The Public Good and the Brazilian State: Municipal Finance and Public Services in São Paulo, 1822-1930
288
The Public Good and the Brazilian State: Municipal Finance and Public Services in São Paulo, 1822-1930
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Overview
In The Public Good and the Brazilian State, Anne G. Hanley assembles an economic history of public revenues as they developed in nineteenth-century Brazil. Specifically, Hanley investigates the financial life of the municipality—a district comparable to the county in the United States—to understand how the local state organized and prioritized the provision of public services, what revenues paid for those services, and what happened when the revenues collected failed to satisfy local needs. Through detailed analyses of municipal ordinances, mayoral reports, citizen complaints, and financial documents, Hanley sheds light on the evolution of public finance and its effect on the early economic development of Brazilian society. This deeply researched book offers valuable insights for anyone seeking to better understand how municipal finance informs histories of inequality and underdevelopment.
Product Details
| ISBN-13: | 9780226535104 |
|---|---|
| Publisher: | University of Chicago Press |
| Publication date: | 05/30/2018 |
| Series: | Markets and Governments in Economic History |
| Sold by: | Barnes & Noble |
| Format: | eBook |
| Pages: | 288 |
| File size: | 722 KB |
About the Author
Read an Excerpt
CHAPTER 1
Introduction
Public Finance and the Origins of Inequality
The Municipality, whether the unyielding ideologues of centralizing regimes like it or not, is the cellular material of nationality; it is the true propelling force of moral and material greatness of the politically organized nations in the democratic regime.
This is where Brazilian life unfolded: in the municipality. Municipal life was where governing was the most personal, where institutions shaped the daily life of every citizen. What time was a shopkeeper allowed to open up business for the day? Who was responsible for keeping streets clean? Could citizens raise livestock in their own backyard? How was dirty water and trash disposed of in the days before piped sewage and regular garbage collection? Most important, who paid? Did they pay enough to keep cities orderly, clean, safe, and free from illness? Were their taxes, licenses, fees, and fines sufficient to keep the roads open and the bridges repaired for commerce? Was this revenue enough to provide children with a proper education? To paraphrase George Bailey in his famous confrontation with Mr. Potter in Frank Capra's It's a Wonderful Life, the municipality was where ordinary Brazilians did most of their working and paying and living and dying.
This book is an economic history of the municipality in Brazil during the first century of that nation's independence from Portugal. The Brazilian municipality is akin to an American county in that it contains urban settlements and their rural surroundings. In the pages that follow, I examine the financial life of the municipality and explain how the local state organized and prioritized the provision of public services, who its stewards determined should pay for these services, and what happened when revenue failed to satisfy local needs. I also look at the debates, decisions, and outcomes to provide an understanding of the evolution of public finance and the provision of public services, as well as their effects on the early economic development of Brazilian society.
The questions of who pays and who benefits are central to our understanding of the origins of inequality. The answers to these questions are found in the contract established between state and citizen via the state's fiscal policies, which set the rules for contribution and establish the patterns of disbursement. As Joseph Schumpeter wrote in 1918, "public finances are one of the best starting points for an investigation of society," because the structure of a state's finances reveals the history of its economic development, its social values, and its cultural biases. The notion of who should shoulder the fiscal burden and who should benefit from state spending, he asserted, was a powerful lens for viewing political, social, and cultural priorities in the relationship between state and citizen. On one level, this history can be read as an analysis of how a new nation structured its public finances. At a deeper level, however, it contributes to our understanding of Brazilian social and economic development, a flawed process that by the end of the twentieth century had produced one of the highest income inequalities in the modern world. In this book, I argue that Brazil's inequality has structural roots in public finance. The financial structure adopted at independence relied on regressive indirect taxes that fell most heavily on those with the least. More important, it gave the municipality the greatest responsibility for public well-being, yet endowed it with the fewest monetary resources for fulfilling that responsibility. This set up a century of tension between the public's need for and the state's ability to invest in the public good, ensuring that at the first point of contact between state and citizen, the citizen would find the state wanting.
* * *
Public finance is crucial to social and economic development, because public revenue pays for the services that support and enhance the quality of life and standard of living of a community's citizens. Next to direct sources of family income, the greatest determinants of welfare in modern societies include physical infrastructure, public safety, clean water and functioning sewer systems, public health care, hygiene, and education. Inadequate or unevenly distributed public services in twentieth-century Brazil promoted what sociologist Sam Adamo termed the "cycle of cumulative disadvantage," whereby poverty, malnutrition, disease, and illiteracy broadened the gap between rich and poor across generations. Recent research by economic historians on the relationship between investment in one public good — education — and inequality appears to confirm Adamo's findings: municipalities that invested in schooling in the early 1900s were better off in the early 2000s. The long-run benefits, however, required economic and political elites to agree to invest broadly in the good — that is, invest beyond what elites would themselves consume, which research by others shows they were loath to do. The study of municipal public finance and the services it paid for deepens our understanding of the investment decisions made in Brazil's first century of independence that had lasting effects on its economic development and inequality.
