millionpersonsor72%oftotalemploymentandgenerateEUR16bnofvalueadded(58%ofthetotal).InTurkeytherelevantfiguresarerespectively:8.8memployed(75%ofthetotal)andEUR86bn(54%ofthetotal).ThedataofOECDandthoseprovidedbyEurostatarenotexactlycoincident.Indeed,theEurostatdatabaseonSMEsdoesnotprovidefiguresfortheWB6andTurkey,althoughthe Commission is part of the SME policy index exercise, and actually finances it.Nonetheless in the next page the data from EUROSTAT and from OECD have beenplottedonacommonscatter.Thechartshowsthat,otherthingsequal,theincidenceofSMEsintotalemploymentisinverselyrelatedtothelevelofdevelopmentmeasuredbyGDPpercapitaexpressedinpurchasingpowerstandards.Thisimpliesthatonewouldexpect that on average WB6 and Turkey rank amongst the countries in which theimportance of SMEs in total employment is higher. Indeed for the 36 countries forwhichdataisavailableandisreproducedintheChartandtheembeddedtable(despitenotbeingstrictlycomparable),WB6andTurkeyrankinthe50%ofthecountrieswiththe higher share of SME employment, the only exception being Bosnia andHerzegovina4.Thisaspectwillbeexploitedintherestofthepaper.

3InthefollowingtheWesternBalkans"6"aredefinedascomprisingAlbania,BosniaandHerzegovina,Kosovounderresolution144,theFormerYugoslavRepublicofMacedonia,MontenegroandSerbia,andtheyarereferredtoasWB6.4TheBFCstudydiscussedbelowgivesahigherfigurefortheincidenceofSMEsinBosniaHerzegovina.TheBFCtablebasedonnationaldataandsurveys,isreportedintheAnnexforcomparison.

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InacontextwheremosttimeseriesreferringtoSMEsaremissing,itcanbearguedthat,given the importance of SME employment in the region, a variable such as totalmacroeconomic employment is mainly influenced in its movements (especiallyincreases)bythosecompanieswithasizeoflessthan250employees.Chart1:SMEincidenceintotalemploymentintheWesternBalkansandintheEU

A recent study conducted by the consultant BFC under the EIB assignment for thecoordination of the Advisory and Support Pillar of the Western Balkans EnterpriseDevelopmentandInnovationFacility5,showsthatthemainsectorofactivityofSMEsin

5See:http://www.eif.org/what_we_do/guarantees/index.htm.

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theregionistrade,whichrepresentsaround35-40%ofthenumberofSMEsandsome25-30%oftheirtotalemployment.Notallenterprisestakeloans.The study tries to estimate some figures for the size of the SME loanmarket. On thedemand side, it starts from a figure of the average loan and then, based on thepercentageofSMEstakingaloan,itestimatesaloandemandfigure.ThisisputatEUR11.7bnfortheWB6region.Table2:SMEdatafortheWesternBalkans

Onthesupplysidethestudystartsfromthevolumeofloansand,giventhepercentageof loans estimated to go to SMEs, calculates a loan supply indicator,which takes thevalueofEUR12.8bnfortheregion.To compare these figures with some main macroeconomic structural data for theregion, one can refer to Table 3, which shows that by and large themacroeconomicvolumeofloanscorrespondstolessthanhalfofestimatedGDP.Table3:MainmacroeconomicdatafortheWesternBalkans

Of relevance also for SMEs and employment, the fact that compared to a totalpopulation of 18.3million people, and a population in the age ofworking (15-65) of17.5 million people, those having an employment are only 6.7 million. Also, youngpeople, forwhich unemployment rates of 50% are reported, can be estimated at 2.4million people, including some 5% of total population assumed to be comprisedbetween25and30yearsoldinadditiontothepopulation15-24reportedinthetable.Thisputat1.2milliontheestimatednumberofde factounemployedyoungpeople intheregion,showingtheurgencytoacttoremedythissituation.

CountryALBAXKMKMERSWB63(*)

Table32:3SME3data

Average %3of3SMEs Loan Bank %3of3SMEs LoanN.3of3SMEs loan taking3loan Demand Loans SupplyN. EUR % EUR3m EUR3m % EUR3m %N %E

111305933333 3536683333333 36.00% 134263333 432473333 26.30% 131173333 Trade 40% 34%186334133333 3434093333333 51.50% 333023333 837743333 22.40% 139653333 Trade 31%4539853333333 3035073333333 52.20% 7323333333 230193333 40.30% 8143333333 Trade 51%7034533333333 4530523333333 40.10% 132733333 431223333 34.80% 134343333 Trade 35% 31%2233133333333 4735193333333 52.80% 5603333333 230303333 25.80% 5243333333 Trade 39%

280384533333 2537533333333 61.80% 434703333 1537723 45.10% 638643333 Other3SMEs 35% 21%716399633333 3634853333333 32.24% 11376333 3639643 32.45% 1237183

Loan3Demand Loan3Supply Main3SME3sectorTable32:3SME3data

Country

ALBAXKMKMERSWB6,(*)

