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MODERNIZING
BRAZIL'S CAPITAL MARKETS, 1985-2001:
PRAGMATISM AND
DEMOCRATIC ADJUSTMENT
Leslie Elliott Armijo
Reed College, Portland,
Oregon
and
Walter L.
Ness, Jr.
Pontifícia Universidade Católica, Rio de Janeiro
March 2002
Paper prepared for the Annual Meeting of the International Studies
Association,
New Orleans, March 25-28, 2002
Abstract
Brazil made a political transition to mass electoral democracy in the
mid 1980s, during the Latin American debt crisis, its worst decade for economic
performance since the 1930s. Reforms of
Brazil's domestic capital markets legislation in the late 1980s and the 1990s
had two main themes: liberalizing previously stringent inward capital controls
and modernizing the domestic corporate governance regime. We find that, where macroeconomic concerns
such as drastically reducing quadruple digit inflation, achieving fiscal equilibrium,
and supporting the balance of payments were of overriding concern, the
policymaking process was relatively centralized and technocratic, with the
Central Bank and Securities Commission implementing important changes where
possible via directives of the executive branch coordinating agency, the
National Monetary Council, but also as necessary through the politically more
difficult process of legislative amendments proposed by the president's
coalition in Congress. As macroeconomic
imperatives have gradually receded in importance, interest group bargaining
over the legislative amendment process has become more complex, and policy
changes more incremental and sometimes contradictory. International actors and forums, particularly the multilateral
agencies, private institutional investors, and the international organization
for securities commissions (IOSOC) apparently have been quite influential in
Brazilian capital markets reform. Yet
it is quite possible to conceive of external actors as strategic allies being
manipulated by Brazilian domestic political players—rather than the reverse.
MODERNIZING
BRAZIL'S CAPITAL MARKETS, 1985-2001:
PRAGMATISM AND
DEMOCRATIC ADJUSTMENT:
Leslie Elliott
Armijo and Walter L. Ness, Jr.
This
essay analyzes the political economy of the major alterations to the
legislation and practices governing Brazil's capital markets, from the 1985
transition to civilian government through the first year of the 21st
century. We argue that it has been an
overwhelmingly pragmatic—as contrasted to an ideologically rigid—process, and
one in which the clash of societal and political interests can be observed, in
a "normal" democratic
process of give and take, even within this relatively arcane issue arena. Our argument proceeds in four sections. The first provides some essential background
on Brazilian political economy. Section
two focuses on reforms to Brazil's international financial regime, that is, to
legislation and institutions governing cross-border capital flows linking
Brazil to the global economy. As is
true of this policy arena in most contemporary states, external financial
policymaking has been largely a top-down process, centralized in the finance
ministry. Section three concerns
reforms to the legal and institutional framework governing the operations of
domestic public companies themselves, which has turned out to be the central
theme of stock market modernization in Brazil.
We note that this ties into the larger global movement of reform of
"corporate governance," ending "crony capitalism," and the
international community's response to the financial crises that roiled emerging
markets throughout the 1990s. We
simultaneously observe that Brazilian actors, both interest groups and
politicians, have utilized this international rhetoric and some international
resources in the service of more parochial and local ends. Since this is the tenor of democratic
politics in the putative models, the OECD countries, we find the story of the
back and forth of Brazilian corporate governance reform at once entertaining
and reassuring. Section four provides a
brief comparison of the importance of the Brazilian market with other emerging
equities markets, highlights the current achievements and problems of the
Brazilian market and offers suggestions about what the future of the Brazilian
capital markets might look like.
I. Where They Came From: A Brief History of Brazil's Capital Markets
to 1985
Brazil's
stock exchanges and capital markets date from the mid 19th century,
when they financed both the imperial government and the commercial warehousing
and export of the privately produced coffee crop, as well as providing a
reasonably safe outlet for the savings of a tiny aristocratic elite based in
Rio de Janeiro (Sweigart 1987; Topik 1987). The exchanges genteelly stagnated in
the decades after 1930, as endemic inflation vitiated the government debt
market, while the central government assumed the politically and economically
crucial task of financing coffee and later import-substituting development.
In 1964, an assertively modernizing
military government resolved to end inflation (and the public deficits that fed
it) and revive private financial markets.
Since the new military government of President Humberto Castello Branco
had purged the Congress of legislators the executive considered irresponsible,
the finance minister had little difficulty in rapidly implementing a coherent
legislative program of financial reforms.
Among the more important changes were Law 4595 of 1964, which for the
first time created an independent central bank, and Law 4728 of 1965, which
established a new type of institution, the investment bank, along with rules
modeled on the U.S. and U.K. models to revive the capital markets, which would
be overseen by the central bank. The
economic policy team also created additional incentives to stimulate the
capital markets. These included
inflation-indexation for both the government debt and residential mortgage
bonds, intended to overcome the investing population's understandable
reluctance to lend long or even medium-term.
Subsequent legislation offered generous subsidies for firms to list
their shares on the stock exchanges, as well as nearly free money in the form
of substantial tax rebates for better-off taxpaying citizens willing to invest
in corporate securities (Trubeck 1971; Ness 1974; Armijo 1993). The political realities of the military
government, however, rapidly rendered this comparatively laissez-faire reform
program unviable, as big industry, big export agriculture, the military, and
the substantial urban middle class all demanded both economic growth and
targeted subsidies in exchange for their continued allegiance. The next president rescinded central bank
independence, and by the early 1970s high inflation had returned (Assis 1983;
Maxfield 1998).
High inflation made
long-term debt finance to the private sector unviable. Though there was a marked speculative boom
in corporate shares in the very late 1960s and early 1970s, irrational exuberance
and corporate governance scandals, in which controlling owners defrauded poorly
informed minority investors, led to a major stock market crash in 1971 which
resulted in market weakness through 1981.
This experience frightened away most individual investors, although the
substantial tax advantages to share ownership induced some capital to remain in
the market. Investors that remained
tended to invest in shares of more
stable but often lackluster state-owned enterprises. In their quest for industrial modernization, however, the capable
technocrats to whom the generals entrusted economic policymaking were
determined to stimulate private financial markets. In 1976, legislative allies of the military government of
President Ernesto Geisel passed Law 6385, which created a securities and
exchange commission (Comissão de Valores
Mobiliarios, or CVM), under the supervision of the Ministry of Finance, to
regulate the stock exchanges and other capital markets activity. Although the presence of the CVM was
supposed to guard against stock fraud and abuses as well as try to develop the
capital markets, the commission initially had few staff members to uncover
wrongdoings and only weak sanctions to
impose.
At the same time, a new
Companies Law, Law 6404 of 1976, updated legislation passed in 1940. In retrospect, most analysts have viewed the
1976 (Lei das Sociedades Anônimas, or Lei das S.A.) as having been primarily
intended to persuade closely held family businesses to take the risk of opening
their capital—and presumably, an equivalent portion of managerial control—to
outside investors. The most notorious
provision was a change in the rules for issuing shares, raising the previous
ceiling for preferred shares (those without the right to vote in shareholders'
meetings, but entitled to be compensated before voting shares in case of
bankruptcy) from 50 percent to two-thirds (66.7 percent) of total shares
outstanding. With this change, family
groups could retain absolute decision-making control by owning as little as
16.7 percent of all shares outstanding, making it almost impossible for other
investors to question management's practices, remove executive directors, or
otherwise defend their interests. At
the same time, minority investors gained new, though modest, rights, including
the right of withdrawal (that is, the right to be bought out at the book value
of shares) during major corporate reorganizations. In addition, if the controlling shareholder was bought out, other
shareholders (initially all other shareholders, but later changed to include
only the owners of common, or voting, shares) would be entitled to receive a
similar offer from the new owner.
Despite their incomplete
development, during the twenty years of the military regime (1964-1984),
Brazil's capital markets remained viable, in the sense that both market
capitalization and trading volume were large by developing country
standards. At the end of military
government in 1984, according to the International Financial Corporation
comparative statistics for what later became to be known as “emerging market
countries,” Brazil had the largest market capitalization for corporate shares
of emerging markets (US$29 billion or 31.5% of the total for all emerging stock
markets) and the largest value traded on stock exchanges (US$10 billion or 31.2% of the total for all
emerging markets). The number of
companies listed for trading on the principal São Paulo Stock Exchange (522)
was second to India. At the same time,
the contribution of decentralized capital markets to allocating additional
capital to the private sector is questionable, as it was the shares of large
and trusted state-owned enterprises that dominated especially the secondary
markets. Arguably this structure, in which the dominant and most heavily traded
firms were state enterprises, helped keep Brazil's SOEs relatively efficient,
since much of their financing was obtained in the market (Trebat 1983).
Brazil had an extended and
relatively peaceful political transition, moving from the apex of
authoritarianism to open political competitiveness between 1975 and 1985, and
from a regime responsive only to economic elites and middle income groups to a
mass democracy with universal suffrage during the late 1980s. By the late 1980s, it was widely agreed
among the Brazilian chattering classes that the previous, and quite
self-conscious, economic model known as import-substituting industrialization,
which had served the country well from the late 1930s through the entire 1970s,
was "exhausted," as evidenced by the international debt crisis, the
cessation of decades of rapid economic growth, and the explosion of annual
inflation into first the triple and then the quadruple digits. Very gradually, and with clear leadership
from senior economic policymakers appointed by the presidents, an elite
consensus arose on the need for market-oriented economic reform to restart
growth. The newly enfranchised masses,
in turn, were relatively indifferent to the problems that fiscal retrenchment
caused for the middle classes, since poorer Brazilians had benefited little
from state spending. However, the poor were
very enthusiastic about inflation-stabilization, since those subsisting in the
informal sector of the economy lacked access to Brazil's pervasive
inflation-indexed incomes and assets, and were thus prepared to support even
radical or painful economic regulatory changes if they could be convinced that
they would result in lasting stabilization.
The democratic transition of 1985 thus represented both a political
regime change and the beginnings of an important and substantive shift in
Brazil's national economic model (Armijo and Faucher 2002).
II. Centralized Policymaking in the Urgent
National Interest: Pragmatic Liberalization of Inward Capital Controls Under
Civilian Rule
Under
democratic rule, two broad sets of policy changes, each representing the
accretion of a series of initiatives aimed at reforming crucial legislation or
institutions, have altered the functioning of Brazil's capital markets. The first set of changes is to the country's
international financial regime, or the rules governing cross-border capital
flows. These were compatible with
measures to remove many of the international trade restrictions that had been
used to prop up the import-substitution strategy. As a consequence of the new rules, international portfolio
investment in Brazilian equities and corporate securities rose dramatically in
the 1990s. At the same time—and
arguably partly because of the relative sophistication of Brazil's domestic
capital and financial markets—Brazil weathered external financial shocks during
the same decade better than most
other emerging markets in Latin America and East Asia.
