1. An extensive literature exists on this subject. A limited review of standard references is as follows: Edmar L. Bacha, “Recent Brazilian Economic Growth and Some of Its Main Problems,” Textos Para Discussão No. 25, Departamento de Economia, Universidade de Brasilia (Apr. 1975); Werner Baer, “The Brazilian Boom 1968–72: An Explanation and Interpretation,” World Development (Aug. 1973); Werner Baer, “The Brazilian Economic Miracle: The Issues and the Literature,” Bulletin of the Society for Latin American Studies, no. 24 (Mar. 1976); Werner Baer and Paul Beckerman, “Indexing in Brazil,” World Development 2, nos. 11 and 12 (Oct.–Dec. 1974); Fernando Henrique Cardoso, “Associated-Dependent Development: Theoretical and Practical Implications,” in Authoritarian Brazil, edited by Alfred Stepan (New Haven: Yale University Press, 1973); Eduardo Periera de Carvalho, Financiamento Externo e Crescimento Econômico no Brasil (Rio de Janeiro: Coleção Relatorios de Pesquisa, IPEA/INPES, 1974); Albert Fishlow, “The Size Distribution of Income in Brazil,” American Economic Review Papers and Proceedings (May 1972); Albert Fishlow, “Reflections on Post-1964 Economic Policy in Brazil,” in Authoritarian Brazil; Albert Fishlow, “Indexing Brazilian Style: Inflation without Tears,” Brookings Papers on Economic Activity, no. 1 (1974); C. Furtado, “The Post-1964 Brazilian Model of Development,” Studies in Comparative International Development 8, no. 2 (Summer 1973); Carlos Langoni, Distribuição da Renda e Desenvolvimento Econômico do Brasil (Rio de Janeiro: Editora Expressão e Cultura, 1973); Walter L. Ness, “Financial Markets Innovation as a Development Strategy: Initial Results from the Brazilian Experience,” Economic Development & Cultural Change 22, no. 3 (Apr. 1974); Affonso C. Pastore, “Observações Sobre a Politica Monetaria no Programa Brasileiro de Estabilização,” Livre Docencia Thesis, Universidade de São Paulo (1973); Affonso C. Pastore, “Aspectos da Politica Monetaria Recente no Brasil,” Estudos Econômicos 3, no. 2 (1973); Mario Henrique Simonsen, “O Modelo Brasileiro de Desenvolvimento,” Fundação MOBRAL, Ministerio da Educação e Cultura (mimeo 1973); Thomas Skidmore, “Politics and Economic Policymaking in Authoritarian Brazil 1937–1971,” in Authoritarian Brazil, Donald Syvrud, Foundations of Brazilian Economic Growth (Stanford, California: Hoover Institute of War and Peace, 1975); Maria Conceição de Tavares, Da Substituçao de Importações ao Capitalismo Financeiro (Rio de Janeiro: Zahar Editora, 1972); Carlos Von Doellinger, et al., Politica de Comercio Exterior e Seus Efeitos 1967–73 (Rio de Janeiro: Coleção Relatorios de Pesquisa No. 22, IPEA/INPES, 1974); John Wells, “Euro-Dollars, Foreign Debt, and the Brazilian Boom,” Centre of Latin American Studies, University of Cambridge, Working Paper No. 13 (England, 1973).

2. The most recent comprehensive review following this orthodox interpretation can be found in: Syvrud, Foundations, and Simonsen, “O Modelo.”

3. See Baer, “The Brazilian Boom,” and Henri Phillipe Reichstul and Luciano G. Coutinho, “O Setor Produtivo Estatal e o Ciclo” (mimeo., 1975).

4. Annibal Villela and Wilson Suzigan, Politica do Governo e Crescimento da Economia Brasileira 1889–1945 (Rio de Janeiro: IPEA/INPES, Serie Monografica 10, 1973); and Werner Baer, Isaac Kerstenetsky, and Annibal Villela, “The Changing Role of the State in the Brazilian Economy,” World Development 1, no. 11 (Nov. 1973).

5. Quem é Quem, Visão (1975).

6. Data available from Conjuntura Econômica 25, no. 9 (1971) and “Sistema de Contas Nacionais: Metodologia e Quadros Estatísticos,” Fundação Getulio Vargas (Setembro de 1974).