Table,3:,Main,Macroeconomic,DataGDP GFCF Empl. Pop. 15365 153242015 2014 2013 2014 2013 201310,533,,,,,,, 2,583,,,,,,,,, 1,165,,,,,,,,, 2,896,,,, 2,519,,,, 585,,,,,,,,,,,14,663,,,,,,, 2,258,,,,,,,,, 1,047,,,,,,,,, 3,827,,,, 3,226,,,, 558,,,,,,,,,,,5,816,,,,,,,,, 1,262,,,,,,,,, 338,,,,,,,,,,,, 1,805,,,, 1,192,,,, #N/A8,477,,,,,,,,, 2,117,,,,,,,,, 688,,,,,,,,,,,, 2,066,,,, 1,755,,,, 305,,,,,,,,,,,3,569,,,,,,,,, 643,,,,,,,,,,,, 202,,,,,,,,,,,, 622,,,,,,, 505,,,,,,, 87,,,,,,,,,,,,,32,830,,,,,,, 6,155,,,,,,,,, 3,249,,,,,,,,, 7,149,,,, 7,965,,,, 1,265,,,,,,,75,887,,,,,,, 15,018,,,,,,, 6,689,,,,,,,,, 18,365,, 17,162, 1,657,,,,,,,

Table,3:,Main,Macroeconomic,Data

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II.Theconceptualframework6The theoretical perspective in which this paper is written is one where non-neutralmoneyproducesshortandlong-termrealeffects.Inasequentialeconomydevelopingincalendar time, money makes equilibria path-dependent, the economy has a highprobabilityofgettingstuck inequilibriawithunemploymentand/orunder-utilisationofcapacityandtheseproblemsneedtobeaddressedbyanactiveeconomicpolicyasitwouldbeunrealistictothinkthat,insuchaneconomy,laissezfairecouldwork.7A natural theoretical reference for examining lending to SMEs in this perspective isGraziani's (2003) monetary theory of production, where endogenous money,interpreted as a flow (and not as a stock), generates path dependent temporarymonetaryequilibriaandwherefinanceimpactsontherealeconomyintheperiodofthecircuitandafter.AcloselyrelatedapproachisDavidson's(1989and2003)"American"post-Keynesian synthesis andhis critiqueofboth the "mainstream"neo-Austrian andneo-classical/neo-KeynesianequilibriabasedonthejointrejectionoftheneutralityofmoneyandofPatinkin's(1956/1965)neo-Keynesianintegrationofnon-neutralmoneyin the formofmoneybalances (stock)àlaPigou. Indeed,bothDavidsonandGrazianipaidsignificantattentiontoKeynes’initialfinanceproblem,anaspectstudiedbyKeynesafterwritingtheGeneralTheory,thatputsthelatterinaperspectiveofcontinuitywiththe Treaty and that is usually neglected in neo-Keynesian and other mainstreamanalyses.BothGraziani'sandDavidson'sapproachescanbeextendedtouncertaintyandrisk.Forinstance,forDavidson,riskquantificationsareimpossibleinnon-ergodicenvironments(Davidson, 1982-1983), which explains why mainstream rational expectationsequilibriamustberejected.Rationalexpectationsareanessentialbuildingblockoftheneo-classicalandtheneo-Keynesianapproaches.Despiteappearances,theyarealsothemainreferencefortheso-calledneo-Austrianapproach,atleastintheversionofHayek,who assumesapriori that,without the distortions brought bymoney and banks, theeconomywould convergence to a “neutralmoney”natural (andoptimal) equilibrium,whichimplieslogicallylaissezfairepolicyprescriptions.ContrarytoDavidson,Graziani'sapproachtothemonetarycircuitadmitsthepossiblequantification of risk, albeit in a context where mainstream equilibria are rejectedbecauseofpathdependence,whichimpliesdefactotheimpossibilityoflearningoutofequilibrium,whichwouldinturnbenecessarytojustifytheabovementionedaprioryforthestabilityofthegeneralequilibriumthatisretainedbyHayek8.6TheauthorsaregratefultoRiccardoBellofiore,FrancescoGaribaldo,MarioSeccarecciaandJanToporowskiforreferencesanddiscussionsonthetopicsexaminedinthissection.7Theordo-liberalschoolretainsanothervariantofthisstabilityassumption,whichisthat,oncetherules(the“EconomicConstitution”)areestablishedandenforcedbytheState,“neutralmoneyequilibria”willprevail,thussuggestingapassiveStatepolicyof“makingmarketswork”contrarytotheactivepolicyprescriptionswhichareneededunderpathdependence.OneoftheauthorsisindebtwithBrigitteYoungforclarificationsontherelationsbetweenthepolicyprescriptionsoftheordo-liberalschoolandoftheneo-Austrians,takenbroadlyandmainlyasdisciplesofHayek.8OnecanrefertoGuesnerie(2001and2005)orEvans&Honkapohja(2001).PathdependenceisaninterpretationofdynamicsonwhichthetwogreatItalianPost-KeynesianeconomistsAugustoGrazianiandPaoloSylos-Labinidefactoagreed,despitetheirdifferencesofopinionsonthestatusofthemonetarycircuitandontheinterpretationofMarx.TheinterestedreadercanrefertoCingolani(2015and2016).