In
the first years of civilian and democratic government the most pressing economic challenge for Brazil's new civilian
leader, President José Sarney (1985-1989), had been to stabilize the economy
and ensure steady economic growth. His government designed four dramatic
economic stabilization plans, each of which was imposed overnight and involved
a wage-price freeze, the removal of indexation, a new currency, and measures to
contain and reduce the federal debt and deficits (Kearney 2001). Each brought inflation down from multiple
annual digits to single digits for a few months, but each ultimately collapsed
in a flurry of simultaneous, competitive price rises from all sectors,
resulting in the rapid and ferocious return of inflation and indexation. For example, the “cruzado plan” implemented
in March 1986 reduced monthly inflation from over 20 percent in February of
that year to an accumulated total of 4.8 percent, as measured by the General
Price Index-Internal Availability,
in the seven succeeding months. The
collapse of the plan rapidly permitted inflation to return to over 20 percent in
each month of the second quarter of 1987.
Nonetheless, and quite remarkably given the prevailing levels of
inflation, economic growth was positive under Sarney. It was also precarious.
And policymakers understood that the fundamental national economic
restructuring that would be necessary to end inflation was likely to
disorganize many existing economic routines that producers, workers, and
consumers had evolved to cope with Brazil's endemic inflation.
The external sector also
concerned policymakers. Brazil's
foreign debt was large, reaching $96 billion in Sarney's first year in office
(Baer 1995: 94). Under the last military administration of President João
Figueiredo (1979-1984), Brazil had reversed a decade-long structural trade
deficit to obtain a substantial surplus of several billion dollars annually,
yet debt service payments rendered the current account as a whole in
deficit. Moreover, under some
scenarios, the end of inflation, should this be achieved, might have adverse
consequences for the country's trade balance—as in fact occurred in when inflation
finally was reduced to single digits in
the 1990s.
One way to support current
account deficits is financing them through net capital inflows. Of course, Brazil had been a large recipient
of long-term foreign commercial bank loans in the 1970s: these had resulted in
the debt crisis of the 1980s. The foreign
banks burned by Brazil’s foreign debt moratorium of 1987 were unlikely to up
the ante with significant new loans.
Aid from foreign governments or the international financial institutions
was unlikely to be large, and came with too many strings. A third option was foreign direct investment
and/or private portfolio flows, both of which began to increase worldwide in
the late 1980s.
Brazil, of course, had a
long history as a significant recipient of foreign direct investment, which had
been intentionally promoted by the central government as early as the late
1940s as was a central pillar of the economic policies of Brazil's
developmentalist president Juscelino Kubitschek in the late 1950s. The legislative framework in force in the
late 1980s was Law 4131 of 1962, which predated the 1964 military coup. It encouraged foreign investment, even
enabling foreign investors to receive some government incentives in sectors
that state planners deemed developmental priorities. Outward capital controls were never of the blunt and absolute
kind, such as prohibitions on capital repatriation for extended time
periods. Instead, all incoming capital
had to be registered with the Brazilian Central Bank (BCB). Annual profit and dividend remittances
thereafter would be taxed by the government according to what percent of the
original capital investment they represented, with higher remittances as a
share of the original investment being more heavily taxed (Rosenn 1991; Baer
1995:217-241). During these years Brazil also had either multiple official
exchange rates or, since the mid 1960s, a official rate more favorable to those
who would exchange Brazilian currency for foreign money which operated
alongside an officially "illegal" but de facto openly tolerated parallel
market, with a higher rate for those who would move capital out of Brazil. In this way, those who desired to repatriate
capital, as well as Brazilians who preferred to invest or purchase goods
abroad, could simply exchange money at the higher rate with little fear of
adverse legal or business consequences.
The system encouraged FDI to remain in Brazil without being inflexible.
From the late 1960s through
the 1970s, Brazil had been overwhelmingly the largest recipient of foreign
direct investment (FDI) among all developing countries, receiving a cumulative
$17 billion from 1967-79 as compared to $7 billion in Mexico, the next largest
recipient (OECD 2001:Table 3). Despite
the quadruple digit inflation of the late 1980s and the foreign debt
moratorium, there continued to be net inflows of foreign direct investment,
another testament to the ability of Brazil's economy to continue to function
even under macroeconomic conditions that would have destroyed most other
national economic systems. However, if
we compare net FDI inflows plus reinvested profits against profit remittances
in the early to the late 1980s, there is a clear deterioration in the latter
period, with a cumulative net inflow by this more complete measure of over $7
billion under Figueiredo, but only a paltry $100 million under Sarney (Baer
1995:231).
One possible solution was to
make FDI more attractive by expanding the range of sector activities in which
foreign ownership would be permitted.
Privatization of previously state-owned assets in key sectors such as
natural resources and public utilities was a discussion that began
comparatively late and reluctantly in Brazil, as compared to Chile, Mexico,
Argentina and the other more industrialized countries of Latin America. Privatization was impeded by legal barriers
to foreign ownership, many of which had been reaffirmed or even extended in the
new, democratic Brazilian Constitution of 1988, which triumphantly replaced
that of the military years. Moreover,
there was a widespread perception, both in society and among the technocracy
that ran economic affairs within the federal executive, that Brazil's
state-owned enterprises (SOEs) had been comparatively efficient and effective
in creating a modern industrial state (Trebat 1983). Government economists, however, were aware that necessary
modernization and capital investment in energy, telecommunications, steel, and
other state-dominated sectors had fallen off drastically due to the perilous
state of public finances. The debate on
large-scale privatization began under Sarney but remained largely out of the
public eye.
A second possibility was
increased opening to foreign portfolio capital inflows via measures which would
permit foreigners to own and trade Brazilian corporate equities, convertible
debentures, and even more sophisticated instruments such as futures and
derivatives contracts. Some portfolio
investors sought the high returns on Brazilian government securities and other
forms of debt. Regulators and foreign portfolio investors
played a cat and mouse game over the years with regulators trying to prohibit
the foreign investor entry into fixed income investments due to its perceived
greater volatility while foreign investors applied their knowledge to use even complex
derivative strategies to obtain fixed returns.
In 1987 the National Monetary Council, an interagency monetary and
financial consultative council presided over by the Finance Minister, decreed a
fairly substantial easing of inward capital controls. Previously foreign capital had been permitted to invest in Brazil
only through a cumbersome process for foreign investment companies (Decree-Law
1401/75) that had found few takers.
Through CMN Resolution 1289/87 there would now be added the so-called
Annex II funds, through which foreigners could purchase shares in open-ended
mutual funds administered by Brazilian financial institutions, as well as Annex
III funds, which were to be closed-end funds managed by those familiar with the
Brazilian market. The only Annex III fund to operate was the Brazil Fund, which
continues listed for trading on the New York Stock Exchange. These measures had some success but were
comparatively insignificant in macroeconomic terms. The net portfolio capital inflows for investment in shares in
1988 through 1990 was only US$ 235 million.
The next government was that
of Fernando Collor de Melo (1990-1992), Brazil's first directly elected
president in twenty-five years, and the country's first ever chief executive
chosen by a genuinely mass electorate.
Two further shock treatment stabilization plans followed, both of which
met with initial success and raised hopes, only to be undermined as various
social groups found ways to escape the new controls which fell on wages,
prices, and, in the so-called "Collor Plan" of March 1990, almost 70
percent of the nation's bank accounts.
Inflation was running at several thousand percent a year when Collor
assumed office in early 1990. It was
twice brought down temporarily, but not vanquished.
Structural reforms
nonetheless went forward. Collor's
economic team implemented substantial trade liberalization and privatized the
first historically state-owned enterprises, mainly steel producers. Collor's finance minister, Zélia Cardoso de
Mello, was not terribly interested in reform of the capital markets, reportedly
shocking both her own nominal subordinates in the CVM and BCB and key private
figures in the markets by abruptly leaving a March 1991 meeting at which a
carefully crafted capital markets modernization plan, with input from various interested
societal actors, was to be formally presented.
The National Monetary Council however moved forward on further loosening
inward capital controls, creating the so-called Annex IV funds in 1991, which
allowed foreign institutional investors (FIIs) to administer their own
portfolios of Brazilian securities within Brazil. The Annex IV funds responded to a clearly articulated demand from
FIIs and inspired a strong response. By
the end of 1993, Annex IV funds had resulted in a net inflow of almost $9 billion
in just three years, with these funds principally invested in corporate
shares.
Collor, a charismatic
political outsider from a dominant family in a rural state, resigned to avoid
being impeached for corruption after serving only two years of his four year
term. His vice-president, Itamar Franco
(1992-1994), was a longtime politician from the country's dominant political
party, the PMDB (the Brazilian Democratic Movement Party), based in Minas
Gerais, one of the three southeastern states that long had shared national
power in Brazil. Franco was also an
old-style clientelistic politician, who came to office initially with little
interest in economic matters. The
president attracted notoriety for obsessing about comparatively small matters
such as the rising real cost of prescription drugs used by the elderly while
quadruple digit annual inflation continued unchecked.
In late 1993, President
Itamar Franco appointed his fourth finance minister, Fernando Henrique
Cardoso. Unlike most of his predecessors
Cardoso was neither an economist nor a successful business leader, but instead
a respected sociology professor of impeccable breeding and leftist views,
turned professional politician with the return of democracy. Comprehending the public's disillusion with
economic shock treatments, the most important innovation of Cardoso's
stabilization plan---named the Real
Plan after the new currency—was not technical, but political. The beginning date of the plan was announced
months in advance (in retrospect, rather like the conversion of most of
continental Europe to the euro),
giving the population time to understand the conversion of the old units to the
new, and even more crucially, giving various social groups and interests
sufficient time to express their grievances with the technical specifics, and
to receive a response from the finance ministry. The process was notably more democratic than had been the case
with the previous six stabilization plans.
And this time around, the process worked. Inflation, which had reached 5153% in the twelve months ending in
June 1994, declined to less than 25% in the corresponding twelve months ending
in July 1995.
The
success of the Real Plan, first announced in late 1993 and implemented on July
1, 1994, enabled Cardoso to resign as finance minister and achieve a strong win
in the presidential election of October, 1994.
Four years later Cardoso (1995-2002) was reelected (after having
successfully pushed to have the new 1988 Constitution revised to allow him to
contest a second term), again winning the election largely on the basis of his
government's successful economic stabilization program. Cardoso assumed office at the beginning of
1995 determined to achieve the market-oriented economic restructuring began
under Collor but mostly stalled under Franco.
Most Brazilian economists agreed that the country's prospects for
sustained, long-term economic growth required not only inflation stabilization,
but also further trade liberalization, privatization of state-owned utilities
and heavy industry, a reduction in public subsidies to the middle and upper
classes (including via excessively generous public employees’ pensions), and a reorientation of
state spending toward basic education and human capital development of poorer
Brazilians.
