Economic Growth, Inequality and Crony Capitalism: The Case of Brazil

223 Pages·2020·6.878 MB·English

by  Danilo Rocha Limoeiro

“That Brazil is notoriously one of the hardest countries in the world to do busi-
ness is often decried but largely unexplained. Combining a sophisticated theor-
etical approach with careful case studies of tax policies and the pharmaceutical
and agricultural sectors, this innovative work shines a spotlight on the political
equilibrium that sustains high transaction costs: politicians enjoy leverage over
economic actors, who do not collectively resist because well-connected busi-
nesses benefit from a regulatory regime that raises the barriers to entry for new
entrepreneurs. This book should be of broad interest to students of the political
economy of emerging market economies.”
— Frances Hagopian, Harvard University
“Observers in Brazil have long lamented both the excessive regulation by the
public sector and the overweening power of big business in the private sector.
This deeply researched book finally puts them together, under sustained scru-
tiny, to show how they are mutually reinforcing. Far from being a fervent advo-
cate of free markets, big business in fact benefits from, and politically supports,
the detailed rules and regulations that give big business a leg up and keep
potential competitors out. Scholars of market reform and business power, in
Brazil and elsewhere, will want to read this innovative and troubling book.”
— Ben Ross Schneider, MIT

Economic Growth, Inequality and
Crony Capitalism
Researchers in international development have long argued that the high costs
of doing business harms prosperity in developing countries, a claim that invites
the question of why governments impose these costs and why societies fail to
enact reforms reducing them. This book seeks to answer the question by look-
ing at the case of Brazil, a large and highly unequal economy riddled with
state-imposed transaction costs. By delving into the political dynamics under-
lying a costly business environment, this book provides the reader with novel
insights into crony capitalism and inequality. It argues that the root cause of
a costly business environment is the collusion between political actors, bureau-
crats and business insiders. Politicians and bureaucrats relish their discretion
over rules and policies as a power resource, since they can increase or decrease
the costs of doing business faced by firms and sectors. Business insiders collude
with government agents to access the loopholes that decrease the cost of doing
business, thus gaining a competitive edge over outsiders. This gives the insiders
weaker preferences for reforms that could decrease the overall cost of doing
business. By pursuing their self-interest, these actors create a low-level equilib-
rium that perpetuates crony capitalism and inequality to the detriment of overall
prosperity. The book makes its case with a sophisticated combination of formal
modeling, quantitative analyses and in-depth case studies of tax policy and of
the pharmaceutical and agricultural sectors in Brazil. Observers have declared
the need for reforms that improve the business environment in developing coun-
tries for a long time. However, the findings presented in this book suggest they
might have underestimated the challenge ahead. Scholars and policy-makers in
international development, business politics and political economy will be inter-
ested in the innovative perspective of this book.
Danilo Rocha Limoeiro holds a Ph.D. in Political Science from MIT and a
Master’s degree with distinction from Oxford University. Currently, he is the
co-founder of Turivius, a company dedicated to helping developing countries
decrease bureaucracy through technology.
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Economic Growth, Inequality and Crony Capitalism
The Case of Brazil
Danilo Rocha Limoeiro