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ThemonetarycircuitiscloselylinkedtotheworkofMichalKaleckiforwhatconcernsthe explanation of profits and their distribution (Graziani, 2003, p. 24; Kalecki 1937and 1942). Kalecki, who also worked in a logic of path dependence, developed theconcept of increasing risk, which states that other things equal, bigger investmentprojects are not necessarily the riskiest. Josef Steindl, a student of Kalecki, appliedKalecki's concept of increasing risk to the analysis of the size distribution of firms.Basedontheapplicationofthisprinciple,SMEscanbeexpectedtohavealowerreturnoncapitaland/orahighercostofcredit(Steindl,1941,1945).ThiscanexplainwhythePareto distribution, or similarly highly skewed and unequal distributions, provide agoodfitoftheofthefirms'returns,astheyhavebeenproventodoalsoforincomeandwealth (Steindl 1965, 1972). Steindl's analysis also implies that there is an inherenttendencytowardstheconcentrationofindustry(Bloch,2005).Further to the pioneering studies of Steindl, the relevance of the Pareto distribution(andtherelatedGibrat-Zipf law)hasbeensupportedbyseveralempiricalresults, seeforexampleCrosato&Ganugi (2007) for Italian industrialenterprises,Fujiwaraetal.(2004aandb)forEuropeanfirms9andIshikawa(2005)forJapan.Infact,inaway,thehighconcentrationandunequaldistributionofreturnsandwealthobservedempiricallycan be interpreted in terms of the breaking-up of the assumption of non-arbitrage,which isnecessary toobtain themoneyneutralitymentionedaboveandpoints in thedirection of a kind of "unequal exchange of risk" (cf. Emmanuel 1972 [1969]), anhypothesisthatdeservestobeexploredfurther10.Apartfromapossiblerejectionoftheassumptionsofthemainstreamfinancialandrisktheories,suchastheno-arbitrageassumption,theapproachretainedhereofsequentialtime with path dependence also givesmuch importance to the spatial factor and itsinterrelationswiththeproductivestructure.Forinstance,inexploringthecausesoftheEuropean crisis, Bellofiore & Garibaldo (2014) linked the monetary analysis of thecircuit tothe literatureon industrialrestructuringattheEuropeanlevel followingthefall of theBerlinwall. These authors criticise the simplistic accounts of the economiccrisisinEuropeintermsonlyofmacroeconomiccurrentaccountimbalancesandpointto the need of considering the structural effects of the restructuring of GermanindustrialstructureandtheparallelreorientationofGermanexternaltradeflowsawayfrom Southern Europe and towards Asia and Eastern Europe after Germanreunification. In thiswork, they refer to contributions such as Simonazzi, Ginzburg&Nocella(2013),whofurtherquoteDeutscheBundesbank(2011aand2011b)orCarlin& Soskice(2009). From the macroeconomic viewpoint, this industrial economicsanalysis is complemented by a consideration of the traditional and often forgottenKeynesian investment-saving causality that makes capital exports a possible drivingfactorofthecurrentaccountbalances(ratherthantheotherwayround),apointfurther

9Bottazzi(2009)observedthat,contrarytowhatisstatedinthisreference,Gibrat'sandParetolawarenotthesamething.IndeedGibrat'slawforeseestheindependenceofthegrowthrateofafirmfromitssize,whereasSteindlobtainedParetodistributionsstartingfromKalecki'sassumptionofincreasingrisk,whichimpliesthatSMEswouldhavelowerreturnsandahighercostofcreditotherthingsequal.10Incidentally, if in the perfect world of money neutrality and non-arbitrage, one observes a Paretodistributionof income, returns,and/orwealth, asonedefacto does, and themarketallocates the risksefficiently,itmeansthatrisksareParetodistributed,i.e.concentratedontherichestpeople,astatementthatrunscontrarytointuition.

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developed for instance in Borio & Disyatat (2011). In such a perspective, thecompetiveness of SMEs in a given area results from their capacity to integrate theinternationaldivisionoflabouratasuitabletechnologicallevel,whichrequiresinturnto be part of the transnational production networks managed by the dominantenterprises locatedinthecentralareas.Thedistributionofthevaluecreatedbytheseintegrated transnational productive chains will depend on the decisions of thedominantfirminthechain,andwillbeakeyfactorfortheregionalcompetitivenessofSMEsinacertainarea.Whilethesefactorsplaycertainlyanimportantrole, fortheWesternBalkanstheyaredifficult to track statistically at the microeconomic level of the SMEs. Hover someevidencecanbeprovidedatmacroeconomiclevelandcanbeanalysedeconometrically.Forinstance,thecharts2and3below,giveanindicationontherelativepositioningofthe Western Balkans in the international division of labour as measured by theopenness ratio (exports of goods and services + imports of goods andservices)/(2*GDP)ortheimportsratio(importsofgoodsandservices/GDP).Chart2:Openessrateandeconomicsize

TheWB6arepositionedontheleftpartofthesecharts,giventheirlowaverageincomelevel, and this is linked to a relatively high incidence of SMEs in their productivestructure, a high openness rate, linked also to their limited economic size, and astrongerdependenceon imports.The last twoaspects, takentogether,alsoreflect thestructuraldeficitoftheircurrentaccountofthebalanceofpayments,oftenoftheorderof10%ofGDP, that confirms that the region is “dependent”on theexternalmarkets.TogetherwithChart1,Charts2and3thusgiveapictureoftheWesternBalkansasaregion integrating the international productive networkswith an economic structuremainlymadeofSMEs,primarilyturnedtowardsthesatisfactionofdomesticmarkets,atarelativelylowtechnologicallevel.