President Cardoso confronted
two types of economic problems with important implications for capital markets
development. First, the impressive end
of high and very high inflation—which has averaged less than 10 percent annually
for seven and a half years as of this writing, a result not achieved in Brazil
since the 1930s, caused serious adjustment problems for both the banking sector
and public finances, as both commercial banks and the central government had
previously found ways to manipulate the regulatory framework so as to profit
from inflation. Banks, for example,
made money from the "float," as they received non-interest bearing
deposits from customers and invested the money in the highly liquid and
remunerative overnight market financing portfolios of government debt
securities. Moreover Brazilians had
become accustomed to paying most of their regular bills—for rent, utilities,
taxes and similar recurring items—in person in their local bank branches, which
also allowed banks to profit from the float until the money was transferred to
the creditors. In the very high
inflation years of the early 1990s, banks' inflation revenues averaged fully 4
percent of GDP (OECD 2000, Table 24).
High inflation had encouraged all levels of government to develop
revenue-saving tricks, such as delaying the payment of government contractors
so that the real value of payments would fall.
Adjustment to the absence of inflation, while vastly superior for the
population as a whole, would be costly, especially given that the central
government hardly could allow the banking sector to collapse. Especially during Cardoso's first four-year
term (1995-1998) bank restructuring was costly. The federal government spent about $20 billion through 2001 in restructuring private banks, a process
that often included government support for mergers and acquisitions, in some
cases by foreign banks, while the cost of restoring public banks to health went
as high as $80 billion (author interview with G. Loyola, February 27, 2002).
A second problem of economic
governance was that of the balance of payments for which, perhaps
counter-intuitively, the end of inflation also had adverse transitional
implications. The Real Plan operated by
means of an exchange rate anchor. This
meant that the central bank (BCB) made an attempt to retain the initial parity
of the real with the U.S. dollar as a bulwark against domestic inflation. Although there was not a rigid currency link
(as under Argentina's contemporaneous currency board system), the BCB
maintained the real at a level that became substantially overvalued. In conjunction with significant tariff
reductions since 1989, comparatively inexpensive imports were an important
reason that Brazilian firms, many of which long had operated in oligopolized
domestic markets, did not raise their prices (P. Malan, Lecture at Gazeta
Mercantil International Forum, New York City, 1996). Inflation remained low,
but Brazil's trade surplus disappeared, implying a larger current account
deficit that would need financing. The balance
of payments current account deficit reached $33.4 billion by 1998.
Pursuing vigorous
privatization was a solution that responded to executive branch concerns over
both the fiscal and trade deficits.
Through the Collor administration, Brazilian state-owned enterprises
(SOEs) had been sold principally to domestic purchasers. Government technocrats had created
sufficient buyers partly by requiring banks to purchase "privatization
certificates" (a disguised tax, though not a particularly onerous one in
context) and by declaring all manner of previously questionable public sector
securities (such as long-term bonds of effectively bankrupt public firms) to be
valid "privatization currencies."
Part of the reason these comparatively sophisticated financial
arrangements had worked was due to the long-standing sophistication of
Brazilian capital and financial markets, where all manner of financial actors
and non-financial businesses had learned to cope with very high and volatile
inflation. Privatization had languished
under Itamar Franco, primarily because it was not an intrinsically popular
program and thus required strong executive leadership from a president
committed to market-oriented economic reform—which Franco was not.
Privatization was not an
easy sell, in that SOEs had long been understood as heroic and successful
symbols of national power and independence.
More practically, public sector unions, including both industrial and
white-collar SOE workers and civil servants, were and remain politically
powerful in Brazil. These unions, and the
political parties that championed their cause, clearly understood that
privatization would imply job losses.
The Workers' Party (PT) and the Democratic Workers' Party (PDT), as well as the political machines
linked to particular state governors, were particularly militant in their
opposition to most privatizations. The
Workers' Party leader, Luiz Ignácio da Silva, universally known as
"Lula," was the consensus opposition candidate in the presidential elections
of 1989 (against Collor), 1994 (against Cardoso), and 1998 (against
Cardoso). As of this writing in March
2002 Lula won the PT presidential primary and leads in the polls for the
presidential elections at the end of the year.
Every recent Brazilian election has been fought over economic policy visions,
indicating the continuing strength of his view in Brazilian society at large.
Privatization in which foreign capital was permitted to bid for majority ownership of firms would be necessary in order to find purchasers for Brazil's larger public sector companies, including the fixed and cellular regional telephone companies to be divested by the huge telephone holding company, Telebrás, the electricity holding company, Eletrobrás, as well as several independent state-owned transmission and generating firms in the sector, and possibly the government oil monopoly, Pétrobras. Moreover, privatization in the absence of net foreign capital inflows would not help in financing the current account and fiscal deficits. But foreign participation required two broad types of legal changes. One set was in the purview of executive branch technocrats in the Brazilian Central Bank and the Securities and Exchange Commission (CVM), the heads of both of which were appointed by the President and reported to the Finance Minister. Most large and potentially attractive Brazilian SOEs long had raised significant amounts of financing in the capital markets. The same rules of corporate governance that allowed private family-owned businesses to retain effective control through ownership of only 16.7 percent of total shares applied to public sector firms as well. Moreover, large SOEs historically had raised resources through issuing bonds placed in international markets. Potential foreign buyers of controlling interests in former Brazilian SOEs, however, might not want to list in Brazil's markets, for a whole variety of reasons encompassing both cost and convenience to their global strategies.
Under the Collor government,
the National Monetary Council through its Resolution 1927/92 added a further
qualification to its Resolution 1289 menu of options for foreign
investors, originally dating from
1988. This was Annex V, which permitted
Brazilian companies, for the first time, to list their shares on foreign stock
exchanges via the mechanisms of GDRs (Global Depository Receipts) and ADRs
(American Depository Receipts).
Brazil's senior economic policymakers, led by President Cardoso's
long-serving finance minister, Pedro Malan, were keenly aware of developments
in global financial markets and anxious to integrate the country into these
markets where they perceived this as nationally advantageous. Malan, who had a background as both an
academic economist and the Executive Director for Brazil at the World Bank, had
served Sarney as Brazil's senior foreign debt negotiator, and so was
particularly attuned to rapid shifts in the larger international financial
context. ADRs from all over the world
traded in New York summed to $340 billion in 1996. Only four years later the volume traded had nearly quadrupled to
$1.2 trillion. Moreover, foreign firms
raised over $29 billion in the United States through primary issues of ADRs in
2000 (Bevilaqua 2001: 38).
The Cardoso
government's initiative to ease inward
capital controls was initially a measure to facilitate privatization, but had
unforeseen consequences. Annex V
rapidly evolved into a major competitive challenge for Brazil's stock
exchanges, as not only newly privatized former SOEs but also Brazil's premiere
private firms either delisted from the São Paulo Stock Exchange (Bovespa) or
witnessed shareholders move the majority of their trading abroad. Luiz Henrique Bevilaqua (2001:46-47)
compared the trading volume on the NYSE and Bovespa for the year 2000 for a
sample of twenty-seven of Brazil's premiere companies, including Aracruz,
Embraer, Gerdau, Pão de Açucar, Petrobrás, Unibanco, Votorantin, and several of
the privatized telephone companies. He
found that 49 percent of the trades in their shares had occurred in New York, representing
a significant loss of potential income for Bovespa and Brazilian financial
brokers and analysts. To date, however,
relatively few Brazilian companies (among them Aracruz Celulose, Pão de Açucar,
Multicanal- now Globo Cabo, and Unibanco), have raised new money through public
issues of ADRs. The government has also
raised money through selling part of its position in companies such as
Petrobrás and now Vale do Rio Doce through secondary offerings. The next major section of this paper returns
to the consequences of Annex V for reform of the domestic regulatory structure
of Brazil's capital markets.
The second set of rule
changes necessary for privatization to proceed were those that required the
participation of Brazil's highly fractious Congress, newly empowered since the
democratic transition of the mid 1980s.
The government coalition in Congress was in reality a loose and
pragmatic alliance of regionally based political parties, the majority of which
were led by old-style clientelistic politicians who conceived of their
legislative task in terms of delivering jobs and public works projects—in other
words, "pork"—to their home states.
The two most important government allies were the PMDB (Brazilian
Democratic Movement Party), which counted former presidents Sarney and Franco
among its heavyweights, the former as a senator and the latter as the governor
of powerful Minas Gerais state) and the PFL (Liberal Front Party), which had a
strong base in the conservative and rural Northeast. Both parties had a much stronger national presence and elected
many more federal deputies and senators than Cardoso's own São Paulo based PSDB
(Brazilian Social Democratic Party).
Moreover, for many decades Brazilian constitutions, including both those
of the military years and the new democratic Constitution of 1988, had reserved
a number of economically strategic sectors either exclusively to the state or
to national entrepreneurs only.
Privatization in such sectors as petroleum would require constitutional
amendments. The Cardoso administration
spent several years fulfilling the complex and arduous task of assembling a
three-fifths majority for two votes each (one to alter the legislation and one
to "regulate" it, one of the forms of checks and balances built into
Brazilian legislative procedures) in both the chamber of deputies and the
senate to alter the constitution so that privatization could proceed (Turcotte
and Faucher 2001).
Through 1998, Brazilian
privatizations raised a total of nearly $86 billion, including via debt
conversions, of which only around $11 billion predated Cardoso's first term.
Approximately $37 billion of this came from foreign investors (Turcotte and
Faucher 2001, Tables I and IV). After
stabilization, non-privatization related foreign direct investment, which had
languished in the difficult years of the 1980s, begin to pick up, including
substantial new investments by transnational corporations with existing
facilities in Brazil. During the Cardoso
government, for the years 1995 through 2001, Brazil received a total of $147
billion in net FDI which includes participations in privatizations compared
with only $14 billion in the mandates of his civilian predecessors Sarney,
Collor, and Franco (BCB).
To put these figures in
context, Brazil's current account deficits during the Cardoso administration
(1995-2001) have averaged $25.6 billion annually. These deficits have been financed almost entirely through net FDI
which averaged $21 billion annually during the same period. Foreign purchases of Brazilian shares,
principally through the Annex IV modality which allows foreign institutional
investors direct access to Brazilian capital markets, has brought in only $0.9
billion annually in the 1995-2000 period, while ADR purchases have brought in
$2.9 billion annually. All of these
flows originate with global private investors, and go to support Brazil's
private sector. Moreover, these flows
are equity investments which do not generate future fixed foreign-currency
denominated liabilities, unlike the commercial bank borrowing which supported
Brazil's current account deficits during the high growth years from the late
1960s through the early 1980s. From a
macroeconomic viewpoint, therefore, the technocratic, top-down project of
significantly (though hardly totally) liberalizing inward capital flows during
the 1990s must be considered fairly successful.
