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How States Shape Markets in Latin America

  • Author(s): Bril Mascarenhas, Tomas
  • Advisor(s): Vogel, Steven K
  • Post, Alison E
  • et al.
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Latin American countries have recently reconfigured their national financial systems in ways that powerfully shape their growth strategies and economic performance in the twenty-first century. Some Latin American countries have developed large capital markets where companies issue equity or long-term bonds, while others have cultivated large long-term credit markets; and some countries have failed to develop adequate capital or credit markets. This dissertation studies this variation in financial system development with two contrasting cases: Chile, which has produced an impressive capital market, and Brazil, which has built up the capacity to deliver long-term bank credit for firms on a massive scale. Argentina, an additional case examined more briefly, scores low on both capital and credit markets. In contemporary Latin America, it is especially critical to understand the politics that drives the evolution of these financial systems, which provide the investment finance that ultimately shapes opportunities for long-run growth.

In 2008, the global financial crisis dried up credit throughout the world. Yet firms in Chile and Brazil continued to grow in this period because they had financial institutions that allowed domestic companies to raise investment capital at home. In the aftermath of the crisis, Chilean and Brazilian firms successfully obtained funds with unusually long-term maturities, albeit through very different channels.

What explains the varying configurations of national financial systems that underlie these new business strategies and opportunities for growth in contemporary Latin America? This study provides a distinctively political explanation of the puzzling contrasts among Latin American national financial systems. The dissertation uncovers the political origins of national financial systems by looking at how states shape domestic markets.

I argue that state involvement in markets hinges on two key policies: state-owned banking institutions’ provision of long-term credit to a country’s firms and the governance of the private segment of the pension system. While some modes of pension system regulation will lead pension funds to channel significant flows of finance to either the equity or the corporate bond market, or to both, other regulatory patterns generate inducements for pension fund investment in other types of assets (e.g. foreign bonds, government debt, and short-term bank deposits), diverting financial flows away from the domestic capital market.

Since state action is the primary driver of variation in the configuration of national financial systems, I begin with the state and the politics within it. Political técnicos—entrepreneurial officials appointed to the top tiers of the executive branch who combine strong expert knowledge with brokering skills—dominate the highly technical, low-salience policy process that shapes domestic markets. I contend that the technical decisions that emerge from power shifts between competing coalitions of executive-branch elite officials with different policy orientations drive the different modes of state involvement in credit and capital markets.

In Chile, top-level officials with a neoliberal policy orientation initiated and then sustained a drastic retrenchment of government lending for the productive sector and designed and enforced formal regulation inducing private-run pension funds to channel major investments to the domestic equity and corporate bond markets. This neoliberal policy orientation underpinning Chile’s mode of state involvement in markets was not predetermined: during its formative phase in the 1970s and 1980s, as well as in its reproduction stage in the 1990s and 2000s, elite executive-branch officials who challenged this economically orthodox orientation had to be defeated and their influence curtailed.

In Brazil, by the late 2000s, elite officials across several agencies successfully pushed for the adoption of a neo-developmental policy agenda. The power shift within the Brazilian state, with the displacement of a coalition of orthodox technocrats that had been strong until the mid-2000s, produced a significant increase in the scale of long-term credit provided by the state-owned National Development Bank (BNDES) and the redirection of giant state-owned-enterprise pension funds as major institutional investors in the domestic stock market and key players in the nascent Brazilian venture capital and private equity industries.

By examining these two contrasting cases, and setting them in the context of developments in Latin America more broadly, I develop a new characterization of Latin American political economies that diverges from attempts to apply the Varieties of Capitalism framework to the region. In that perspective, the largest and most advanced Latin American countries all fit under a single model of hierarchical market economy (HME). Yet since states have developed remarkably different growth strategies—from Chile’s neoliberal continuity to Brazilian neo-developmentalism, to forms of neo-statism in Argentina—we must be careful to appreciate the diversity of political economy models in twenty-first-century Latin American capitalism.

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This item is under embargo until April 2, 2021.