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Intro From Federal Banking in Brazil

Intro From Federal Banking in Brazil

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Published by: Pickering and Chatto on Jul 06, 2010
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07/06/2010

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– 1 –
INTRODUCTION
Te elementary truths o political science and statecra were frst discredited, thenorgotten.Karl Polanyi,
Te Great ransformation
 (New York: Farrar and Rinehart, 1944), p. 33
Government banks make sense. As banks, they retain competitive advantagesbecause o greater client confdence and unbeatable brand names such as theBanco do Brasil. As policy instruments, they provide branch o ces, automatedteller machines and mobile services over cellular phones to reach citizens. Teirsta can manage complex inormation about local needs, measure costs, beneftsand risks, and assert contractual control to correct public policies beore theyrun astray. Government banks provide large policy levers or political leadersand social orces. Tese institutions are oen large enough to provide counter-cyclical credit to avert or ameliorate recessions. Federal banks may implementreorms such as privatizations and public sector modernization through ‘IMF-like’ conditional loans to sub-national governments. In the past, directed creditrom government banks drove rapid industrialization in late-developing coun-tries. Such policies continue in many emerging, transition and developing nations. But government banks do much more than direct industrial change.Government
 savings
banks have served local communities across Europe, someor centuries, to emerge aer liberalization o the industry and monetary union with increased market shares and renewed social mandates. Brazilian ederalbanks have also emerged rom military rule, abuse by traditional elites during  prolonged transition, monetary disorder and fnancial crises to shape develop-ment and democracy. Tree big banks, a commercial-investment bank, a savingsbank and a development bank provide over a third o domestic credit in twenty-frst-century Brazil. Tese institutions are commanding heights, both in thetraditional sense o directing large industry and in a new sense. Federal bankshave provided a new channel or social inclusion o the bankless (80
 
 per cent o Brazilians in 2000!) and essential policy alternatives or reorm and economicmanagement amidst boom and bust cycles.
 
2
 Federal Banking in Brazil 
A problem with government banks is that liberal market economies such asthe United States and United Kingdom have none (ignoring support/owner-ship during crisis and past experiences). Government banks remain dissonantrom liberal principles such as ree trade and ree market equilibrium. Nonethe-less, these institutions remain at the centre o political economy in advanced anddeveloping countries. Federal banks in Brazil have persisted because they pro- vide valued policy alternatives and retain competitive advantages over privateand oreign banks.Tis returns to old ideas about how public banks may steer development andsustain social economies. However, the question is not whether commanding heights can centralize power and policy. Tis study is about commanding depth,both in a social and a fnancial sense. From Lenin through Alexandre Gerschenk-ron, Arthur Lewis and Gunnar Myrdal, central government banks were seen ascritical agents or rapid industrialization and modernization. o
command depth
 implies decentralization and diusion to embed government banks in society, politics, frms and markets. Unless government banks are part o the complex-ity, diversity and contestation involved in citizenship, political parties, interestgroups, social movements and transparent government that reect the separa-tion and diusion o power true to democracy, then government banks will allshort o their potential. Large-scale lending oends liberal principles and oendamages the environment. It also distances decisions rom citizens, institutionso representative government and measures o supervision and control that areneeded or democracy
 and 
prudent banking, sound risk analysis and inormeddecision making about resource allocation.Tese claims are grounded in theories o political economy, banking anddemocratization. However, they dier rom neo-liberal theory. Te Brazilian casecounters the idea o global convergence toward private banking through liberali-zation and privatizations. Tis is not an anti-market observation. Te Brazilianstock market Bovespa grew rom 3 per cent o GDP in 1990 to over 100 per cento GDP in 2008 (beore losing then regaining 
half  
its value), with a variety o utures markets, mutual unds and fnancial instruments now available to frmsand investors. Tese advances notwithstanding, government banks still provideover a third o domestic credit. Government banks have not impeded fnancialdevelopment. o the contrary, Brazilian ederal banks have led in the creationo new markets and new banking services in Brazil. Case studies describe howthese institutions have been central players in the record number o initial publicoerings, the unprecedented capitalization o frms on the stock market, policiesdesigned to democratize stock and bond ownership and the creation o uturesmarkets or interest rates, oreign exchange and commodities that have served asbellwethers to approximate public policy and investor confdence. Without gov-ernment banks, Brazilian fnancial markets would not be where they are today.
 
 
 Introduction
3
Government banks have not crowded out fnancial markets. Instead, paraphras-ing Polanyi´s claim about regulation, government banks and markets have growntogether in Brazil. Federal banks have also implemented new social services andamily grants through AM citizenship cards to help reverse severe inequality.Tis has impaired neither their leadership in credit, fnance and capital markets,nor their ability to help adjust the economy and reorm the public sector.Bank change in Brazil thus confrms core ideas in political economy about varieties o capitalism and institutional oundations o competitive advantage.Dierences rom liberal market economies and neo-liberal theory do not implydysunctionality. And Brazil is not an outlier. Government banks remain atthe centre o both coordinated market economies across Continental Europeand many emerging and developing nations. Tis anomaly or liberal theoryand market-centred approaches both inspired this study and shaped its course.Research began in 2001 when privatization remained an unshaken principle atinternational fnancial institutions and largely accepted as best policy by schol-ars. Orthodoxy was also adopted by the coalition government led by PresidentLuis Inácio Lula da Silva’s Partido dos rabalhadores (Worker’s Party, P) in2003 to avert a oreign exchange crisis that would have delegitimized the Brazil-ian le or a generation. Consensus about neo-liberalism has since given way, butcomparative studies, causal analysis and alternative theories remain embryonic.o explain why ederal banks remain so important in Brazil, it was necessary togo back to basics in political economy, public policy and banking.Debates in comparative fnancial economics about bank-centred versus mar-ket-centred fnancial systems frst led me astray. Te compelling ft between thisdichotomy and Hall and Soskice’s varieties o capitalism (liberal and coordinatedmarket economies) seemed to provide the key to explaining why governmentbanks remained so important in Brazil. However, as reerence to the booming Brazilian stock market suggests, the dichotomy between bank- and market-cen-tred fnancial systems is orced and now out o avour. Financial economics nowemphasizes the importance o legal systems and the particularity o domesticconfgurations o banking and fnance. Te liberalization and deepening o fnancial markets in traditionally state- and bank-centred systems such as Franceand Japan (and Brazil, ignoring dierences or the moment) also reveals thatbanks and markets mix better than scholars eared. But the banks versus marketsdichotomy tends to obscure a more undamental reality about Brazil. Advanced political economies tend to have
both
deeply leveraged bank credit and capitalmarkets. Developing nations tend to have
neither 
.Tis is a study o how ederal banks helped bring Brazil out o underde- velopment, military rule and monetary chaos by providing policy options oradjustment, reorm and social inclusion. Brazilian ederal banks helped buershocks, induce reorm, reach the bankless and manage the economy. Tis has

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