7. For a review of this period see Werner Baer, Industrialization and Economic Development in Brazil (Homewood, Ill.: Irwin Press, 1965); Joel Bergsman, Brazil, Industrialization and Trade Policies (New York: Oxford University Press, 1971); and Judith Tendier, The Electric Power Industry in Brazil (Cambridge, Mass.: Harvard University Press, 1968).

8. See Werner Baer, The Development of the Brazilian Steel Industry (Nashville, Tenn.: Vanderbilt University Press, 1969), and Nathaniel Leff, The Brazilian Capital Goods Industry 1929–1964 (Cambridge, Mass.: Harvard University Press, 1968).

9. We are grateful to Tom Trebat for this point.

10. See Reichstul and Coutinho, “O Setor” and Baer, “The Brazilian Boom.”

11. Reported in Gazeta Mercantil, São Paulo (3 Dezembro de 1975), p. 5.

12. Journal do Brasil (22 Aug. 1975), p. 16. For detailed information on stock trading and new issues see the annual reports of the Bolsa de Valores de São Paulo for 1972, 1973, and 1974.

13. When international agencies finance a substantial part of the expansion plans of state enterprises, international bidding from foreign firms is required. Domestic firms are allowed only a limited cost advantage over foreign firms, thereby reducing their chances of participating extensively in the supplier activity.

14. The argument that the technical capacity of local producers can meet much of this demand is made not only by private producers in the capital goods area but also by leading technical experts. The director of the Instituto de Pesquisas Tecnologicas de São Paulo made the same remarks in a personal interview with the authors.

15. Skidmore, “Politics and Economic Policymaking”; Fishlow, “The Size Distribution”; and Celso Lafer, O Sistema Politica Brasileiro (São Paulo: Editora Perspectiva, 1975).

16. There was extensive debate on this issue in all the major newspapers in Brazil throughout 1975 and 1976. The most detailed statement setting forth the private sector position can be found in a report issued by the São Paulo Federation of Industries (FIESP). See Gazeta Mercantil, São Paulo (4 de Setembro de 1975).

17. For an interesting sociological analysis of the entrepreneurial behavior of private sector Brazilian industrialists in Brazil, see Fernando Henrique Cardoso, Empresario Industrial e Desenvolvimento Econômico no Brasil (São Paulo: Difusão Européia do Livro, 1964). For several economists' perspectives on this issue see Bergsman, Brazil Industrialization (chap. 6); Leff, The Brazilian Capital Goods Industry (chap. 6); and Samuel Morley and Gordon W. Smith, “Import Substitutions and Foreign Investment in Brazil,” Oxford Economic Papers (Mar. 1971).

18. See Baer, “The Brazilian Boom,” and Reichstul and Coutinho “O Setor.”

19. Many private firms, of course, deliberately ignore the stock market to avoid disclosure requirements and the problem of weakening family control. However, those that are listed on the stock market are usually among the largest, most modern, and best managed private firms in Brazil and it is precisely these firms that find it difficult to compete with state enterprises for stock market capital.

20. Conceição de Tavares, Da Substitução; C. Furtado, “The Post-1964 Brazilian Model”; Ness, “Financial Markets”; Syvrud, Foundations; and Andre F. Montoro Filho, “The Recent Development of the Brazilian Financial System and the Application of a General Equilibrium Analysis” (Ph.D. dissertation, Yale University, 1976).

21. Ness, “Financial Markets”; Syvrud, Foundations; and Montoro Filho, “The Recent Development.”

22. See Montoro Filho, “The Recent Development.” With the growth of inflation, an informal inflation-proof market developed (frequently referred to as the “parallel market”) designed to circumvent the 12 percent usury law. With the creation of indexed credit instruments, however, there was a gradual decline of funds channeled into the parallel market. By 1970 this market practically disappeared except as a form of non-formal credit for many small farmers in the rural areas. Consumer consortiums or lotteries became so popular in the preindexed credit era in Brazil that it has been estimated that close to 20 percent of all automobile sales were conducted through these nonbank consumer consortiums.