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Chart3:Importrateandeconomicsize

Giventheunavailabilityofmoremicrodata,theminimaltheoreticalframeworkthatisoffered below for the empirical analyses of the following sections is essentially amacroeconomicone,wheretheSMEsarenotseparatedfromtherestoftheproductivesector.Whilethischoiceisdictatedatthisstagemainlybythelackofdataavailability,itcanbedefendedontwogrounds:

a) themacroeconomicapproachallowsalreadytointroduceinamorerelevantwaythe monetary factor and particularly money creation by the banking sector,whichisitselfapre-conditionforaproperanalysesofrisk.

b) Toalargeextent,theproductivestructureoftheWesternBalkansisessentiallymadeofSMEs,thereforethemacroeconomicevolutionsoftheprivateproductivesectorreflecttoalargeextentdevelopmentsconcerningthepopulationofSMEs.

In the following, the empirical analysis thus relies heavily on the techniques ofeconometricestimationwithunobservedvariablesmakinguseofmacroeconomicdataandinstrumentalvariables.Two ways appear possible for the empirical validation of the conceptual schemedescribedabove.Thefirstconsistsinusingmacroeconomicdataonlendingandoutputcreationinlinewiththephasingschemeofthemonetarycircuit.Thesecondconcernstheeconometricexplanationof themacroeconomicaggregatesofemployment,whosevariations can be taken to reflect mainly credit conditions affecting SMEs. If, in thisexplanation,somekeypost-Keynesianvariablesappeartobesignificant, thenonehasfound some prima facie evidence of the relevance of the proposed approach for theanalysisofSMEs.

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Concerning the first aspect, the reference to the analyses of integrated T accountsdeveloped below allows to show the potential of the theoretical approach of themonetarycircuitforanalysingcreditissuesandtheirimpactontherealeconomy,andthus also SMEs that represent an important part of it. In particular, an exercise isdeveloped below to illustrate the sequence of adjustments following a loan from aninternational institution to the local banking sector for investment by SMEs. In thisexample,only theeffectsonthereceivingeconomy(WesternBalkans)areconsideredand they are taken as flows during the relevant periods (phases of the circuit). Forsimplicity,theseflowsareactuallyrecordedinTaccountsrepresentingbalancesheets,withthereforeAssetsonthelefthandsideandLiabilitiesontherighthandside.Figure1:LoantoSMEphase0

Loan%FL0 Deposits%FX0 Reserves%R0 Debt%FD0 FX%holdings%FX0 Reserves%R0 Debt%FD0 Cap.%Imp.%FX0

EU%consolidated%bank%sector WB%commercial%banks WB%central%bank WB%Balance%of%Payments WB%Enterprises%(SMEs) WB%Households

Atthestartofthesequenceofthecircuit,aloanFL0isgivenbytheforeignconsolidatedbankingsectortothelocalbankingsector.ThisincreasesholdingsofforeignexchangereservesatthelocalcentralbankbyFX0.ThelocalCentralBankcreatestheequivalentamountof local currencyandputs itat thedisposalof the localbankingsector in theformofreservesR0,whichcorrespondtothedebtliabilityofthissectortowardstheEUconsolidatedbankingsector.Inthelocalbalanceofpayments,increasedforeigndebtiscompensatedbyanentryofcapitalintheformofcash.Figure2:LoantoSMEphase1

Reserves&'R0 Deposit&C1 Deposit&C1 Debt&D1Loan&L1

WB&HouseholdsEU&consolidated&bank&sector WB&commercial&banks WB&central&bank WB&Balance&of&PaymentsWB&Enterprises&(SMEs)

In the first phase of the circuit the local banking sector gives a loan to the localproductivesector,whichisassumedtobemadeonlyofSMEs.Insodoing,theydestroytheirreservesandreplacethemwithaclaimonSMEsthatcorrespondstothedepositthey offer to them as a third part liability the latter use for payments. For the SMEsthese,inanamountC1,areanassetthatisliquidandacceptedaslocalcurrency.Intheirliabilities,SMEshavethecorrespondingdebttothelocalbankingsectorD1.Figure3:LoantoSMEphase2

Deposit(SME(,C1 Deposit(,C1 Deposit(C2 WC

Deposit(HH(C2 ΔWIPC WI

ΔWIPI

WB(central(bank WB(Balance(of(PaymentsEU(consolidated(bank(sector WB(commercial(banks WB(Enterprises((SMEs) WB(Households

Inthesecondphase,SMEspaysalariestohouseholdscancellingtheirdepositsandtheyacquireaclaimonthehouseholdontheproductiontobecompleted,whichisbookedhere as an increase in work in progress. Both these claims and the correspondingsalariespaidaredueinpartfortheproductionofconsumptiongoodsandinpartfortheproduction of capital (or export) goods. On the side of consolidated sector of localcommercialbanks,depositsofSMEsaretransferredtohouseholds.Inthethirdphase,householdsbuyconsumptiongoodsfromtheenterprisesforthetotaloftheirwagesastheyareassumednottosaveforsimplicity.SMEsthusrecoverfromsalesthemoneytheyinjectedinitiallyinthecircuitassalariesforanamountofC3=C2.

