Hostname: page-component-848d4c4894-hfldf Total loading time: 0 Render date: 2024-06-05T11:13:03.339Z Has data issue: false hasContentIssue false
  • English
  • Français

Endowments, fiscal federalism and the cost of capital for states: evidence from Brazil, 1891–19301

Published online by Cambridge University Press:  23 March 2010

André C. Martinez Fritscher  and
Aldo Musacchio
André C. Martinez Fritscher
Affiliation:
Banco de México, amartinez@banxico.org.mx
Aldo Musacchio
Affiliation:
Harvard Business School and NBER, amusacchio@hbs.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

There is a large literature that aims to explain what determines country risk (defined as the difference between the yield of a sovereign's bonds and the risk free rate). In this article, we contribute to the discussion by arguing that an important explanatory factor is the impact that commodities have on the capacity to pay. We use a newly created database with state-level fiscal and risk premium data (between 1891 and 1930) to show that Brazilian states with natural endowments that allowed them to export commodities that were in high demand (e.g. rubber and coffee) ended up having higher revenues per capita and lower cost of capital. We also explain that the variation in revenues per capita was both a product of the variation in natural endowments (i.e. the fact that states cannot produce any commodity they want) and a commodity boom that had asymmetric effects among states. These two effects generated variation in revenues per capita at the state level thanks to the extreme form of fiscal decentralisation that the Brazilian government adopted in the constitution of 1891, which gave states the sole right to tax exports. We also run instrumental variable estimates using indices of export prices for each state. These estimates confirm our findings that states with commodities that had higher price increases had lower risk premia.

Type
Articles
Information
Financial History Review , Volume 17 , Issue 1 , April 2010 , pp. 13 - 50
Copyright
Copyright © European Association for Banking and Financial History e.V. 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

2 North, D. C. and Weingast, B. R., ‘Constitutions and commitment: the evolution of institutions governing public choice in seventeenth-century England’, Journal of Economic History, 49 (1989), pp. 803–32CrossRefGoogle Scholar.

3 Bordo, M. and Rockoff, H., ‘The gold standard as a “good housekeeping seal of approval”’, Journal of Economic History, 56 (1996), pp. 389–428CrossRefGoogle Scholar.

4 Ferguson, Niall and Schularick, Moritz, ‘The empire effect: the determinants of country risk in the first age of globalization, 1880–1913’, Journal of Economic History, 66 (2006), pp. 283–312CrossRefGoogle Scholar.

5 Sussman, N. and Yafeh, Y., ‘Institutions, reforms, and country risk: lessons from Japanese government debt in the Meiji era’, Journal of Economic History, 60 (2000), pp. 442–67CrossRefGoogle Scholar; and Mauro, P., Sussman, N. and Yafeh, Y., Emerging Markets and Financial Globalization: Sovereign Bond Spreads in 1870–1913 and Today (Oxford and New York, 2006)CrossRefGoogle Scholar.

6 Landon-Lane, J. and Oosterlinck, K., ‘Hope springs eternal: French bondholders and the Soviet Repudiation (1915–1919)’, Review of Finance, 10 (2006), pp. 507–35Google Scholar.

7 Flandreau, M. and Zumer, F., The Making of Global Finance: 1880–1913 (Paris, 2004)Google Scholar.

8 W. Summerhill III, ‘Credible commitment in the tropics: sovereign borrowing in imperial Brazil, 1822–1889’, presented at the conference New Frontiers in Latin American Economic History, Harvard University, 16–17 May 2008.

9 Abreu, M., ‘Brazil as a debtor, 1824–1931’, Economic History Review, 59 (2006), pp. 765–87CrossRefGoogle Scholar.

10 Engerman, S. and Sokoloff, K., ‘Factor endowments, institutions, and differential paths of growth’, in Haber, S. (ed.), Why Latin America Fell Behind (Stanford, CA, 1997)Google Scholar; M. Bruhn and F. Gallego, ‘Good, bad, and ugly colonial activities: studying development across the Americas’, MIT mimeo (2007); and J. Naritomi, R. R. Soares and J. J. Assunção, ‘Rent seeking and the unveiling of “de facto” institutions: development and colonial heritage within Brazil’, NBER Working Paper no. 13545 (2007).

