Studart, Rogerio; (1993) Investment finance, saving and funding and financial systems in economic development: theory and lessons from Brazil. Doctoral thesis (Ph.D), UCL (University College London).

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Abstract

This thesis discusses the Post Keynesian theoretical perspective on the role of banks, financial markets and savings in the process of economic development in the light of the Brazilian experience from 1947 to 1983. In contemporary Post Keynesian theory, growth and investment are determined by long-term entrepreneurial expectations and the availability and cost of finance. Finance is sharply distinguished from saving - which is said to derive from, rather then be a precondition for, growth. The supply of finance in economies with a developed financial structure is determined, thus, by banks and their expectations. Saving, which funds (but does not finance) capital accumulations, hence has an important role, in the Post Keynesian theoretical perspective, in maintaining the financial stability of the growing economy. Post Keynesian theory, nevertheless, is based on a specific type of financial system, with well-developed banking and non-banking financial institutions and markets for a diversified range of financial assets. Most developing countries, in contrast, do not have developed financial markets, and growth has to depend heavily on bank credit. Such credit-based financial structures need to develop alternative institutions to finance - and, especially, fund - long-term investment, to avoid the risk of financial instability and other possible adverse side-effects of growth. The theoretical modifications to Post Keynesian theory, necessary in applications to developing countries, are discussed in the context of the Brazilian case. The period from 1947 to 1983 in the history of Brazilian economic development was chosen for two interrelated reasons. First, there are two clear cycles in the process of industrialisation of the country during the period 1947-55 and 1967-83. Second, and perhaps more importantly, the intervening period saw a reform (in 1964-65) which substantially changed the functioning of the financial markets. The reform focused on long-term financing, recommending increases in the real internal interest rates (through indexation) and a greater openness to foreign borrowing, in order to increase the availability of loanable finds. These measures, however, produced a highly fragile and speculative financial system, which continued to depend upon the state for a long-term investment funds and tended to borrow foreign currency at higher levels than the finance requirements of the country warranted. Therefore, using a Post Keynesian approach, this thesis maintains that the 1964-65 financial reform was based on a misguided theory and that, consequently, in a great extent responds for Brazil's recent imbalanced path of development.

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