III. Decentralized Policymaking in the Brazilian
Legislature: The On-going Saga of Corporate Governance Reform
A second aspect of Brazilian capital markets
modernization is improving and modernizing the legal and institutional
framework through which private business firms can avail themselves of external
finance. We note that "external
finance" in this context means from resources originating outside the
firm, not necessarily outside the country.
External finance might come in the form of either debt or equity. Debt finance, in turn, could mean either
bank loans or securitized debt, such as corporate bonds, or short-term
commercial paper. Bank loans do not constitute capital markets transactions,
but placement of new shares or debt instruments do. We note again that in Brazil public sector firms (SOEs) may also
raise significant amounts of external finance via the capital markets, although
restrictions originating in the Geisel government (1974-1978) and the
substantial privatizations of the 1990s reduced their presence
considerably. The capital markets also
involve the secondary trading of corporate equity and debt and derivative
contracts related to these assets.
To all appearances reforms
in Brazilian capital markets and the legal framework for publicly traded firms
("open capital companies" or "sociedades de capital aberto") are part of the global movement
of the 1980s and 1990s for "corporate governance reform." In the United States, large institutional
investors--including both private mutual funds at such companies as Fidelity
and, especially, large pension funds, most notably CALPERS (California Public
Employees Retirement System)--have been important sources of pressure for
greater "transparency" in corporate management. The essential goal of this movement is to
protect a corporation's ostensible owners—that is, its shareholders, who usually
are assumed to be widely dispersed—against mismanagement and the personal
appropriation of corporate resources by corporate insiders, generally senior
management. Large institutional
investors, which unite many small investors in the enormous mutual and pension
funds they manage, have thus assumed the mantle of Robin Hood, protecting the
pensions of Omaha grandmothers from the machinations of insider traders and
excessively compensated executives.
Thus, the recent dramatic bankruptcy of the Enron Corporation at the
close of 2001 is understood in the "corporate governance" context as
a morality tale in which senior managers allegedly used shadowy partnerships
and creative accounting in connivance with their public auditors to reap large
salaries and profits for themselves while destroying shareholder value.
We will argue that increases
in transparency and penalties for white collar crime are part of the story of
corporate governance reform in Brazil—but hardly all of it. In fact, although many actors have seized
upon the theme, quite a few of the actual reforms serve quite different
purposes and interests, and might be better understood as new entries in the
long Brazilian tradition of changes "para
ingles ver" (for the English to see), a reference to the important
role of British private capital in developing Brazil in the 19th and
early 20th centuries and the necessity Brazilians felt of conforming
(or appearing to conform) to international (that is, British) norms, from dress
to accounting practices. The English in
our tale are the contemporary controllers of international financial resources:
the World Bank and International Monetary Fund; international standard-setting
and rule-making bodies run by G7 governments and others, such as the
International Organization of Securities Commissions (IOSCO); and, of course,
foreign private institutional investors.
In other words, one theme of this section is that corporate governance
reform in Brazil has been a convenient—and externally rewarded—rallying cry,
around which Brazilian actors have pursued their own often quite disparate
interests.
Our second organizing theme
for this section focuses less on the substantive content of policy changes
("Is this really corporate governance reform or something rather
different?") and more on the process.
As contrasted with the top-down, technocratic, and largely uncontested
changes that characterized the process of liberalizing inward capital controls
and other measures intended to develop capital markets in the late 1980s and
1990s, the story of corporate governance reform has been more overtly
political. One important reason for this
is that changes to Brazilian companies law must pass through the Brazilian
Congress, while alterations in many (though not all) of the rules governing
foreign capital flows and other capital market reforms can be accomplished by
administrative rulings under the control of the National Monetary Council
(CMN), or the technocrats in the Central Bank (BCB) Securities and Exchange
Commission (CVM), and Private Insurance Superintendency (SUSEP), all bodies
under the stewardship of the Finance Minister.
A second reason for the observable significant differences in the
political process of modernizing
these two closely related aspects of the regulatory framework for Brazilian
capital markets is that no established interest perceived itself—at least
initially!—to be threatened by the rule changes liberalizing the entry of
foreign portfolio equity capital, while the prospect of United States style
corporate governance reform has caused many leaders of Brazilian business
associations to become quite agitated in defending what they see as their interests.
We begin our analysis in
this section with a closer look into the characteristics of Brazilian capital
markets. Who finances whom through
Brazil's capital markets? Looked at from
the viewpoint of business enterprises, financing from the capital markets is
substantial. Table 1 shows that between
1995 and 2001 Brazilian firms registered public issues of an average of $13.2
billion annually from the capital markets, broadly defined. This compares to long-term bank financing
from the BNDES (National Economic and Social Development Bank), still the major
domestic source of long-term bank loans in Brazil, of approximately $11 billion
in the most recent year 2001. By this
admittedly rough measure, and assuming that some portion of BNDES credit goes
to firms that are not publicly traded companies, financing from the
decentralized capital markets since the inauguration of the Real Plan is more
important for big business in Brazil than long-term development bank
credit. In addition, private placements
of listed companies equities accounted for another $6.1 billion in average in
corporate financing in each year of the period, as shown in Table 2, giving
total corporate securities issues of $19.3 billion per year.
TABLE 1
TOTAL PUBLIC
ISSUES OF CORPORATE SECURITIES, 1981-2001
(in US$ billions)
|
Year |
Shares |
Convertible Debentures |
Straight Bonds |
Total Bonds |
Commercial Paper |
TOTAL |
|
1981 |
0.3 |
0.3 |
1.3 |
1.6 |
0 |
1.9 |
|
1982 |
0.5 |
0.4 |
1.5 |
1.9 |
0 |
2.4 |
|
1983 |
0.2 |
0.6 |
0.3 |
0.9 |
0 |
1.1 |
|
1984 |
0.5 |
0.3 |
0.1 |
0.4 |
0 |
0.9 |
|
1985 |
0.5 |
0.1 |
0.1 |
0.2 |
0 |
0.7 |
|
1986 |
1.2 |
0.1 |
.... |
0.1 |
0 |
1.3 |
|
1987 |
0.3 |
.... |
.... |
.... |
0 |
0.4 |
|
1988 |
0.4 |
0.3 |
2.3 |
2.5 |
0 |
2.6 |
|
1989 |
0.7 |
0.4 |
0.4 |
0.8 |
0 |
1.5 |
|
1990 |
0.6 |
0.1 |
1.0 |
1.1 |
0 |
1.8 |
|
1991 |
0.8 |
..... |
1.0 |
1.1 |
0 |
1.9 |
|
1992 |
1.1 |
0.1 |
0.3 |
0.4 |
0 |
1.5 |
|
1993 |
1.0 |
0.3 |
1.9 |
2.2 |
0 |
3.2 |
|
1994 |
2.7 |
1.8 |
1.3 |
3.2 |
0.2 |
6.0 |
|
1995 |
2.1 |
1.0 |
6.5 |
7.5 |
1.3 |
10.8 |
|
1996 |
9.2 |
1.3 |
7.1 |
8.5 |
0.5 |
18.1 |
|
1997 |
3.5 |
1.3 |
2.4 |
3.7 |
4.5 |
11.7 |
|
1998 |
3.5 |
3.2 |
5.4 |
8.6 |
10.9 |
23.0 |
|
1999 |
1.5 |
0.8 |
2.8 |
3.6 |
4.4 |
9.5 |
|
2000 |
0.8 |
0.8 |
4.0 |
4.8 |
4.1 |
9.7 |
|
2001 |
0.6 |
0.3 |
6.3 |
6.6 |
2.3 |
9.5 |
Sources: CVM and Central Bank of Brazil.
TABLE 2
PUBLIC ISSUES
AND PRIVATE PLACEMENTS OF CORPORATE SECURITIES, 1995-2001 (in US$ billions)
|
Year |
Public
Issues: Equities, Bonds, and Commercial Paper |
Equity
Private Placements |
Total |
|
1995 |
10.8 |
4.8 |
15.6 |
|
1996 |
18.1 |
3.3 |
21.4 |
|
1997 |
11.7 |
6.8 |
18.5 |
|
1998 |
23.0 |
12.4 |
35.4 |
|
1999 |
9.5 |
7.5 |
17.0 |
|
2000 |
9.7 |
4.8 |
14.5 |
|
2001 |
9.5 |
2.9 |
12.4 |
Sources: Public Issues- Table 1
Private
Placements- Calculated by Bordeaux and Ness (2002) from equity subscriptions,
excluding public issues, reported by the São Paulo Stock Exchange in the Gazeta
Mercantil. Converted into dollars at
the average exchange rate of the year.
Also intriguing is the fact
that large institutional investors as a group now hold substantially more
corporate equity than do the family groups who founded and continue to manage
the overwhelming majority of Brazilian businesses. Table 3 estimates that, as of the end of 1999, Brazilian
institutional investors (pension funds and mutual funds) held 17.9 percent of
all corporate equity, while foreign institutional investors (either within
Brazil or via ADRs) held another 32.5 percent.
Controlling shareholders owned just 33 percent. In the United States and
United Kingdom, and to a lesser extent in continental Europe, large
institutional investors have in the 1980s and 1990s been leaders in shareholder
activism, relentlessly pressing management for better corporate
governance. Brazil would seem to be a
natural site for such shareholder activism, as its institutional investors are
among the largest in the developing world.
Brazil's largest pension fund is PREVI, the retirement fund for
employees of Brazil's largest commercial bank, the public sector Bank of
Brazil, which had assets of $17.5 billion at the end of 1999. PREVI is 86th in the world in
size and is one of only four domestic pension funds in all emerging markets
among the top 200 largest worldwide.[1] Nine Brazilian pension funds managed over $1
billion in assets each at the end of 2001.
Table 4 shows that the total assets of Brazilian institutional investors
between 1994 and 2001 averaged around $202 billion annually, very substantial
resources in an economy with a GDP of around $800 billion in 1997 and 1998,
immediately preceding the large forced devaluation of January 1999.