In light of the above, we should be careful in interpreting the sharp growth of formal credit in the banking system from the mid-sixties onward as representing an equivalent increase in aggregate savings and investment brought about by indexed credit instruments. There is clearly an important element of substitution here as savers transferred their savings from the informal market and consortiums (which are not recorded in official statistics) to the formal credit market.

23. Ness, “Financial Markets.” See note 22 above.

24. Kenneth King, “Recent Brazilian Monetary Policy,” CEDEPLAR, Belo Horizonte (mimeo., Outubro de 1972).

25. H. Patrick and U. Wai, “Stock and Bond Issues and Capital Markets in Less Developed Countries,” IMF Staff Papers (July 1973).

26. In closing this introduction, we should make clear that we do not intend to study in any detail the efficiency of financial intermediation in Brazil or the problem of administered interest rates. Our analysis assumes as given the fact of administered interest rates and a policy of specialization that compartmentalized financial markets. The results of these policies were two-fold. For the first time real interest rates, which had been typically negative, became positive, a fact that can be considered a net benefit to the financial system. On the other hand, the frequent complaint that surplus funds (savings) exist in certain financial markets while shortages characterize other markets suggests that many market imperfections exist in the allocation of savings into investment in the segmented financial structure. In the spirit of the theory of the second best, the mere expansion and diversification of a financial system that at the same time includes many deliberately induced distortions does not necessarily lead to a net improvement in economic efficiency.

27. It should be noted here that personal savings is estimated as a residual in the national accounts and is independent of the type of asset being bought (i.e., whether an indexed savings instrument in the official credit market or an unofficial type of asset in the parallel market). If we add to this the fact that private savings did not increase since 1965, we can conclude that the “substitution effect” referred to earlier must have been substantial between the formal and informal credit markets.

28. Government bonds (ORTN'S) were in fact the first savings assets that were indexed for inflation in 1965. Thus, bonds set the precedent for the indexation of other savings instruments in both the private and the public financial markets. Of all the financial data recorded in table 3, government bonds must be analyzed with caution. The government frequently issues bonds as a means of transferring resources among various public sector entities. For example, if the national trust funds in the Social Integration Program (PIS) enjoy a surplus cash situation (contributions exceeding obligations), as is the case currently, this fund buys government bonds and as a result transfers resources to other sectors of the government. Thus, it is clear we cannot work with the gross balance of government bond sales since there is considerable double counting in this total. The data in table 3 (column 6) only refer to government bonds held by private individuals excluding all intra-public-sector purchases as well as those purchased by financial intermediaries. See Affonso C. Pastore et al., “Reflections about the Brazilian Experience on Indexation” (Paper presented at the NBER/IPE Seminar on Indexation, Universidade de São Paulo, 1975).

Given the fact that, prior to 1964, government debt management had been far from exemplary, indexation and a real rate of return were insufficient incentives to promote initially a large voluntary purchase of government bonds. Compulsory subscription by government entities and tax credit-induced purchases by firms and individuals were important factors in the rise of bond sales in the middle to late sixties. See Keith Rosenn, “Adaptations of the Brazilian Income Tax to Inflation,” Stanford Law Review 21, no. 1 (Nov. 1968):94–96. Since 1970 voluntary purchases have become more important.

29. The stock price index tabulated in table 5 comes from research currently underway at the University of São Paulo. See Emilio Alfieri, “Analise da Bolsa de Valores como Intermediario Financeiro 1968/74,” Instituto de Pesquisas Economicas (IPE), Universidade de São Paulo (mimeo., 1976). We thank the author for allowing us to use his material.

30. On this point, see Patrick and Wai, “Stock and Bond Issues,” and The Development of the Capital Markets in Brazil (Rio de Janeiro: IBMEC, 1975). For an excellent review of the early development of the capital market institutions in Brazil, see David M. Trubeck, “Law Planning, and the Development of the Brazilian Capital Market,” The Bulletin, New York University, School of Business Administration, nos. 72–73 (Apr. 1971).

31. To take advantage of these tax credits firms had to sell new shares directly to the public and have these new underwritings registered through the Central Bank. Firms also distribute new shares (bonificações) to current shareholders in place of dividends. This can be done in two ways: through incorporation into the capital reserves of the firm or through an indexed revaluation of fixed assets. These new shares are added to the new underwritings to show the variation in the supply of stocks in table 5.