11 See André C. Martinez Fritscher, ‘Bargaining for fiscal control: tax federalism in Brazil and Mexico, 1870–1940’, PhD dissertation Boston University, 2009.

12 Brazil, Ministerio da Agricultura, Finanças da União e dos Estados 1822–1913 (Rio de Janeiro, 1917).

13 Villela, A., ‘Distribuição regional das receitas e despesas do governo central no. II reinado, 1844–1889’, Instituto de Pesquisas Econômicas, 37 (2007), pp. 247–74Google Scholar.

14 Martinez Fritscher, ‘Bargaining for fiscal control’.

15 Costa, W. P., ‘A questão fiscal na transformação republicana: continuidades e descontinuidades’, Economia e Sociedade, 10 (1998), pp. 141–74Google Scholar.

16 Ibid.

17 Love points out that even some of the states that wanted more fiscal autonomy supported a relatively strong central government (with the right to collect all import duties) because they understood the benefits of having a national authority in charge of monetary policy, negotiating trade treaties with other countries, and backing states on certain programmes with positive spillovers across states (e.g. the coffee valorisation programme). See Love, J. L., ‘Federalismo y regionalismo en Brasil, 1889–1937’, in Carmagnani, M. (ed.), Federalismos Latinoamericanos: México/Brasil/Argentina (México, 1993)Google Scholar.

18 Paraná had coffee as its main export in the 1920s; it was mainly a mate tea exporter in the first two decades of our study.

19 See Love, J. L., São Paulo in the Brazilian Federation, 1889–1937 (Stanford, CA, 1980)Google Scholar; and Topik, S., The Political Economy of the Brazilian State, 1889–1930 (Austin, TX, 1987)Google Scholar.

20 It is not clear that in a dynamic game states would have wanted to charge higher taxes. Brazil was losing its comparative advantage to new producers in Southeast Asia and higher tax rates could have speeded up the process. In fact, one could speculate whether Brazil would have lost its competitive edge in natural rubber so fast (around 1910).

21 F. T. Fernandes, ‘Taxation and welfare: the case of rubber in the Brazilian Amazon (1870–1910)’, mimeo presented at the 69th meeting of the Economic History Association (2009).

22 Lyra, J., Economia e finanças dos estados do Brasil, 1913 (Parahyba, 1914)Google Scholar.

23 See Stone, I., The Global Export of Capital from Great Britain, 1865–1914: A Statistical Survey (New York, 1999)CrossRefGoogle Scholar; and Obstfeld, M. and Taylor, A., Global Capital Markets: Integration, Crisis, and Growth (Cambridge, 2004)CrossRefGoogle Scholar.

24 Mauro, P., Sussman, N. and Yafeh, Y., Emerging Markets and Financial Globalization: Sovereign Bond Spreads in 1870–1913 and Today (Oxford, 2006), p. 41CrossRefGoogle Scholar.

25 Abreu, ‘Brazil as a debtor, 1824–1931’.

26 Brazil, Balancos da receita e despeza da republica (Rio de Janeiro, 1914).

27 Ibid.

28 Brazil, Diretoria Geral de Estatística/Ministerio da Agricultura, Industria e Commercio, Estatística das finanças do Brasil (Rio de Janeiro, 1926).

29 Taken from Musacchio, A., Experiments in Financial Democracy: Corporate Governance and Financial Development in Brazil, 1882–1950 (Cambridge and New York, 2008)Google Scholar, data appendix.

30 Note that in this setup increases in exports increase capacity to pay not only through higher export tax revenues, but also because higher exports could make the private sector expand other activities that also yielded tax revenues for state coffers.