Public finance is key to social and economic development, economists and economic historians argue, because its structure and implementation have important consequences for creating public and private incentives to provide public goods and services. Public goods and services are those provided for the benefit or well-being of all members of society, often by a government but sometimes by private parties on behalf of governments. Principal among the concerns of this literature are two essential questions: how much investment in public services is enough, and who should pay? For example, it is essential to determine the correct allocation of responsibilities among levels of government (national, state, local), type of provider (public, private), types of financier (government, private sector, taxpayer), and types of consumer (firm, agency, citizen). For one thing, public investment in public goods and services may promote economic development and quality outcomes for standards of living, but it may also discourage private investment and needlessly overburden a public financial system's capacity to generate needed revenue. Another challenge lies in determining the optimal level of investment in certain types of public goods, in terms of both which level of government should pay and which volume of investment is sufficient, potentially creating conditions of over- or underinvestment. Investment in public goods and services by a centralized government, for example, will likely be less sensitive to preferences of different communities than when investments are made in a decentralized system. And while economic theory suggests that local provision of public goods and services can better reflect the balance between a community's desired level of services and its willingness to pay for them, reliance on local taxes to pay for locally consumed public services can perpetuate structural inequalities between communities. Subsidies and credits designed to remedy such imbalances may create unintended incentives and lucrative but not developmental investment. Finally, recourse to borrowing on the capital markets can alleviate shortfalls in municipal revenue, but such borrowing can create crippling debt burdens on local governments and require bailouts by the federal government. Federal bailouts, in turn, can give incentive to opportunistic borrowing at the municipal level. These are but a few of the complexities raised by scholars.
The messiness of getting public finance right has been the subject of much heated debate in modern-day Brazil. Some of the debate concerns the proper incentives to promote needed investment. The nation's development bank, Banco Nacional de Desenvolvimento Econômico e Social or BNDES, is more known today for its massive transfers of public funds to subsidize private businesses than it is for the development projects that informed its creation in 1952 and the policies we typically associate with such institutions, such as remedying a regional imbalance in development of infrastructure or resolving a case of market failure. In its recent policy of "picking winners," the bank has instead financed businesses that, according to analysts, were likely candidates for attractive financial terms from private-sector lenders.
Another area of contention in Brazil today is over the need to reform its pension system, which weighs heavily on the federal budget, crowds out spending on public goods, and, some argue, exacerbates inequality. The crisis first arose over the scandalous retirement pensions of government workers, the so-called marajás of the late 1980s and 1990s. These were parasitical public servants who earned high salaries, contributed little to the welfare of their constituencies, and received the constitutionally guaranteed right to retire at 100% of their exit salary after minimal time in their position. Strictly speaking, marajás were the high-profile parasites, but the policies that lined their own pockets also bloated public pensions through egregious loopholes: After retiring from one public-sector position, many individuals sought another that ensured them a second full pension. This loophole was closed by the late 1990s, but the burden of public-sector pensions weighs heavily against public finance at every level of the government. In the private-sector pension system, evading the contribution tax is widespread, leading to a small number of contributors funding the pensions enjoyed by the retirees and their beneficiaries. Moreover, compared with their counterparts in other Latin American countries, Brazilians retire early and enjoy generous survivor and dependent benefits, increasing the burden on contributors that in turn fuels tax evasion. Most Brazilians draw a single pension that is not enough to support them, but many accumulate multiple lucrative pensions that extend income inequality from the working years into retirement. Some reform of these problems can be accomplished via administrative changes, but overhaul of the pension system requires a constitutional amendment, a major impediment to change. A testament to the severity and duration of the problem is its repeated appearance, year after year, in mainstream journals with such alarmist titles as "Tick, Tock."
A third point has to do with the fiscal relationship between the three levels of government, national, state, and local. Brazil's 1988 constitution was dedicated to the idea of fiscal decentralization to enhance the autonomy of subnational governments after decades of highly centralized governance dating back to the era of president Getúlio Vargas in the 1930s. To this end, it created block grants from the federal government to municipalities as part of a package of resources meant to address regional distributional inequalities and allow local governments to determine the best use of the funding. Not surprisingly, the number of municipalities multiplied. But the 1988 constitution also introduced a problem that defined the 1990s and created crisis conditions for Brazilian public finance. In the return to democracy and the attempt to rectify the antidemocratic legacy of the recent past, the national government was politically unable or unwilling to impose fiscal discipline on the newly empowered subnational governments. The 1988 constitutional commitment to the autonomy of the local and state governments quickly became coupled with excessive borrowing and spending, with the national government repeatedly bailing them out. The central government's lack of a credible commitment to allow those subnational governments to fail when their spending and borrowing exceeded their revenue created an implicit promise to bail them out, which in turn spurred more fiscal indiscipline and more bailouts. The cost of this failure to hold states and municipalities accountable for their fiscal health contributed to a series of reforms intended to rein in the indiscipline, but unstable conditions in public finance dominate the news cycles to this day.