TABLE 3
ESTIMATE OF LISTED COMPANY SHAREHOLDER COMPOSITION, 1999
INVESTOR |
End of 1999 Position- US$b |
% of Total |
|
Private pension funds |
17,0 |
11,1 |
|
Stock mutual funds |
10,4 |
6,8 |
|
Foreign Investors- Annex IV |
23,1 |
15,0 |
|
Depositary Receipt Programs |
26,9 |
17,5 |
|
Largest Shareholder |
50,7 |
33,0 |
|
Residual |
25,4 |
16,5 |
|
TOTAL |
153,5 |
100,0 |
Source: Ness (2000)
TABLE 4
BRAZILIAN
INSTITUTIONAL INVESTORS, 1994-2001
(in US$ billions)
|
|
Total Assets |
|
|
Technical Reserves |
|
|
|
|
Year |
Mutual Funds: |
|
Company |
Open |
Capitalization |
Insurance |
|
|
|
Fixed Income |
Stock |
Pension Funds |
Pension Funds |
Companies |
Companies |
TOTAL |
|
1987 |
0,9 |
0,6 |
|
|
|
|
|
|
1988 |
1,5 |
0,8 |
|
|
|
|
|
|
1989 |
2,1 |
1,1 |
|
|
|
|
|
|
1990 |
0,4 |
0,3 |
|
|
|
|
|
|
1991 |
11,6 |
0,6 |
|
|
|
|
|
|
1992 |
18,5 |
0,6 |
|
|
|
|
|
|
1993 |
22,3 |
2,5 |
|
|
|
|
|
|
1994 |
50,4 |
4,2 |
85,6 |
|
0,8 |
4,7 |
145,7 |
|
1995 |
69,2 |
2,1 |
77,2 |
2,0 |
1,9 |
7,4 |
159,8 |
|
1996 |
90,6 |
4,7 |
83,5 |
3,1 |
3,2 |
8,0 |
193,1 |
|
1997 |
97,2 |
12,0 |
90,7 |
4,1 |
3,3 |
9,3 |
216,6 |
|
1998 |
107,8 |
11,0 |
83,9 |
5,6 |
3,4 |
9,8 |
221,5 |
|
1999 |
107,8 |
11,5 |
68,4 |
5,4 |
2,5 |
6,3 |
201,9 |
|
2000 |
134,3 |
12,8 |
73,4 |
7,0 |
2,8 |
9,5 |
239,8 |
|
2001 |
137,3 |
10,7 |
72,5 |
8,8 |
2,7 |
9,2 |
241,2 |
|
Sources: CVM, Central
Bank, ABRAPP, Susep |
|
|
|
|
|||
If accurate, this snapshot
has a number of interesting connotations for our view of the nature of
capitalism in contemporary Brazil, perhaps suggesting that Brazil is becoming
more similar to the decentralized, securities-based financial systems of the
United States and United Kingdom than to the bank-lending dominated financial
systems of Germany, France, and Japan (see Henning 1994 for an explanation of
these categories). Moreover, these
conclusions also would imply that Brazil is shifting dramatically away from the
state-led development model of national economic governance that clearly
characterized the country between the 1940s and mid 1980s.
Our reading of the situation
suggests that, while some players in Brazil's capital markets might like to see
them evolve so that they come to look more like the Anglo-American model, there
also is fierce resistance in many quarters.
The bottom line as of early 2002 is that Brazil's company law (Lei das S.A., or the law governing
limited liability corporations) still permits founding families to retain
control with as little as 16.7 percent of the total shares outstanding. This makes Brazil's corporate financing
regime far different from that of the United States or United Kingdom, where
non-managerial investors have the votes to oust management, even when
management remains in the hands of members of the founding family. Moreover, Brazil's financial system remains
dominated by large universal banks, with the biggest of all, the Bank of
Brazil, remaining in the public sector. These banks dominate lending, asset
administration, and underwriting. Overall, then, and despite the presence of a
large and vibrant domestic capital market and large institutional investors,
Brazil remains closer to the continental European model controlled by universal
banks than to the Anglo-American one.
At the same time, two
important changes occurred in 2001, following congressional battles that took
up most of the late 1990s. First, the
latest revision of the company law in Congress substantially increases the
rights of minority investors, who are much less likely now to lose money in the
case of a transfer of controlling ownership or major corporate
reorganization. Second, Brazil's
Securities and Exchange Commission (CVM) is now formally independent of the
Finance Ministry, and will be
directed by appointed board members serving fixed terms. Section IV below summarizes our best guesses
about the ways Brazilian capital markets may evolve in the future. We devote the remainder of this section to
exploring the interplay of interests that have shaped capital markets
modernization through the 1990s.
Five sets of actors, each
with differing interests and power resources, have been involved in the
post-stabilization struggle over domestic capital markets
"reform." We discuss the
concerns and resources available to each in the approximate chronological order
in which each became involved in trying to alter (or preserve) the regulatory
framework for Brazil's capital markets.
First is the executive branch technocracy as a whole, coordinated by the
Finance Ministry, whose views are colored by the overriding imperative of
achieving macroeconomic stability. The
second group is comprised of foreign actors, including both foreign portfolio
investors in Brazilian securities and, more importantly, the international
apostles of improved corporate governance, located in international
organizations dominated by G7 governments as well as non-governmental
organizations. Third are Brazilian
publicly traded firms themselves, a list that includes most of Brazil's
premiere corporations. The fourth group
is a coalition of Brazilian regulators, mainly in the CVM but with allies in
the Central Bank (BCB) and the National Economic and Social Development Bank
(BNDES) plus Brazilian financial market professionals, such as ABAMEC (the
Brazilian Association of Securities Analysts), BOVESPA (the São Paulo Stock
Exchange, which represents its broker members), and the Brazilian Institute of
Corporate Governance (IBGVC), all of
whom are trying to recruit Brazilian institutional investors, especially ABRAPP
(the Brazilian Association of Pension Funds) and ANBID (the National
Association of Investment and Development Banks), to the cause of increasing
transparency and minority investor protections for the sake of the future
growth of Brazilian capital markets.
The fifth and final actor is Congressional politicians and their
political parties, few of whom are specialized in or understand these issues
well or find them terribly compelling, but through whom reforms to much of the
basic legislation must pass.
The earliest significant
moves in the 1990s came from the Finance Ministry and executive branch
technocracy. As noted, the major
concern of Brazilian finance ministers has been to adjust Brazilian regulation
and institutions so that foreign direct and portfolio investors would bring
capital into the country, which has been crucial for maintaining macroeconomic
stability. Since the 1976 legislation
governing limited liability corporations (as known as the "companies
law" or Lei das S.A.), in cases
of significant corporate reorganization or sale of the controlling interest,
minority investors had had the right to demand to be bought out, albeit only at
the usually lower book value rather than at
a calculation of "fair market value,". Economists in the Finance Ministry and BNDES, which prepared most
of the technical documents for privatization, had been concerned that potential
investors in a controlling interest in privatized firms would be deterred if
they had to make a comparable offer for all of the outstanding shares, both
common (voting) and preferred (non-voting, but with certain ostensible
financial advantages), rather than merely purchasing the controlling block of
shares from the federal government.
Under the guise of modernizing the capital markets to make them conform
to international standards, modifications that tended to reduce minority
investors' rights were first introduced in a limited fashion via the so-called
“Lobão” Law 7958 of 1989 and later
by the broader Law 9457 of 1997. The
1997 law was introduced by Representative Antônio Kandir (PSDB, São Paulo), who
had been Economic Policy Secretary in the Collor government, and had the result
of rescinding the previous requirement that new owners of controlling shares of
publicly traded companies extend their share purchase offer to minority
ordinary shareholders in the cases of
division of the company (cision) into
various new companies as would be necessary to prepare for the privatization of
Telebrás and some companies of the electrical energy sector.
In addition to balance of
payments concerns, the Finance Ministry also had fiscal worries. Many decades of creative coping with high
inflation had given Brazil a deserved reputation as a financially sophisticated
locale, and one in which those who were skilled in accounting, evading taxes, and playing the market
could always prosper. For this reason,
special levies on the financial sector tended to be politically popular. Brazilian chief executives had also had a
tradition dating back to at least the interwar period of raising crucial
revenues through temporary taxes, forced loans, and the like, which would hit a
given activity or sector with a surcharge scheduled to expire in three or five
years. Law 9311 of 1996 instituted a
tax on all financial transactions, including all stock trades. The resulting CPMF (literally, the
provisional contribution on financial movements) has been maintained ever
since, with the now lame duck Cardoso government in early 2002 making a strong
push to extend this levy until at least 2004 to generate revenue for the
federal government in spite of harmful impacts on the capital markets.
A second group seeking to
influence the legal and institutional framework of Brazil's capital markets has
been international organizations of both governments and the private sector
promoting better "corporate governance." These have included IOSCO, COSRA (Council of Securities
Regulators of the Americas), and IIMV (Iberoamerican Capital Markets
Institute), each of which the Brazilian CVM has participated in for many years,
as well as newer bodies such as the G22 study group set up to recommend
improvements in the global financial architecture following the Asian financial
crisis of 1997-1998 (Porter and Wood 2002).
In the late 1990s the OECD provided funding for the World Bank to create
the Global Corporate Governance Forum (GCGF), housed within the International
Finance Corporation. The mission
statement identifies lack of transparency in business accounting and financial
management as a major cause of the financial crashes in East Asia in 1997-1998
and recommends that emerging market countries protect themselves by adopting
global best practices.
The GCGF's Private Sector
Advisory Group (PSAG), created in July 1999, is headed by Ira S. Millstein, a
management professor who is perhaps the movement's best known academic
advocate, and includes among the other founding members heads of two major U.S.
institutional investors (Mark Mobius of the Templeton Fund and the senior
administrator of TIAA-CREF), the chief executive officers of major enterprises
in Brazil (Furlan of Sadia, a poultry producer and exporter), India, Thailand,
and South Africa, and central bankers from France and the United Kingdom. The associated Investor Responsibility Task
Force includes all of the major U.S. private institutional investors (Goldman
Sachs, Templeton, Fidelity, State Street, and so on), as well as several of the
largest pension funds for special categories of employees, including CALPERS,
TIAA-CREF, the pension fund of the AFL-CIO, the New York State Employees Fund,
and others. There are only two members
from developing countries, Brazil's PREVI and Sun Capital, a private sector
mutual fund from Thailand.
Interestingly, the World Bank's GCGF itself embodies several different
visions of what reform of corporate governance means. The AFL-CIO, of course, has devoted its political activities in
recent years to opposing free trade agreements on the grounds that they export
jobs away from the United States. They,
recently but significantly joined by CALPERS, wish to promote "socially
responsible" investing, which means boycotting countries where labor
standards, freedom of political organization, and perhaps workers’ pay do not meet
developed country standards.
The Global Corporate
Governance Program is envisioned to function via Country Programs in emerging
markets. The very first developing
country to sign up was Brazil, which held its first of three meetings thus far
in Rio in September 2000, with six attendees from the Investor Responsibility
Task Force, three senior World Bank officials, nine prominent Brazilian CEOs,
and representatives from Brazilian institutional investors, including both
PREVI and the BNDES (the National Economic and Social Development Bank, here
present in its role as a major institutional investor), the financial markets
(including BOVESPA), their regulators (the four top officials from the CVM),
Congress (Representative Kandir), and the government (including Finance
Minister Pedro Malan).
Our sense is that various
actors in Brazil's internal debates over capital markets reform have attempted
to familiarize themselves with the interests and rhetoric of global governance
reform in an effort to forge alliances and adapt modernization projects popular
with foreigners for their own domestic goals .
