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Financial Development, Growth and Equity in Brazil

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  • Armando Castelar
  • Regis Bonelli o
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    Abstract

    Financial markets help to foster growth and productivity through their role inmobilizing savings to finance investment and production, selecting and monitoringinvestment projects, diversifying risks, and allowing investment and production to becarried out in the most productive scale and time frame. This paper examines the linksbetween financial development, growth and equity. The focus is on the Brazilian case,but we also aim at contributing to a broader discussion on the role of financial marketsin fostering economic development in Latin America. The analysis discusses: a) Brazil?srecent growth record, which resembles Latin America?s average regarding pace andsources of growth; b) recent changes in financial intermediation in the region, stressingthe role of the public sector in absorbing private savings; c) the interface betweengrowth and finance; d) the issue of access to financial services; and e) the impedimentsto financial deepening and inclusion drawn from the Brazilian experience.Among its conclusions we highlight the relatively small contribution the Brazilianfinancial system has had towards promoting growth and equity in the followingsequence: a) the incomplete macroeconomic adjustment of the economy, which lead tohigh interest rates, market volatility, and a preference of savers for liquid, short-termfinancial investments; b) the high tax burden and the associated high degree ofinformality and fiddling with company accounts, which lower the quality of theinformation disclosed to financial institutions and capital markets; c) the central role ofthe state in mobilizing and allocating savings, largely an inheritance of the pre-1990sdevelopment model, which dampens the impact of financial intermediation on capitalproductivity; and d ) the low protection of minority shareholders and especiallycreditors against expropriation by the state and private parties create a highly uncertainand risky environment that raises the cost of capital, discourages financialintermediation and raises the preference for short-term and liquid financial assets.

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    Bibliographic Info

    Paper provided by Instituto de Pesquisa Econômica Aplicada - IPEA in its series Discussion Papers with number 1118.

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    Length: 42 pages
    Date of creation: Sep 2005
    Date of revision:
    Handle: RePEc:ipe:ipetds:1118

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    1. Eduardo Lora & Ugo Panizza, 2002. "Structural Reforms in Latin America under Scrutiny," Research Department Publications 4301, Inter-American Development Bank, Research Department.
    2. Ross Levine, 1997. "Financial Development and Economic Growth: Views and Agenda," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 688-726, June.
    3. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Law and Finance," Working Paper 19451, Harvard University OpenScholar.
    4. Sebastian Edwards, 1995. "Why are Saving Rates so Different Across Countries?: An International Comparative Analysis," NBER Working Papers 5097, National Bureau of Economic Research, Inc.
    5. Eduardo Lora, 2001. "Structural reforms in Latin America: What has been reformed and how to measure it?," Research Department Publications 4287, Inter-American Development Bank, Research Department.
    6. Demirguc-Kunt, Asli & Laeven, Luc & Levine, Ross, 2004. "Regulations, Market Structure, Institutions, and the Cost of Financial Intermediation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 593-622, June.
    7. Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
    8. Pagano, Marco, 1993. "Financial markets and growth: An overview," European Economic Review, Elsevier, vol. 37(2-3), pages 613-622, April.
    9. Reint Gropp & John Karl Scholz & Michelle White, 1996. "Personal Bankruptcy and Credit Supply and Demand," NBER Working Papers 5653, National Bureau of Economic Research, Inc.
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