The deficits that plague Brazilian public finance have resulted in serious clashes in the streets and in the halls of government. For decades, the pattern of state and municipal bailouts by the central government in times of debt crisis created an incentive structure that encouraged subnational units to rack up debt, ultimately burdening the federal government. In recent years, citizens took to the streets in massive demonstrations against the use of public funds to build stadiums and infrastructure for the 2014 World Cup. And just weeks before Rio de Janeiro was to host the 2016 Olympic Games, police officers greeted arriving tourists with huge banners saying Welcome to Hell, informing them that public-sector employees had gone unpaid for months. Both of these athletic events, which were meant to showcase Brazil's ascension to First World status, siphoned staggering sums of money away from addressing its citizens' critical needs for public health and physical infrastructure and transportation during a deep and enduring recession. An alleged accounting sleight of hand to cover up the magnitude of deficits incurred by the government of president Dilma Rousseff led to the charge of a "crime of responsibility" that resulted in a vote to impeach her. This vote was conducted by a congress replete with legislators under investigation for their liberal interpretations of the proper use of fiscal resources. Brazil's inability to resolve the serious structural problems in its public finances has very nearly brought down its fragile democracy.
The crises of modern public finance are so great, in fact, that it is surprising to recall that the notion of the government's role in providing services to its citizens is a relatively recent phenomenon. For most of human history, services that were communally shared and consumed, such as they existed, were paid for by local notables or private charitable organizations. Taxation by the state was almost entirely related to maintaining internal order and protecting external boundaries. Before the nineteenth century, the role of government in the everyday lives of citizens in most parts of the world was fairly limited, especially at the local level. Public revenue was generated primarily through indirect taxes to pay for war abroad and to maintain peace at home. The types of public services we receive from government in the modern day were largely absent from daily life.
Beginning in the nineteenth century, the responsibility for providing public goods was increasingly viewed as the responsibility of the state. As governments consolidated central authority and secured the ability to assess and collect taxes, they developed the resources to expand public services beyond national security and domestic law and order. The rise of the fiscal state allowed governments to conceive of a more involved role in the lives of their citizenry by investing in social overhead capital to promote well-being and enhance economic growth. Public health and education became essential to the agenda of the liberal state, but so did infrastructural development. Over time and across nations, roads, bridges,schools, public health clinics, low-income housing, food assistance programs, scholarly research, and the arts all became supported to some degree by taxes. The rise of the fiscal state and expanded public services in individual national experiences was neither uniform nor inevitable, but it was an identifiable trend in Western nations across the nineteenth century, particularly in their quest to ameliorate the socioeconomic and environmental problems associated with industrialization and urbanization. By the twentieth century, there was little question that the state had a role to play in protecting and promoting the well-being of its citizenry.
The debate turned from whether the government had a role to play to which level of government was responsible for public well-being. Did centralized regimes better serve their populace, or did decentralized regimes? The answer, according to economists, was decentralized regimes. Beginning with Charles Tiebout, the economist who argued that consumers (citizens) express their preferences for public goods by "voting with their feet," scholars have argued that local provision of certain public goods and services was the most efficient use of public funds because local governments were most adept at discerning consumers' preferences. Overinvestment in publicly provided public goods and services meant unnecessarily high levels of spending on goods and services, ones the consumers in that community did not value. To finance this high level of investment, taxes and/or debt burdens must be high as well, in essence asking residents to pay for something they are not likely to consume. Underinvestment in publicly provided public goods meant a lighter tax burden, but the lower investment in goods like roads, parks, schools, and so forth caused property values in the community to suffer. Because no two individuals have the same preference for the appropriate level or distribution of provision of public goods, the tax or debt burdens associated with them, or the impact the level of investment has on property values, they will move to the community matching their preference or tolerance. Universal provision of public goods and services by a centralized government is therefore less efficient than decentralized provision. Scholars argue for the greater efficiency of fiscal federalism, a decentralized structure of public finance that retains responsibility for some goods like military security at the national level while deploying the responsibility for most public goods to state or local levels, where they can be tailored to local preferences.
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