It is perhaps no coincidence that the GCGF's Private Sector Advisory
Group and Investor Responsibility Task Force were constituted in the months
immediately following Brazil's dramatic forced 40 percent devaluation of early
January 1999, adjustment to which was made significantly easier by a package of
assistance led by the International Monetary Fund and backed by the U.S.
Treasury. We should recall, moreover, that
foreign investors, preponderantly
institutional, since the introduction of Annex IV in 1991 and Annex V (ADRs) in
1992 have in the last ten years purchased Brazilian shares to the tune of
approximately $3.9 billion a year—an amount that is neither overwhelming nor
insignificant in the context of Brazil's capital market, though it is quite
large in the context of external portfolio flows to other emerging market
countries, and has been important to Brazil's balance of payments. Brazilians clearly have been interested in
being seen to be leaders in the good corporate governance movement. They have also participated actively in
international organizations of securities commissions, with a former CVM
President serving as President of IOSOC and this organization’s standards being
incorporated into Brazilian securities market regulations whenever
feasible. At the same time, since
neither GCGF Investor Responsibility Task Force members Sadia nor PREVI in any
way takes orders from the CVM much less the Finance Ministry, it seems clear
that other key actors in Brazil's capital markets have been more than willing
to be courted by international actors and to make sure that their interests are
acknowledged in international forums.
Within Brazil, for example, public sector employees unions, emphatically
including Bank of Brazil employees served by PREVI, have opposed the Cardoso
government on many measures to reduce the existing extremely generous
entitlements for public sector workers, and tend to be close to the PT
(Workers' Party), led by Luiz Ignácio da Silva.
A third group attempting to
shape the nature of "reforms" in Brazil's domestic capital markets is
Brazilian big business, represented most explicitly by ABRASCA (the Brazilian
Association of Open Capital Companies) whose membership list is a who's who of
corporate leaders. ABRASCA's positions
are echoed, though less publicly, by FIESP (the Industrial Federation of São
Paulo) and other, newer and smaller business associations such as the Family
Business Network. ABRASCA's members are
primarily descendents of the founding families who retain controlling interests
in virtually all Brazilian private firms. Valadares and Leal (2000) and Leal,
Carvalhal, Aloy and Lapagesse (2000), for example, show that in their sample of
225 large open-capital companies not controlled by the government, a single
shareholder controlled, on average, 48 percent of the voting shares and 33
percent of total capital. (Newly
privatized firms, because they are so large, have tended to be bought by small,
tight consortia of investors. These are
not founding families, but in other respects may share the perceptions and
interests of other controlling shareholders.)
As such, ABRASCA's vision of corporate governance reform embraces the
sorts of reforms pushed by the Finance Ministry for the sake of streamlining
privatization and reducing the costs of being a publicly traded (open capital)
company. These have had the effect of
diluting the already feeble sanctions available to minority investors in
Brazil. ABRASCA opposes many
legislative changes to increase the rights of minority investors on the grounds
that they will increase unnecessary paperwork, bureaucracy, and cost, resulting
in driving away good firms from raising funds in Brazil's capital markets.
A recent guest column in the
Gazeta Mercantil, Brazil's equivalent
of the Wall Street Journal, echoes
these views (Vidigal 2002). Its author
is Antônio Carlos Vidigal, former owner of the Coca-Cola bottling franchise in
Rio de Janeiro and presently Executive Director of the Family Business Network
and astonishingly coordinator of the corporate governance course of the
Brazilian Institute of Capital Markets Research (IBMEC), a private research and
teaching facility in Rio. Vidigal's
title is, "When Governance is Useless." He notes that corporate governance is important in the United
States because corporations don't have controlling owners. Ownership is pulverized. The Board of Directors has to think what is
best for the company and not for its President. Managers need to be controlled by shareholders to minimize agency
costs. In Brazil, Vidigal continues,
the needs are different. He says he
doesn't know of a Brazilian company that has its ownership pulverized without
the figure of the controlling shareholder(s).
The chief executive is almost always the same person as the controlling
shareholder or one of his close relatives.
Consequently, there is no need to protect the controlling shareholder
from professional managers. What the
Brazilian corporation needs are more efficient management practices ("melhorar a gestão") and not
encumbering corporate governance procedures.
Vidigal acknowledges that minority shareholders must be protected
against abuses by the controlling shareholder, but it is clear that he does not
see this as a major problem.
Brazilian big businesses
have also taken concrete steps to protect themselves from what many family
dynasties see as the looming threat of shareholder activism. We noted in our introduction to this section
that capital markets finance has become more important than long-term bank
loans for large Brazilian companies, in a reversal of the pattern since the
early 1960s. But the devil is in the
details. Of the $19.3 billion raised
annually in Brazil's capital markets in the 1990s, new additions to corporate
shares accounted for only an average of $9.1 billion: the rest were securitized
debt borrowings and commercial paper issues.
Moreover, two-thirds of the new share subscriptions, or $6.1 billion,
represented private placements of corporate securities, mainly rights issues
offered to existing shareholders. Of
total external financing of around $30 billion annually available to Brazilian
corporations in the post-stabilization 1990s, that is, only an average of
around $3 billion, or about ten percent of the total, represented new issues of
corporate shares sold on the public market.
Of course, ABRASCA, FIESP, and other business associations--and
sometimes the candidates and political parties dependent on big business for
campaign finance, which includes many members of President Cardoso's fractious
congressional coalition--also decry the taxation of business and the capital
market, through such measures as the CPMF.
A
fourth actor in the drama of Brazilian capital markets reform consists of the
Securities and Exchange Commission (CVM). Although the CVM was formally
subordinate to the Finance Minister until 2001, its primary goals have been
capital markets development and regulation, not national macroeconomic
management. As such, the CVM has long
campaigned to upgrade Brazilian financial rules and institutions to meet global
standards of transparency and "best practice" in disclosure,
corporate governance procedures, and minority shareholder protection. The CVM is supported by various other
Brazilian government agencies and academic economists who have come to believe
that better corporate governance is essential for sustained capitalist economic
growth in the 21st century; plus various financial professionals who
draw their primary livelihood from Brazil's capital markets, including the
broker-members of BOVESPA (the São Paulo Stock Exchange) and the securities
analysts of ABAMEC (the Brazilian Association of Securities Analysts). This pro-reform coalition wants to
strengthen capital markets regulation, improve corporate transparency, better
minority investor protections. In its
annual congress in April 2002, for example, ABAMEC plans to present, in
coordination with other groups, a new long-term plan for development of the
capital markets. This coalition is probably the group within Brazil
whose policy preferences are closest to those of the mainstream corporate
governance movement in the advanced industrial democracies, especially the
United States. The Brazilian Institute
for Corporate Governance was founded in 1999 by those interested in investor
relations for publicly traded companies.
Their vision is perhaps closer to that of ABAMEC than to their bosses in
ABRASCA. Members of this coalition have
worked diligently to convert Brazil's institutional investors, as well as key
members of Congress, to their views, just as the international advocates of
better corporate governance have.
Thus far, Brazil's own
institutional investors largely have remained interested observers. The institutional investors are organized in
four class associations: ABRAPP (Brazilian Association of Pension Funds) for company
pension funds, ANBID (National Association of Investment and Development Banks)
for mutual fund administrators, FENASEG (National Federation of Insurance
Companies) for insurance companies, and ANAPP (National Association of Open
Private Pension Funds) for open pension plan companies. ABRAPP has been dominated by state-owned
enterprise pension funds such as PREVI, which are the largest Brazilian
institutional investors in term of total assets. As ABRAPP's members principally run fixed-benefit plans, the organization
has devoted most of its political activism to sustaining the rights of their
beneficiaries and administrators and trying to deflect government efforts to
tax fund income. The government department
responsible for company pension funds in the Social Secutiry Ministry faces
many major funds with actuarial deficits run by their sponsoring company. Various pension fund administrators are also
being accused of insider information traffic and trading manipulation for their
private interests. With all these
concerns ABRAPP has thus far demonstrated only modest activism in defense of
the funds’ rights as minority shareholders, and the funds' beneficiaries have
been more interested in establishing adequate internal governance procedures in
the pension funds themselves. ANBID, in
contrast, is dominated by Brazil's major universal banks which are responsible
for the major volumes of asset management and securities underwritings. The major part of Brazilian mutual fund
assets are invested in government rather than corporate securities, and in
fixed income assets rather than equities, lessening the propensity for ANBID
members to be activists with respect to minority shareholder rights. Insurance companies represented by FENASEG
and open pension plans represented by ANAPP have relatively few resources
invested in corporate securities. When
the insurance and open pension plan companies have resources to be invested in
corporate securities, the asset management area of the related bank is often
responsible for this portfolio management and representation in corporate
governance processes.
There
have been advocates of decentralized capital markets and shareholder democracy
in the CVM and the Central Bank (BCB), as well as academia, for decades; many
are the same individuals who have long sought to create an independent central
bank in Brazil (Maxfield 1998; Sikkink 1991).
Today's leading figures, including Central Bank President Armínio Fraga,
who coordinates government policy with respect to the capital markets, CVM President José Luiz Osório and the
academic economists Luiz Carlos Mendonça de Barros and Alexandre Scheinkeman,
represent a long tradition in Brazil, but one that has become more influential
since the emergence of a technocratic consensus in the 1980s on the need for
thorough-going market-oriented economic reform as a means for reinvigorating
growth. The thinking or Osório is
illustrative:
"Today there are only two ways that a
Brazilian can become a big businessman. He can be born rich or he can gain
access to BNDES (National Economic and Social Development Bank) financing. We want to create a third way- through the
capital markets."
(Interview with author on February 26,2002)
These figures almost universally have prior experience in
investment or development banking or were trained in economics by United States
universities. The underlying economic
orientation of those promoting capital markets development, including with
improved corporate governance procedures, on carefully articulated intellectual
grounds is therefore quite close to those in the Finance Ministry. Their differences should be understood as
flowing primarily from the structural imperatives given by their current major
responsibilities (short and medium-term macroeconomic management versus the
longer term goal of capital markets development), rather than distinct or
incompatible visions of national economic development.
Changes in Brazil and the
larger world have provided the group we might term the (genuine) corporate
governance reformers with new allies and politically relevant resources since
the end of inflation in 1994. Most
obvious, of course, has been the strong entry of international actors (our
second group, as above) favoring capital markets modernization along
Anglo-American lines, now well ensconced in the World Bank as part of
President James Wolfensohn's attempt to
win friends among the increasingly critical populations of the G7 donor
countries by making the Bank more open and participatory, and focusing on
management consulting disciplines ("governance" across a variety of
economic activities) along with building dams and demanding fiscal
tightening. The OECD, as noted, is
willing to fund this effort, cynics might say in order to avoid making any more
substantive concessions to the demands from many developing countries and much
of Western Europe for reforms of the international financial architecture. Longtime Brazilian advocates of freer, more
transparent capital markets have greeted these trends with understated glee.
