The Future of Brazil by William H Overholt

Author:William H Overholt [Overholt, William H]
Language: eng
Format: epub
ISBN: 9780367292324
Google: 9bTByQEACAAJ
Goodreads: 51788335
Publisher: Routledge
Published: 2019-01-15T09:23:54+00:00

The Financial and External Sector

The two most striking legacies growing out of the development of the financial sector in the recent past are the crucial role of the state in mobilizing domestic savings and the growing role of foreign savings in the promotion of Brazilian development. The declining role of the private sector in mobilizing and managing domestic savings has been underscored since 1974 by growing bankruptcies of, and scandals involving, 140 independent financeiras. The Central Bank has had to use its judicial power to take over these firms to protect third parties. Also, this development does not bode well for continued market segmentation and financial specialization based on small to medium-sized independent financial companies, given their poor performance in this area.

Although the state has raised forced savings substantially through its various trust funds (FGTS, PIS, PASEP), these—even in combination with voluntary private savings—have not been sufficient to supply the volume of savings required to meet the high rates of investment and growth. This raises the whole question of the role of the foreign debt in the Brazilian economy in the 1970s. The most plausible explanation of this is that the foreign debt supplied external savings (at convenient terms and interest cost) for demand-specific working capital and for the investment requirements of the productive modern sector of the economy in a way that local domestic sources of savings could not do—despite the ongoing reforms of the domestic capital markets. This is not to say that there wasn't a supply of domestic savings to draw upon. However, it was not to be had under the terms (large volume, medium-term length of loan, relatively low interest cost, etc.) required by the modern sector. The Brazilian financial sector was still incapable of channeling domestic savings out of short-term consumer credit operations—or out of the longer-term capital gains havens such as land, real estate, and apartment investments—and transforming this savings "potential" into funds for meeting the investment needs of modern sector manufacture.

Had foreign savings been absent, it is unlikely that the Brazilian capital markets could have been restructured in such a manner as to draw out an equivalent amount of voluntary private savings from other relatively unproductive uses, or that the government would have raised the level of taxation or forced savings to meet the shortfall. The larger voluntary savings strategy would have required higher rates of interest (to compensate for greater risk and the opportunity cost of alternative uses) than the productive sectors could have profitably assumed. The greater forced savings strategy would have implied a decline in consumption levels below that to which Brazilian society had become accustomed, as well as rising costs for business. In this sense, foreign borrowing—made possible through the unusually elastic supply of Eurodollars at this time—was not only a convenient and relatively inexpensive form of financing a higher level of investment and growth. It was also a strategy that permitted a higher level of consumption and one that avoided the politically unpleasant and technically uncertain task of restructuring domestic capital markets to assume this role.

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