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Because households do not save, their previous deposits are fully spent forconsumption(C3=WI+WC)andthusdisappear.Figure4:LoantoSMEphase3

Deposit(SME(C3 (.ΔWIPC Δ (Net(Worth Deposit(.C2 (.WC

Deposit(HH(.C2 (.ΔWIPI (.WI

Deposit(C3Inv.(Goods.

WB(Balance(of(PaymentsEU(consolidated(bank(sector WB(commercial(banks WB(Enterprises((SMEs) WB(Households WB(central(bank

SMEs, after recovering their monetary costs, generate a profit in the form of anincreasednetworth corresponding to the investmentgoods theyaccumulate thatarenot yet sold. In the liabilities of the banking sector, deposits of households aretransferredbacktotheaccountofSMEs.In the fourth phase of the circuit, SMEs repay the loan to the local banks. They thuscanceltheirdebtandtransfertheirliquidholdingstothebanks.Thelatterthusincreasetheir reserves at the central bank and cancel both the loan in their book and thecorrespondingmoneyliabilitytoSMEs.Figure5:LoantoSMEphase4

Loan%&L1 Deposits%SMEs&C4 Deposit%&C4 Debt%&D1Reserves%R4

EU%consolidated%bank%sector WB%commercial%banks WB%Enterprises%(SMEs) WB%Households WB%central%bank WB%Balance%of%Payments

Finally,inthefifthphase,thelocalcommercialbanksrepaytheloantotheconsolidatedbanking sector abroad by using their reserves, against which the central bank givesthem back foreign currency. It is of course assumed for simplicity that, during theperiod,theforeigncurrencywaskeptbythecentralbankasaforeignreserveandthattheexchangerateremainedstable.Themoneyinitiallycreatedwiththecorrespondingloan in the starting phase is now completely destroyed and the monetary circuit isclosed.Figure6:LoantoSMEphase5

Loan%&FL5 Deposits%&FX5 Reserves%&R5 Debt%&FD0 FX%holdings%&FX0 Reserves%&R4 Debt%&FD0 Debt%Service%&Fx0

WB%Balance%of%PaymentsEU%consolidated%bank%sector WB%commercial%banks WB%Enterprises%(SMEs) WB%Households WB%central%bank

Itistobenotedthatifhouseholdswouldhavekeptsomeofthemoneytheyreceivedaspayment of their salaries in the form ofmonetary balances at local banks, and thesewouldnothavebeenrelenttotheSMEs,notallthemoneyinitiallycreatedwouldhavebeendestroyedat theclosureof thecircuit andSMEswouldhave remained indebtedtowards the local banking sector at the end of the circuit for the full amount ofhouseholds’savings.Thenumberofphasesillustratedaboveisarbitrary,asareaswellthetimeboundariesdefining the accounting period of the circuit. The established convention is that thestartingphaseofthecircuitcoincideswiththeinitialmoneycreation,whiletheendingphase is marked by money destruction. The initial contributions to the theoreticalliteratureofthemonetarycircuitassumedimplicitlyorexplicitlytheidentitybetweentheperiodofmonetarycreationanddestructionontheonehand,andtheaccounting,production and consumption periods on the other.Working in a financial accountingperspective, Vallageas (forthcoming) is probably the first author who discussedexplicitlythepossibilitytobreaktheidentitybetweenthefourperiods.

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Often, the accounting period coincideswith the production period, as in the exampleabove. In this example however, only consumer goods are disposed of during theaccountingperiod,while investment/exportsgoodsareaccumulatedat theendof theperiod. It is noteworthy that these accumulated goods are a profit that is realizedbySMEsinkind.Thisillustratesthefactthatinthisvariantofthemonetarycircuit,profitsareanalysed firstasa real transfer. In thenextphasesof thecircuit, theseprofits inkind are going to be realized in money by selling the corresponding goods tohouseholds,totheGovernmentorabroad.Thealternativevariantistoallowthemonetaryrealisationofprofitswithintheperiodof the circuit. This would require extending the accounting period up to the sale ofinvestment/export goods, thus obtaining the full coincidence between the accountingperiod,theperiodofcreationanddestructionofmoneyandtheconsumptionperiod.Insuchacase,thepresenceofmonetaryprofitswithintheperiodcanbeachievedwithahigherinitialloanofthelocalbankingsectorthatcoversalsothemonetarypaymentoftheinvestmentgoodswithintheperiod.Thiscase,whichcanbetakenasanillustrationof the "single period" in the monetary circuit, was understandably retained as areferencecaseinthefirsttreatmentsofthemonetarycircuit(seeforinstanceParguez,1980orSchmitt,1966)as it isreadilycomparabletothestaticgeneralequilibriumofHayek and and Arrow-Debreu, to the stationary neoclassical equilibrium of Walras,PigouandothersortothesingleperiodoftheSwedishschool.Finally,acommentmustbemadeoninterestrates,whichareassumedintheexampletobeeithernullortobeoffsetbetweenactiveandpassiveinterests.This impliesthatthe banking sector makes no profits. This assumption was retained only for ease ofpresentation and can be easily relaxed in the sameway in which one can introducemonetaryprofits in the circuit. In Cingolani (2010) examples are developed inwhichbothinterestsandmonetaryprofitsappearduringtheaccountingperiodofthecircuit.Diagram1:Thestationarymonetarycircuit

