Published by EH.Net (June 2016)
William R. Summerhill, Inglorious Revolution: Political Institutions, Sovereign Debt, and Financial Underdevelopment in Imperial Brazil. New Haven: Yale University Press, 2015. xiii + 342 pp. $85 (hardcover), ISBN: 978-0-300-13927-3.
Reviewed for EH.Net by Anne Hanley, Department of History, Northern Illinois University.
William Summerhill (Department of History, UCLA) presents us with a puzzle. How was it that Brazil managed to gain the trust of international and domestic capital markets by establishing its creditworthiness in the nineteenth century yet failed to engender growth-inducing financial market development at home? Aren’t the two supposed to go hand in hand? According to Douglass North and Barry Weingast, they should. Britain’s Glorious Revolution provides the example of a constitutional reform that separated the sovereign from control over public finance, handing it to an elected parliament responsive to the body politic. This was the key to creditworthiness. Political institutions that safeguarded the property rights of state creditors were also responsive to the demands of entrepreneurs at home, leading to financial deepening that created the conditions for robust economic growth and development. One political revolution, two virtuous outcomes. Yet in Brazil, the same constitutional reform that established the creditworthiness of the state did not promote financial deepening. Summerhill’s book studies Brazil’s success in one endeavor and failure in the other to explore a lost opportunity. If only the legislators who repeatedly borrowed and consistently serviced debt had also acted to promote instead of stifle the domestic private financial sector, Brazil may have parlayed its excellent creditworthiness into modern, sustained economic growth. Yet this assumes that being a credible borrower naturally leads to broad-based financial development. The Brazilian case shows that it ain’t necessarily so. Summerhill offers a series of carefully crafted chapters resting on an array of richly constructed original data sets to demonstrate precisely why. Early chapters focus on the nature, timing, cost, and track record of borrowing abroad and at home to establish Brazil’s surprisingly vibrant creditworthiness in spite of challenges from many disruptions and conflicts from regional revolts to international war. Later chapters turn to domestic financial markets — the Rio de Janeiro stock exchange and commercial banks — to identify how and why these were stymied.
Summerhill weaves a sophisticated analysis of the Brazilian experience across the two parts of the book. Brazil successfully committed to borrow without default for sixty years, a highly unusual feat for Latin American countries who had a propensity to default in the aftermath of independence, and was rewarded with regular access to the capital markets and downward trending costs of capital. To take just one example of Summerhill’s carefully layered analysis, he delves into Brazil’s declining costs of capital to test what the proximate causes were and how they differed for foreign and national creditors. Where others have argued that Brazil’s improved terms came from always making its payments, Summerhill’s tests show that shifts in risk premia came from reassessments of the likelihood of default. The market responded not to past performance, the so-called “reputational effect,” but to the implications of disruptions for future repayment, a finding that is interesting while one is reading about the conflicts of the 1830s to 1860s, but downright chillingly prescient by the end of the book. Moreover, his rich price data series reveal that the risks keeping domestic creditors up at night were entirely different from those that occupied the concerns of foreign lenders. In a bit of historical fortune that the two rarely coincided, Brazil always had access to capital on one side of the Atlantic or the other. Because of this access, Summerhill argues, it was able to fight and win wars, strengthen the central state, invest in infrastructure, and extend its authority over a continent-sized country. Its borrowing in foreign and national markets reinforced its good behavior: what was good for external debt service (low inflation) was also good for domestic creditors (no fear that debts would be inflated away). Chapter 4, a wonderful investigation of domestic borrowing, leaves us with a picture of a sophisticated market and savvy government officials.
Yet the political elites that succeeded so well in building up the state elected to closely control and stifle domestic financial market development. The Council of State, an advisory body to the Emperor comprised of members of parliament, had ultimate control over approving corporate charters. This turned out to be a clear conflict of interest: by limiting the number of charters, the parliament limited the options available to the investing public and diverted their savings into domestic credit instruments when the government needed money. This skewed incentive that promoted the nation-state at the cost of private sector development was reinforced by the close ties between statesmen and entrepreneurs who received the coveted charters. As a result, banks were few and profitable. The Brazilian economy was woefully underserved, while the political-financial cronies got rich. What would the British think of that?! If nothing else, Summerhill’s tale of two markets is a compelling illustration that Britain’s experience was exceptional, not the standard.
This is an excellent book built on a solid foundation of data carefully examined, tested and explored so it seems petty to want to know more, but a series of unanswered questions nag the reader: what were the financial theories and models available to Brazil’s statesmen as they designed their constitution that gave fiscal power to elected legislators? Their experience with the Portuguese crown was enough to make them want to separate the sovereign from the purse, but how did they decide what this new form should take? And what was their inspiration for maintaining tight control over the distribution of corporate charters? This question is important, because one wonders whether the Brazilian elites knew of a virtuous path that could have benefited the nation yet actively chose the course of self-gain, or if they were responding to a unique set of constraints that gave incentive to development-stunting policy choices. That is, was cronyism an initial input or an unintended outcome? In the end, it didn’t matter. A political coup in 1889 put an end to Brazil’s creditworthy status and turned it into the serial defaulter it is now known to be. If there ever was an example of the weakness of the reputational effect argument, this was it, loud and clear.
Anne Hanley is associate professor of Latin American history at Northern Illinois University. She is author of Native Capital: Financial Institutions and Economic Development in São Paulo, Brazil 1850-1920 and is writing a book on municipal finance and the provision of public services in Brazil. email@example.com
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