Endowments, fiscal federalism and the cost of capital for states: evidence from Brazil, 1891–1930
AbstractThere 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 paper, 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 data base with state-level fiscal and risk premium data for Brazil states 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, thus, 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 decentralization that the Brazilian government adopted in the Constitution of 1891, which gave states the sole right to tax exports. We end by running instrumental variable estimates using indices of export prices for each state to instrument for revenues per capita. Our IV estimates confirm our results that states with commodities that had higher price increases had lower risk premia.
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Bibliographic InfoArticle provided by Cambridge University Press in its journal Financial History Review.
Volume (Year): 17 (2010)
Issue (Month): 01 (April)
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Other versions of this item:
- Andre Martínez-Fritscher & Aldo Musacchio, 2009. "Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930," Harvard Business School Working Papers 10-027, Harvard Business School, revised Dec 2009.
- André C. Martínez Fritscher & Aldo Musacchio, 2009. "Endowments, Fiscal Federalism, and the Cost of Capital for States: Evidence from Brazil, 1891-1930," NBER Working Papers 15411, National Bureau of Economic Research, Inc.
- H4 - Public Economics - - Publicly Provided Goods
- H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
- N0 - Economic History - - General
- N16 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Latin America; Caribbean
- N96 - Economic History - - Regional and Urban History - - - Latin America; Caribbean
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