Startingfromthisratherdetaileddescriptionofthesequenceofthecircuit,whatarethe

SMEsexpectationsoffutureactivity

Loandemandtothebankingsector

Acceptanceoftheloanbythebankingsector

EmploymentcreationandpaymentofWages

Production

Saleandloanrepayment

12

implicationsforthedatagenerationprocessandthepossibleeconometricestimations?Iftheeconomyisrelativelystableinsomekindofstationarystateinlevelsoringrowthrates,thesequencedepictedinDiagram1onthepreviouspagecorrespondstothe“circulareconomy”equivalentoftheaboveexample.It follows that under either stationary or uniform growth conditions, the followingcorrelationswould be expected both atmacroeconomic level or at the level of SMEsaggregates,whenthecorrespondingdataexists:

- Loansattimet=f(Wagesattimet);or- Loansattimet=f(ValueofProductionattimet);or- Loansattimet=f(ValueofSalesattimet).

Anotherpossibility is totakemacroeconomicemploymentasanendogenousvariable.This is consistent with Keynes’ concept of effective demand, which is one of thetheoretical rootsof themonetarycircuit.For instance let'sassumeSMEsexpectationsare embedded in a desired level of employment E*SME, which is a function of SMEs'perception of effective demand and of the financial costs that banks impose on themFCBANK,capturedbySylos'variableSYLOSasinrelation(1)11.Let'sassumethenthatthefinancial costsare setbybanksasa functionof thevolumeof the loans theywant togenerate LOAN*, themselves a function of the perceived effective demand by banks,EFFDBANKS,asinrelation(2):

𝐸"#$∗ = 𝑓 𝐸𝐹𝐹𝐷"#$, 𝐹𝐶,-./ (1)𝐹𝐶,-./ = 𝑔[𝐿𝑂𝐴𝑁∗ 𝐸𝐹𝐹𝐷,-./ , 𝑆𝑌𝐿𝑂𝑆] (2)

Thenreplacing(2)in(1)onegets(3):𝐸"#$∗ = 𝑓 𝐸𝐹𝐹𝐷"#$, 𝑔[𝐿𝑂𝐴𝑁∗ 𝐸𝐹𝐹𝐷,-./ , 𝑆𝑌𝐿𝑂𝑆] (3)

Assumingasimplestandardrationingschemeforeffectivedemandwecanwrite:𝐸"#$ = 𝑓 𝑀𝑖𝑛 𝐸𝐹𝐹𝐷"#$, 𝐸𝐹𝐹𝐷,-./ , 𝑆𝑌𝐿𝑂𝑆 = 𝑓 𝐸𝐹𝐹𝐷, 𝑆𝑌𝐿𝑂𝑆 (4)

Ideally one would estimate directly (4), however, since EFFD and SYLOS could beunobservable,onecanassume:

𝐸𝐹𝐹𝐷 = 𝑔< 𝐿𝑂𝐴𝑁, 𝐺𝐷𝑃 ; 𝑆𝑌𝐿𝑂𝑆 = 𝑔@ 𝐿𝑂𝐴𝑁, 𝐺𝐷𝑃 (5)wherebothloanandGDParenominal.Inthatcase,therelationtobeestimatedwouldbe:

𝐸"#$ = 𝑓 𝐿𝑂𝐴𝑁, 𝐺𝐷𝑃 (6)andtoavoidmulticollinearityproblems:

𝐸"#$ = 𝑓 𝐿𝑂𝐴𝑁/𝐺𝐷𝑃 (7)whereifLOAN/GDPissignificantthemodelisvalidated.

11Thisisavariablethatcapturesthecashflowstressofdebtors,seetheannextoSylos(2003).

13

III.EmpiricalfindingsIn order to draw some empirical evidence, we focus on the following economies:Turkey,FYROM,Albania,SerbiaandBosniaandHerzegovina.Unfortunately,countriessuch as Kosovo and Montenegro could not be included in this exercise due to dataavailabilityreasons.Anoverviewofthedatasources,alongwithabriefdescriptionofthevariablesthathavebeenusedisprovidedintheAppendix.