Yet at least as important
are shifts in the incentives to other members of the coalition within
Brazil. Since its establishment in
1978, the CVM has spent much of its history either fighting with Brazilian
capital markets participants or mediating fights between them. This pattern of course is quite typical of a
regulatory agency, whose brief is to rein in the markets' cowboy capitalism
("o faroeste do mercado de capitais"). In particular, the CVM was frequently called
upon to settle disputes between the BVRJ (the Rio de Janeiro Stock Exchange)
and BOVESPA (the São Paulo Stock Exchange), who were fierce rivals. Nor did most analysts, brokers, dealers, and
other professionals feel much love for what they viewed as the stodgy and
bureaucratic CVM, perhaps particularly after its move from Rio de Janeiro to
Brasília in 1991, so that its directors could spend more time explaining
themselves to the newly powerful and regionally based politicians in
Congress. But the unexpected fallout of
the Finance Ministry's moves in the late 1980s and early 1990s to ease inward
foreign capital flows—most particularly the famous 1992 National Monetary
Council directive known as Annex V, which for the first time allowed Brazilian
firms to list their shares on foreign stock exchanges—pushed Brazil's financial
market professionals to unite with the CVM and take up the banner of corporate
governance reform with a vengeance.
The problem—from the
viewpoint of BOVESPA et al.—is that the availability of ADRs, plus Brazilian
financial market taxes, especially the CPMF, has caused the Brazilian capital
markets to lose almost half of its potential business over the course of the
1990s, as many of Brazil's blue chip firms, prominently including privatized
state-owned enterprises, have witnessed the shift of the majority of their trading to the New York Stock
Exchange. This trend has been coupled
with the delisting of many firms which have been taken over by foreign and
local groups. The number of firms
listed for trading on stock exchanges has fallen from the 600s throughout the
1980s to 428 at the end of 2001. The
combination of a major market manipulation scandal in 1989 (the Naji Nahas
affair), its rapidly declining business relative to BOVESPA, and the difficulties
of Brazilian capital markets as a whole following the introduction of Annex V
in 1992 and then the CPMF in 1996, led to the closure of the Rio de Janeiro
Stock Exchange (and seven minor exchanges) for equities trading in mid 2000
after a century and a half in business, and the transfer of its remaining
business to its archrival in São Paulo.
Added to these difficulties was the shrinking of equities underwriting
were the facts that most of Brazil's most prominent firms decided in the 1990s
to expand their capital base not through issuing new shares available to the
general public through initial public offerings (IPOs), even of preferential
stock, but instead to encourage existing shareholders, particularly those
holding the controlling interest, to purchase additional shares. Both of these trends led Brazilian capital
markets to lose business during the 1990s.
For this reason the industry
associations of financial market professionals, particularly the securities
analysts of ABAMEC, have unofficially joined forces with the CVM and have been
quite active in lobbying for a version of capital markets modernization that
more closely reflects the goals of the corporate governance movement. In the very late 1990s this coalition began
to achieve some successes. The 1997
revision of the companies law, which on the whole weakened protections for
minority investors, unleashed a storm of protest within this very specialized
community, which began to organize in earnest.
Two results have been most significant as of this writing in early
2002. The São Paulo Stock Exchange,
based on a report written by economists Mendonça de Barros and Scheinkeman, in
2000 established a New Market on the pattern of Germany's Neuer Market. Its conditions for listing require companies
to establish standards of corporate disclosure and governance that closely
mirror "international best practices," a phrase that largely but not
entirely means current United States listing requirements. For new issues, companies must agree not to
issue preferred shares. The Neuer
Market is intended to inspire complete confidence in foreign institutional
investors. Thus far there have been few
takers in Brazil—only one firm thus far has chosen to register for trading
under its most rigorous level of requirements after an IPO--but it remains a
very recent innovation. The second
significant victory for the reform camp has been the newest version of the
companies law, passed in 2001, which we discuss next.
Our fifth and final set of
actors is Brazilian politicians and political parties in the Congress. In truth, congressmen and women represent
not so much an additional set of independent actors with unique preferences for
capital markets modernization as a comparatively new—that is, post democratic
transition--locus for major battles over Brazilian economic policymaking of all
types. To some extent the gradual
relocation of the initiative for capital markets policies from the executive
branch technocracy to the Congress is a function of the fact that the basic
framework for domestic capital markets legislation is embodied in ordinary
statues, passed by the Congress, as opposed, for example, to administrative
rulings of the National Monetary Council (CMN, an interagency body headed in
recent years by the Finance Minister).
The larger reality, however, is that considerable real influence over
the direction of economic policymaking as a whole has shifted to the
legislature.
Moreover, President Cardoso
has clearly understood this fact. His
government has been relatively successful precisely because his Cabinet and
their subordinates have been significantly more willing than their predecessors
for many decades—perhaps ever--to engage in the tedious and frustrating job of
persuasion, inducement, and consensus building in the legislature. As noted above, in our view the really
significant innovation of Cardoso's Real Plan was precisely the political innovation that it was
announced well in advance and debated at length by all of the interested
parties, rather than any particular element of its technical design (see Armijo
2002).
In fact, most of the major
reforms of Cardoso's government have been back and forth affairs, each step
instituting incremental change, usually in the direction of progress toward
market-oriented economic restructuring (Armijo and Faucher 2002). The same has begun to happen in the arena of
capital markets modernization. After
passage of the 1997 revision of the Companies' Law (Law 9457), which became
controversial especially in retrospect, several of the Congressmen and members
of the government coalition who had been instrumental in the 1997 legislation
came to believe that further significant revisions were urgently needed. This group included Representatives Luiz
Carlos Jorge Hauly (PSDB-PR), Emerson Kapaz (PPS-SP), and Hélio Costa (PMDB-MG),
each of whom offered his own version of a revisions to the Lei das S.A. in 1999 or 2000.
In late 1999 Kapaz was appointed as reporter for the House's Committee
for the Economy, Industry and Commerce, with a brief to consider the Hauly and
Costa proposals. Kapaz visited Europe and the United States to obtain opinions
on what needed to be changed, and evidently was impressed with the need for
improved corporate governance if foreign capital was to be attracted. His suggestions became the core of the
significant reforms that eventually constituted the 2001 reform of the
Companies' Law, which also passed through the Finance and Taxation Committee
where legislators chose a new "reporter," or main shepherd of the
legislation through Congress: this was once again Representative Antônio
Kandir. After numerous amendments in
both committees, as well as a series of high profile (at least among Brazil's
business community!) public hearings, the House of Representatives approved the
project, known as Law 10303 of 2001 by 374 to 30, with one abstention in early
2001, followed by the Senate (without further amendments) six months
later. The original (Kapaz) version of
the project received strong support from the CVM and BCB within government, the
ABAMEC, and from the World Bank and foreign institutional investors. The business associations ABRASCA and FIESP
led the opposition which was able to stymie some measures contrary to
controlling shareholder interests.
The most important
substantive changes include making the CVM independent, with directors serving
fixed terms and not dismissible by the Finance Minister or national
President. CVM directors are thus, at
least formally, more independent than their counterparts at the Brazilian
Central Bank. Law 10303 also guarantees
minority shareholders at least 80 percent of the price received by controlling
shareholders in the case of a buyout, established criminal penalties, for the
first time, for certain egregious securities law transgressions, created a new
national Committee for Accounting Standards, and directed the CVM to "give
priority" to promoting processes which would have "educative or
preventative impacts" on market practices. New, though not existing, open capital companies may issue
preferential (non-voting) shares up to a limit of 50 percent, instead of the
previous two-thirds, of all shares (Fleischer 2001). However, President Cardoso, on the advice of government lawyers,
vetoed 17 specific items, in that he considered that the Congress had exceeded
its constitutional powers. Many of the
specific items vetoed were reinstated by him, but via the route of an executive
branch Provisional Measure (medida
provisória) which gives the executive more room to make revisions to the
rules in future. On the one hand, this choice
suggests that this economic legislation, like so much else, is part of the
larger dance of mutual influence and accommodation between Brazil's President
and its Congress. On the other hand,
reform minded legislators were not necessarily displeased to have some of the
Congress' authority "stolen" in this fashion. Since Brazilian geographically elected
politicians (like their counterparts in most other contemporary mass
democracies) are seldom experts in such arcane matters as capital markets
regulation, it makes objective sense to leave many of the technical details to
the experts: that is, to the technocracy, whether in the Finance Ministry, BCB,
or the newly independent CVM.
IV. Conclusions: The Modernization of Brazilian
Capital Markets in Comparative Perspective
Several
themes seem important to emphasize in our comparative conclusions. We begin with the more directly economic
conclusions, then present our political summary.
First, Brazilian capital
markets are, and have long been, very large within the context of developing
countries. Brazilian market
capitalization as a percent of GDP in 1998 was slightly below the median for
the set of important emerging market countries in our Table 5, but this ranking
is partly due to the very sophistication of Brazilian financial markets. Thus, the total capitalization of Brazil's stock market that year was $161 billion,
but this figure doesn't include other portfolio financial assets, such as
corporate bonds and commercial paper, public debt securities, and the
derivatives traded on Brazil's Commodities and Futures Exchange (Bolsa de
Mercadoria e Futuros, known as BMF).
Although according to Table 6, stock exchange trading volume as a
percentage of Brazilian GDP was only about 19 percent in 1998, this percentage
was only exceeded by the emerging markets of Taiwan, Korea, and China. The value of derivatives trades on the BMF
in 1999 was "over six times GDP."
In fact, Brazil's futures' exchange is the tenth largest in the world
(OECD 2001: 75).
TABLE 5
EMERGING
MARKET CAPITALIZATION AS
PERCENTAGE OF
GDP
|
|
1982 |
1987 |
1992 |
1997 |
1998 |
|
Argentina |
1,71% |
1,84% |
8,16% |
20,23% |
15,21% |
|
BRAZIL |
3,64% |
5,75% |
11,59% |
31,14% |
20,67% |
|
Chile |
18,06% |
28,19% |
70,86% |
97,22% |
65,87% |
|
China |
n.ª |
n.ª |
4,37% |
22,97% |
24,12% |
|
Colombia |
3,39% |
3,45% |
9,91% |
17,95% |
12,98% |
|
India |
3,75% |
6,65% |
24,69% |
30,53% |
24,46% |
|
Korea |
5,92% |
24,96% |
34,14% |
8,79% |
35,76% |
|
Mexico |
1,03% |
5,96% |
38,24% |
43,51% |
23,31% |
|
Peru |
2,75% |
1,88% |
6,24% |
27,54% |
18,56% |
|
Russia |
n.ª |
n.ª |
n.ª |
29,41% |
7,45% |
|
Taiwan |
10,47% |
47,87% |
47,67% |
101,60% |
99,76% |
|
Venezuela |
3,56% |
9,23% |
12,51% |
16,49% |
7,98% |
Source: International Finance Corporation, Emerging Stock Markets Fact Book,
various years.