For more information about this series, please visit: www.routledge.com/
Routledge-Studies-in-the-Modern-World-Economy/book-series/SE0432
Economic Growth, Inequality
and Crony Capitalism
The Case of Brazil
Danilo Rocha Limoeiro
Firstpublished2021
byRoutledge
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BritishLibraryCataloguing-in-PublicationData
AcataloguerecordforthisbookisavailablefromtheBritishLibrary
LibraryofCongressCataloging-in-PublicationData
Names:Limoeiro,DaniloRocha,1982-author.
Title:Economicgrowth,inequalityandcronycapitalism:thecaseof
Brazil/DaniloRochaLimoeiro.
Description:Abingdon,Oxon;NewYork,NY:Routledge,2020.|
Includesbibliographicalreferencesandindex.
Identifiers:LCCN2020008385(print)|LCCN2020008386(ebook)
Subjects:LCSH:Industrialpolicy–Brazil.|Transactioncosts.|Business
andpolitics–Brazil.|Economicdevelopment–Moralandethicalaspects–
Brazil.|Brazil–Economicconditions.
Classification:LCCHD3616.B83L562020(print)|LCCHD3616.B83
(ebook)|DDC338.981–dc23
LCrecordavailableathttps://lccn.loc.gov/2020008385
LCebookrecordavailableathttps://lccn.loc.gov/2020008386
ISBN:978-0-367-89651-5(hbk)
ISBN:978-1-003-02033-2(ebk)
TypesetinTimesNewRoman
bySwales&Willis,Exeter,Devon,UK
Contents
Listoffigures ix
Listoftables xi
Preface xii
1 Cronyism,growthandinequality 1
Ricardo’spredicamentandtheargumentinshort 3
Contribution:understandingRicardo’spredicament 10
Roadmap:acentralpuzzleanditsexplanation 14
Capitalism,regulation,LeftandRight:abriefreflection 17
2 Cronycapitalismactors,continuityandchange 22
CronycapitalisminBrazil 23
Business 31
Politicians 36
Bureaucrats 39
Formalizingtheargument 46
Change 50
3 Industryleadersandpoliticalengagement 57
Areindustryleadersmorepoliticallyengaged? 58
TestingthehypothesisinBrazil 59
Estimation 64
Conclusion 71
4 ThepoliticsoftaxationinBrazil 73
Disjointlayeringandthetaxsystem 75
Subnationaltaxationandtaxbreaks 90
Tariffpolicies 108
Conclusion 124
viii Contents
5 Pharmaceuticals 126
Functionsanddistortionsofbureaucracies 128
ThepharmaceuticalindustryinBrazil 134
ThecasesofSãoPauloandGoiás 139
Anvisa:welcomedbutunloved 140
Whynotfightbackagainstregulatorydistortion? 148
6 Agriculture 154
Blurredlines 155
TheagriculturalboominBrazil 161
DemandforParetooptimalreforms 168
Thebootstrapsector? 172
Thepoliticalcloutofagribusiness 178
7 Conclusion 183
Futureresearch 184
Bibliography 190
Index 202
Figures
1.1 LetterreceivedbyRicardofromthelocalelectricitycompanypro-
posingthathebuildtheelectricitylineusinghisownresources 2
1.2 Theissueofstate-imposedtransactioncostsiscommontolower-
incomecountries 13
2.1 Shieldingdomesticfirmsfromforeigncompetition 27
2.2 Alargershareoffirmsthatmadecampaigndonationsobtainatermo
aditivocomparedtotheshareofthosewhodidnotdonate 31
2.3 StategovernorsinBrazilfacestructuralproblemstoformagovern-
ingmajority 38
2.4 Bureaucraticmodelsandtheirimpactonthebusinessenvironment 43
3.1 Variationinnumberofexporterscorrelatespositivelywithvariation
inexchangerates 60
3.2 Shareofdonorfirmsintheleadersandlaggardsgroupsistheoppos-
iteofwhatthecurrentliteraturepredicts 62
3.3 Industryleadersareonaverage38%morelikelytomakeacampaign
donation 68
3.4 Industryleadersareonaverage32%morelikelytodonatetothePT 69
3.5 Industryleadersdonatetoawiderspectrumofcandidates 70
4.1 Brazilhasthemostcomplextaxsystemintheworld 74
4.2 TheNationalAssociationexplainstoitsassociateshowtheycould
blockoneattemptattariffreduction 79
4.3 BrazilandUAEareoutliersandleveragepointsinthesemodels 88
4.4 GoiásisthemostaggressiveBrazilianstateintermsoftaxbreak
disbursement 95
4.5 NumberofnewfirmsenrolledintheGoiásstatetaxbreakprogram 104
4.6 MNCsaremorepredominantinthemanufacturingandprimary
sectorinGoiás 105
4.7 MNCsareonaverage5%morelikelytoreceiveataxbreakinGoiás 107
4.8 Brazilisaveryclosedeconomy 110
4.9 HowMercosurchangesitstariffs 111
4.10 Firmscanfileapetitiontocreateexceptionaltarifflineswithina
currenttariffforcapitalandcomputergoods 113
4.11 SardineimportstoBrazil 116