3.1StylisedfactsTobeginwith,we focuson theevolutionof compensation toemployeesover the lastdecade.AsshowninFigure7,compensationofemployeesasashareoftotalexpenseshasbeenstableinthecaseofBosniaandHerzegovina.ThestrongestfluctuationsinthisvariablehavebeenobservedinthecaseofMacedonia.Figure7:Compensationofemployees(%expenses)

Forabetterunderstandingofthedegreeofdevelopmentofthefinancialsystem,Figure8displaystheevolutionofthedomesticcredittotheprivatesectorthathasbeenissuedbybanks.Overall,anincreaseindomesticcreditbybankshasbeenobservedsincetheearly 2000s. Particularly relevant is the fact that for most of the economies underconsiderationtheshareofdomesticcredittoGDPremainedstableduringtheaftermathofthefinancialcrisis.AnexceptiontothisgeneraltrendistheTurkisheconomy,whereanupwardandstrongtrendhasbeenfollowedsince1997.

15

20

25

30

35

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

%

Albania BosniaandHerzegovina

Turkey Serbia

Macedonia,FYR

14

Figure8:Domesticcredittoprivatesectorbybanks(%ofGDP)

Source:Authors’elaborationbasedontheWorldBankdatabase.Note:InthecaseofSerbiaandBosniaandHerzegovinathedatafortheperiod1995-1996hasbeenestimatedbymeansoflinearextrapolation.Drawingattentiontothecostoffinance,Figure9reportsthelendinginterestratethatprivatesectorborrowersneedtofacewhenaccessingbankfinancing.Asshowninthefigure, a substantial decrease in the interest rates has been observed since 1995.Nevertheless,lendinginterestratesseemtohavestabilisedoverthelastfiveyearsandareintherangeof5-15%.Figure9:Lendinginterestrate(%),1995-2015

Source:Authors’elaborationbasedontheWorldBankdatabase.Note:NodataisreportedforTurkeyinthisdatabase.InthecaseofSerbia,thedatafor2015hasbeenestimatedbymeansoflinearextrapolation.

Moreover, Figures 10 and 11 show the proportion of firms that have used banks tofinance investment and working capital respectively. Turning to the use of banks tofinance investment, the lowest proportion has been observed in Albania, where only10% of firms use this channel. In contrast, around 40% of the firms that operate in

01020304050607080

1995

2000

2005

2010

2015

%

Turkey Macedonia,FYRSerbia AlbaniaBosnia-Herzegovina

0102030405060708090

1995

2000

2005

2010

2015

%

Macedonia,FYR Serbia

Albania BosniaandHerzegovina

15

TurkeyandBosniaandHerzegovinaobtainthefinancialresourcesthatarerequiredtofinancetheirinvestmentsfrombanks.Focusingontheuseofbankstofinanceworkingcapital,Figure11showsaconsiderablyexpansionofthissourceoffinanceovertheperiod2005-2013inthecaseofMacedonia.Inparticular,theproportionoffirmsthathasusedthissourceoffinancehasincreaseby20%duringthementionedperiod.However, theopposite trendhasbeenobserved intheAlbanianeconomy,whereaslightdeclinewasregistered.Figure10:Firmsusingbankstofinanceinvestment(%offirms)

Source:Authors’elaborationbasedontheWorldBankdatabase.Note:Thedatashowedas2009inthecaseofAlbaniarelatesto2007,sincethe2009valueismissingfromtheWorldBankdatabase.AsimilartreatmenthasbeenusedinthecaseofTurkeywherethedatawasavailablefor2008.Figure11:Firmsusingbankstofinanceworkingcapital(%offirms)

Source:Authors’elaborationbasedontheWorldBankdatabase.Note:Datafor2009hasnotbeenreportedsinceitismissingintheoriginalsource.

0

10

20

30

40

50

60

70

Turkey Albania BosniaandHerzegovina

Macedonia,FYR

Serbia

%

2005 2009 2013

05101520253035404550

Turkey Albania BosniaandHerzegovina

Macedonia,FYR

Serbia

%

2005 2013

16

AcomparisonofFigures10and11revealsthatalargerpercentageoffirmsusebanksto financeworking capital rather than investment.Theonly exception to this generaltrend is Turkey inwhich the same proportion of enterprises finance investment andworkingcapitalbymeansofbankingfinance.AsshowninFigure12,employmentmeasuredasapercentageoftotalpopulationhasremained stable over the period 1995-2015 in the case of Bosnia and Herzegovina,whileanincreaseinemploymenthasbeenobservedsince2005inMacedonia.Figure12:Employmenttopopulationratio,15+,total(%)

Source:Authors’elaborationbasedontheWorldBankdatabase.Note:Datafor2015hasbeencalculatedbyapplyingtherateofgrowthofthelastyearavailable.Finally,Figure13reportstheevolutionofGDPoverthepasttwodecades.Figure13:GDP(US$current,Index1995=100)

Source:Authors’elaborationbasedontheWorldBankdatabase.

