Roe & Vasconcellos: How Brazil Broke Loose
CAMBRIDGE - Brazilian President Dilma Rousseff's visit last week to Washington, DC, offers an occasion to consider how some once-poor countries have broken out of poverty, as Brazil has. Development institutions like the World Bank have advocated improving business law as an important way to do so. Are they right?
Such thinking goes back at least as far as Max Weber's argument that an effective business environment requires a legal structure as predictable as a clock. Investors, it is thought, need clear rules and effective courts. Security of contract and strong mechanisms that protect investors are, in this view, foundational for financing economic growth. If a potential financier is unsure of being repaid, he or she will not invest, firms will not grow, and economic development will stall. Rules and institutions come first; real economic development follows.
But, compelling as this logic seems, Brazil's rise does not confirm it: financial and economic growth was not preceded by - or even accompanied by - fundamental improvements in courts and contracts.
Growth is unmistakable: Brazil's financial markets have expanded robustly, with stock-market capitalisation rising from 35 per cent of GDP in 2000 to 74 per cent in 2010. In the eight years prior to 2004, only six companies went public; in the eight years since, 137 have. Last year, Brazil overtook the United Kingdom - often held up as an exemplar of contractual security - as the world's sixth-largest economy.