Subnational Capital Markets in Developing Countries: From Theory to Practice

By John Petersen; Mila Freire | Go to book overview
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Chapter 15
Latin America and the Caribbean
Brazil

A past of excessive borrowing by a few large states makes the
future difficult for all subnational entities
.

Rodrigo Trelles Zabala and Giovanni Giovanelli


Lessons

Brazil’s experience with subnational borrowing serves as a cau-
tionary tale of the deep and lasting effects that weak central
control, macroeconomic instability, fiscal indiscipline, and insuf-
ficient regulation can have on a country’s public finances. This
story in large part reflects the legacy left by imprudent lending
by state banks and failure to subject the states to the discipline
of the capital market. It also reflects the gyrations of Brazil’s po-
litical system as it alternated between decentralization and re-
centralization.

The latest phase of democratization has led to advanced devo-
lution of political and fiscal authority to the states, giving them
substantial power to generate revenue and a large degree of au-
tonomy. Subnational borrowing powers have traditionally been
extensive and flexible. There was abundant borrowing in the
1960s and 1970s, with both domestic and foreign bond issues
permitted as well as financing from state-owned banks, which

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