32. See note 19.

33. Not all “open capital” (capital aberto) corporations are listed on the stock market and not all the stocks on the stock market are open capital corporations. Nevertheless there is a strong overlap between the two. There is a consensus among market specialists that the behavior of open capital underwritings is a good proxy for the behavior of the stock market in capturing private savings.

34. Among the top 20 financeiras, independents held 50 percent of total assets in 1973 but only 42 percent in 1974, showing that the large commercial bank conglomerates were increasing their share in the consumer finance market. Among the top 20 companhias de credito imobiliario the total assets of independents declined from 61 to 58 percent from 1973 to 1974. Finally, among the top 20 investment banks, independents held only 31 and 23 percent of total assets in 1973 and 1974, respectively. Conglomerates increased their share significantly. In all segments of these three financial markets the largest five commercial banks (Bradesco, Itau, Real, Nacional, and Uniao de Bancos) in general controlled the largest “specialized” financial institutions. See Visão, Edição Financeira (28 de Abril de 1975). One of the reasons for the tacit official approval of this conglomerate growth is the feeling that a small number of large, strong local banks can compete more effectively for external capital from the Eurodollar and other foreign markets than could a larger number of smaller banks.

35. Until 1965 rents were frozen, pegged to the nominal value of the original contract with no indexing for inflation. As a result, real rents declined and housing investments were discouraged. In the post-1965 period rent readjustments were permitted with indexing, thereby creating a positive stimulus for housing construction. For a discussion of this issue see Keith Rosenn, “Controlled Rents and Uncontrolled Inflation: The Brazilian Dilemma,” The American Journal of Comparative Law 17, no. 2 (1969).

36. Government savings banks had a tradition of accepting small savings accounts and, in addition, were more secure against the threat of bankruptcies than private banks.

37. There are no official data on defaults or evictions. Newspapers in recent years, however, have emphasized the default problem. For an excellent review of the BNH system using a flow-of-funds approach, see Clark W. Reynolds and Robert T. Carpenter, “Housing Finance in Brazil: Toward a New Distribution of Wealth” in Latin American Urban Research 5, edited by Wayne E. Cornelius and Felicity M. Trueblood (Beverly Hills, Calif.: Sage Publications, 1975).

38. Here it is important to remember that indexed returns for private savings accounts are in effect guaranteed by the government through the BNH. If a private savings and loan association has idle balances (and thus cannot pay the indexed readjustment on its liabilities), it simply redeposits these balances in the BNH who will in turn pay the relevant monetary correction for inflation plus a positive yield. Thus private savings institutions have their risks reduced significantly by state intervention guaranteeing indexation for inflation plus a yield.

39. José Roberto Mendonça de Barros, “The Social Integration Program: A Brazilian Attempt at Income Distribution,” Discussion Paper, Instituto de Pesquisas Econômicas, Universidade de São Paulo (mimeo., 1974).

40. Through May 1975, PIS and PASEP funds amounted to 22.5 billion cruzeiros, while indexed exchange bills of the private sector amounted to 50 billion cruzeiros and indexed time deposits 27.7 billion cruzeiros. Data on PIS resources and PASEP investment application data from 1971 onwards can be drawn from Boletims and Relatorios Annuais, Banco Central do Brasil, 1972–1976.

41. Affonso C. Pastore and José Roberto Mendonça de Barros, “O Programa de Integracao Social e a Mobilizacao de Recursos paro o Desenvolvimento,” Estudos Econômicos 2, no. 4 (1972).

42. Lafer, O Sistema.

43. See Pastore et al., “Reflections,” and Lafer, O Sistema.

44. Pastore et al., “Reflections.”

45. See for example Farm Growth in Brazil, Report to AID by the Department of Agricultural Economics and Rural Sociology, Ohio State University, Columbus (1975), chap. 10; Dale W. Adams et al., “Is Inexpensive Credit a Bargain for Small Farmers? Recent Brazilian Experience,” Inter-American Economic Affairs 26, no. 1 (Summer 1972); and Dale W. Adams and Joseph L. Tommy, “Financing Small Farmers: The Brazilian Experience 1965–1969,” Agricultural Finance Review 35 (Oct. 1974).