TABLE 6
STOCK EXCHANGE EQUITIES TRADING AS
PERCENTAGE OF GDP
|
|
1982 |
1987 |
1992 |
1997 |
1998 |
|
Argentina |
0,41% |
0,30% |
6,85% |
8,78% |
5,30% |
|
BRAZIL |
2,12% |
3,27% |
5,26% |
24,78% |
18,85% |
|
Chile |
0,67% |
2,65% |
4,85% |
10,05% |
5,61% |
|
China |
n.ª |
n.ª |
4,00% |
41,14% |
29,69% |
|
Colombia |
0,24% |
0,22% |
0,97% |
1,74% |
1,48% |
|
India |
2,67% |
2,63% |
7,81% |
12,82% |
14,96% |
|
Korea |
3,63% |
18,90% |
36,89% |
35,73% |
45,05% |
|
Mexico |
0,47% |
11,08% |
12,26% |
14,63% |
8,68% |
|
Peru |
0,16% |
0,68% |
0,99% |
6,32% |
4,51% |
|
Russia |
n.ª |
n.ª |
n.ª |
3,75% |
3,79% |
|
Taiwan |
7,05% |
82,80% |
113,46% |
458,01% |
341,64% |
|
Venezuela |
0,12% |
0,60% |
4,33% |
4,36% |
1,61% |
Source: Same as Table 5.
Second,
despite the genuine depth and sophistication of Brazilian financial markets,
Brazil's stock market can legitimately be considered underdeveloped. Not only is market turnover as share of
market capitalization low, but trading has been quite highly concentrated in
stocks of just a few companies, reflecting the fact that family groups (or, in
the cases of recently privatized firms, small consortia of controlling
shareholders), continue to control even most publicly traded private
enterprises. Table 7 shows that, until
the breakup and privatization of the state-owned telephone holding company,
Telebrás, in 1998, Brazilian trading was quite concentrated even by developing
country standards. It seems fair to
assume that one of the principal reasons for the lethargy of the Brazilian
stock market has been its lack of transparency and insufficient protections for
minority shareholders, as discussed earlier in this essay. With the breakup of Telebras, Brazilian
trading became less concentrated compared with other emerging markets, with
only China in 1999 having more pulverized trading.
TABLE 7
PERCENTAGE OF
TRADING VOLUME IN TEN MOST TRADED STOCKS
|
|
1991 |
1995 |
1997 |
1998 |
1999 |
|
Argentina |
70,6 |
56,2 |
85,4 |
89,3 |
80,9 |
|
BRAZIL |
47,4 |
52,4 |
63,7 |
54,1 |
23,6 |
|
Chile |
60,5 |
56,3 |
58,3 |
60,4 |
75,9 |
|
China |
n.ª |
15,8 |
13,8 |
5,5 |
10,2 |
|
Colombia |
52,1 |
50,7 |
67,8 |
34,0 |
54,8 |
|
India |
29,4 |
33,5 |
81,1 |
51,7 |
54,0 |
|
Korea |
18,8 |
17,5 |
12,5 |
24,1 |
24,1 |
|
Mexico |
32,3 |
54,1 |
45,6 |
50,8 |
60,4 |
|
Peru |
n.ª |
72,7 |
56,4 |
62,0 |
47,4 |
|
Russia |
n.ª |
n.ª |
71,9 |
86,4 |
90,9 |
|
Taiwan |
17,8 |
19,9 |
22,7 |
19,9 |
29,6 |
|
Venezuela |
89,4 |
70,7 |
65,8 |
71,3 |
64,0 |
Source: Same as Table 5.
Moreover, Brazil's stock market has gone
through hard times in the 1990s, partly as a direct result of giving the best
Brazilian firms the option of having their shares traded (through depositary
rights) and even raising capital in foreign markets, particularly the United
States. Where there were in the mid
1980s nine stock exchanges, including the two major ones in Rio de Janeiro and
São Paulo, these had been reduced to only one, BOVESPA, in 2000. Even more dramatic was the virtual drying up
of both new and seasoned public issues of shares., which reached previous highs
of over 100 annually in both the early 1980s but have fallen to only about 6 a
year in 2000 and 2001. Of these half were seasoned issues and half IPOs.
Interestingly, the decline in market activity seems to have been severe enough
to promote notable cooperation around the cause of reform among previously
often quarreling actors, including both capital markets regulators and private
financial professionals.
The
lack of interest in investment in Brazilian equities has in part been due to
the lackluster profit performance of many Brazilian companies in the
economically difficult 1990s and the low return this has brought to
investors. Table 8 shows that Brazilian
firms traded on stock exchanges had very low returns on equity in the 1990s. In the 1995-2001 period, the average return
on equity was a paltry 4.4 percent for non-financial companies. This helped cause investors in corporate shares
to obtain relatively lower returns. If
our investor placed his money in the shares of the São Paulo Exchange Index at
the beginning of civilian rule in 1985 and held the investment until the end of
2001, he would have obtained an annual real rate of return of only 4.8 percent
compared with higher returns on fixed income such as overnight financing of
government securities (9.1 percent) and prefixed bank certificates of deposit
(9.5 percent). The low profitability of
Brazilian firms and low return of investments in Brazilian shares have
contributed to the relatively low price to book value ratios of Brazilian
shares compared to other emerging markets as is shown in Table 9.
TABLE 8
RETURN ON
EQUITY OF BRAZILIAN LISTED COMPANIES
|
|
Non-Financial |
Return |
Financial
Institutions |
Return |
All Listed
Companies |
Return |
|
Year |
Number |
% |
Number |
% |
Number |
% |
|
1993 |
435 |
0,16% |
69 |
10,82% |
504 |
1,40% |
|
1994 |
438 |
4,35% |
67 |
7,35% |
505 |
4,65% |
|
1995 |
442 |
1,53% |
68 |
-51,63% |
510 |
-1,93% |
|
1996 |
441 |
3,46% |
58 |
-11,36% |
499 |
1,87% |
|
1997 |
449 |
5,77% |
52 |
9,21% |
501 |
6,10% |
|
1998 |
501 |
3,89% |
51 |
-5,91% |
552 |
2,89% |
|
1999 |
465 |
2,18% |
42 |
13,34% |
507 |
3,23% |
|
2000 |
427 |
9,18% |
36 |
8,39% |
463 |
9,09% |
|
2001-9m |
398 |
5,01% |
37 |
18,83% |
435 |
6,69% |
Source: Compiled by the Ness from São Paulo Stock Exchange reports in the Gazeta Mercantil.
Obs: 2001- Three-quarter data annualized.
TABLE 9
AVERAGE PRICE-BOOK VALUE RATIOS FOR
COMPANIES IN IFC COUNTRY INDEXES
|
|
1987 |
1992 |
1997 |
1998 |
1999 |
|
Argentina |
0,4 |
1,2 |
1,8 |
1,3 |
1,5 |
|
Brazil |
0,6 |
0,4 |
1,0 |
0,6 |
1,6 |
|
Chile |
0,9 |
1,7 |
1,6 |
1,1 |
1,7 |
|
China |
n.ª |
n.ª |
1,1 |
1,0 |
2,2 |
|
Colombia |
1,6 |
1,9 |
1,2 |
0,7 |
0,7 |
|
India |
1,9 |
4,7 |
2,3 |
1,8 |
3,3 |
|
Korea |
2,5 |
1,1 |
0,5 |
0,9 |
2,0 |
|
Mexico |
0,8 |
2,0 |
2,3 |
1,4 |
2,2 |
|
Peru |
n.ª |
3,6 |
2,0 |
1,6 |
1,5 |
|
Russia |
n.ª |
n.ª |
0,5 |
0,6 |
2,3 |
|
Taiwan |
2,7 |
2,2 |
3,2 |
2,6 |
3,3 |
|
Venezuela |
3,2 |
1,6 |
1,2 |
0,5 |
0,4 |
Source: Same as Table 5.
Third,
it seems important to emphasize that recent removal of some capital controls,
particularly on inward portfolio investment, has not resulted in a capital
markets regulatory regime that is free of significant outward controls, usually
couched (as in the G7 countries themselves, we note) as "prudential"
requirements. Thus, for example,
Brazilian institutional investors must invest their resources in domestic
financial assets. Nor can individual small
investors easily escape to the NYSE, despite its lower taxation. In the medium term, however, the trend
toward delisting is eroding the supply of corporate shares. Whether the New Market will attract enough
small (too small for the NYSE), but good firms, creating something of a niche
market in Brazil, is as yet difficult to predict. Will there be a supply of new Brazilian firms innovating in
services, products, and processes? Will
the successful firms want partners- initially private equity and later the investing
public in general? Will they come to
the New Market with IPOs or will they be bought out by existing local and
transnational firms offering better prices?
Fourth,
however, there is considerable potential for Brazilian corporate share and
other capital markets development. It
seems quite likely that Brazil will become/continue to be a leader among
emerging market countries in corporate governance reform, traditionally
understood. As this essay has
described, there are now enough domestic interests aligned so as to benefit
from changes in this direction to keep pushing it forward. For example, although Brazilian
institutional investors haven't yet really become involved, they should tend to
support these changes, which are also clearly in the interest of the CVM and
those, such as securities analysts, who work in the capital markets. We also note, once again, that Brazil has
some of the largest institutional investors, in terms of total assets, in the
developing world, which is another among the reasons that international
corporate governance activists will continue to try to recruit Brazilian
allies. As minority investor
protections improve, foreign and domestic capital could find corporate shares
more attractive, although this is hardly a foregone conclusion, as relative
returns is the ultimate bottom line.
(At some point, we note, there could be another looming conflict between
the macroeconomic concerns of the Ministry of Finance and the new style
"developmental" concerns of the corporate governance proponents. To date, Brazilian mutual funds, mostly administered
by the biggest domestic banks, have been heavily invested in government debt,
though pension funds have been somewhat less so. If corporate securities become too attractive, this eventually
could become a problem for the government.)
Our
fifth and final conclusion is that Brazilian capital markets regulation, in
common with other arenas of national economic policymaking, has been
"democratized," for better or worse, in the sense that Congress as a
locale and the overt interplay of economic interest groups as a process both
have become more important since the mid 1980s. Financial market regulation will always be an arcane subject, and
thus largely a technocratic preserve, but it is interesting, and perhaps
ultimately comforting, to observe that the messy process of legislative reform
in Brazil's notably fragmented Congress has, on the whole, probably been a
source of improved financial regulation, rather than the reverse. Moreover, we expect that traditional
Brazilian firms, perhaps grumbling all the way, will successfully accommodate
themselves to whatever legislative "reforms" come their way.
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