202530354045505560

1995

2000

2005

2010

2015

%

Albania BosniaandHerzegovinaSerbia MacedoniaTurkey

0

200

400

600

800

1000

1200

1995

2000

2005

2010

2015

Index(1995=100)

Turkey Macedonia,FYR

Serbia Albania

Bosnia-Herzegovina

17

3.2EconometricsresultsForthepurposeofthissectionwefocusontherelationshipdescribedinexpressions(6)and(7),forlackofdata.Asapreliminarytest,somecorrelationcoefficientshavebeencalculatedinordertoassesstheexistenceofapossiblelinearrelationshipbetweenthevariables.Inviewoftheresultsofthistest,weproceedtoestimateeconometricallythementionedrelationshipinthecaseofMacedonia.Sincethetimehorizonforwhichdataisavailableisnotsufficienttoexploretheexistenceofacointegratingrelationship,weestimateasimpleOLSmodelasreportedinTable4.Forestimationpurposes,relation(7)wasestimatedbymeansofthedomesticcredittoprivatesectorbybanksin%ofGDP,whichisonlyapreliminaryapproximation,butcapturesbothelementsofthevolumeofcreditandofthelendingconditions.Inordertoavoidmulticollinearityissues,theGDPindicatorhasnotbeenincludedintheestimatedmodel.Theestimationofanindividualbehaviouralmodelispreferredtotheutilisationofcross-sectionalorpaneldatatechniquessincethereisaconsiderableheterogeneityacrossthecountriesunderconsideration.Table4:Econometricestimates

L_EMP Coefficient12Constant 2.9894L_SYLOS(-2) 0.0600**L_EMP(-1) 0.7614*** R-squared 0.8746LM(1) 3.5854(0.0826)LM(2) 3.1207(0.0844)Whitetest 0.7414(0.5833)ARCH(1) 0.0144(0.9061)ARCH(2) 0.1677(0.8477)Source:Authors’elaboration.

ProvisionalconclusionsThisisaworkinprogressand,atthisstage,theconclusionscanonlybeprovisional.However,thefactthatagoodstatisticalfitbetweenemploymentandcredithasbeenfoundforMacedoniaisencouragingtocontinueworkonthesubject.

12***,**and*indicatestatisticalsignificanceandrejectionofthenullatthe1,5and10percentsignificancelevels,respectively.Inthebottompartofthetablenumbersinparenthesesshowthelag(s)oftherelevantvariable.

18

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Patinkin,Don.1965[1956].Money,InterestandPrices,Secondedition,NewYork:Harper&RowPublishers,firsteditionpublishedbyRowPaterson,1956.Simonazzi,Annamaria,AndreaGinzburgandGianluigiNocella.2013."EconomicrelationsbetweenGermanyandsouthernEurope",CambridgeJournalofEconomics37,n.3:653–675.Schmitt,Bernard.1966.MonnaieSalairesetProfits,Paris:PressesUniversitairesdeFrance,(alsoAlbeuve:Castella,1975).Steindl,Josef.([1941]1990)."OnRisk",OxfordEconomicPapers,no.5(June),pp.43–53.RepublishedinJosefSteindl:EconomicPapers1941-88,3-12,NewYork,PalgraveMacmillan,1990Steindl,Josef.[1945a]1990."CapitalistEnterpriseandRisk",OxfordEconomicPapers,no.7(March),pp.21–45.Steindl,Josef.1945b.SmallandBigBusiness:EconomicProblemsoftheSizeofFirms,Oxford:Blackwell.Steindl,Josef.1965.RandomProcessesandtheGrowthofFirms,London:Griffin.Steindl,Josef.1972."TheDistributionofWealthafteraModelofWoldandWhittle",TheReviewofEconomicStudies,Vol.39,No.3(Jul.,1972),pp.263-279SylosLabini,Paolo.2003."ProspectsfortheWorldEconomy",BNLQuarterlyReview,no.226,September2003:179-205.Availableat:http://ojs.uniroma1.it/index.php/PSLQuarterlyReview/article/view/9897/9779VallageasBernard.(forthcoming)Monnaie,profit,valeur.Unessaisurlecircuitetl’économiemonétairedeproduction.WoldH.O.A.andP.Whittle.1957."AModelExplainingtheParetoDistributionofWealth",Econometrica,Vol.25,No.4(Oct.,1957),pp.591-595

21

Appendix:DatasourcesTable5providesanoverviewofthemaindatasourcesthathavebeenusedfortheempiricalanalysispresentedinSection3.Table5:Datasources

Variable DatasourceDomesticcredittoprivatesectorbybanks(%ofGDP)

WorldBank.WorldDevelopmentIndicatorsdatabase.

Compensationofemployees(%expenses)

WorldBank.WorldDevelopmentIndicatorsdatabase.

GDP(constantLCU) WorldBank.WorldDevelopmentIndicatorsdatabase.

GDP(currentLCU) WorldBank.WorldDevelopmentIndicatorsdatabase.

GDP(currentUS$) WorldBank.WorldDevelopmentIndicatorsdatabase.

Firmsusingbankstofinanceinvestment(%offirms)

WorldBank.WorldDevelopmentIndicatorsdatabase.

Firmsusingbankstofinanceworkingcapital(%offirms)

WorldBank.WorldDevelopmentIndicatorsdatabase.

Lendinginterestrate(%) WorldBank.WorldDevelopmentIndicatorsdatabase.

Employmenttopopulationratio,15+,total(%)(modelledILOestimate)

WorldBank.WorldDevelopmentIndicatorsdatabase.

Source:Authors’elaboration.