Experiments in Financial Democracy

The road to understanding the path of Latin American economic development is paved with explanations as to why things have gone so terribly wrong. These explanations generally have blamed the legacy of Latin America’s colonial experience which, so it goes, doomed the area to weak institutions, inefficient legal systems, corrupt governments, and fractured social bases.Enter Aldo Musacchio, who not only demonstrates that this was not true for Brazil but more profoundly argues that many of the assumptions about Latin America’s colonial heritage simply do not hold. One of the main arguments about Latin America’s delayed economic development was that civil law countries, especially Latin American civil law systems with deep colonial ties, carried the burden of the weak legal systems with commensurate effects on the financial development, whereas common law countries (like the United States and Britain) had better institutional protections to support economic and corporate development and therefore prospered. In Experiments in Financial Democracy Musacchio uses a wealth of company statutes and their regulatory environment, stock and bond prices and their variations, shareholder meeting minutes, and bankruptcy court cases during Brazil’s transition from late colonial subject to modern twentieth-century populist state to debunk these assumptions and demonstrate that legal traditions are unrelated to financial development, and that legal history is not the correct indicator for the region’s financial and economic history.The scaffold upon which Musacchio builds his argument is the nature of Brazil’s legal system, which, he argues forcefully, does not have a role in Brazil’s financial development. Brazil’s dynamic corporate environment in the late nineteenth and early twentieth centuries was not a product of legal tradition but a response to business transparency and investor participation. Turn-of-the-century corporate regulations in Brazil created incentives for private equity purchases, which in turn compelled companies to see the value in protecting their small-equity shareholders (as opposed to the large shareholders). We know from previous authors that banks mattered less than the stock market in Brazilian economic growth, and with this book Musacchio goes further to show that the practice of corporate governance and the protection of shareholder rights were crucial in the development of the Brazilian corporate and financial structure. Musacchio’s findings on the “financial democracy” of the title force us to rethink our understanding of corporate governance and shareholder rights in Latin American history, and he none too subtly suggests that there are current-day policy implications that need to be considered in this light as well.Beyond challenging the colonial legacy argument, Musacchio also questions the roles of personal networks and insider dealings in Brazilian corporate endeavors. His access to a treasure trove of bankruptcy cases highlights the role that creditor protection played in the development of capital markets, as well as the commitment of Brazilian courts to defend these rights. Following his example, if the courts indeed defended creditor rights so well in Brazil, then it behooves every other Latin American business historian to find these cases in other countries and buttress or question the accepted role of personal networks in business and financial dealings through these cases.Musacchio’s research is deep, detailed, and exhaustive, and readers will only occasionally be distracted by slightly less than brilliant contributions. For example, to support his creditor-rights over personal-connections argument, Musacchio used network analysis to identify bankers who sat on shareholder meetings and boards. Musacchio finds that bankers did not sit on many boards and therefore concludes that development of these corporations did not hinge on banks or relationships with bankers. In a work of otherwise such careful enquiry, the rationale of this conclusion disappoints. It is also unnecessary — we wouldn’t expect bankers to be so important in a context where stock markets, not banks, were the engines of financial growth. Still, it is an elegant example of network analysis.Unfortunately for Brazil, the golden years of corporate democracy ended during the interwar era, when the macroeconomic and political context of the post – World War I shortage of capital and the rise of trade unionism under Getúlio Vargas provoked retrenchment and concentration among business owners. The second part of Musacchio’s book shows that the decline in creditor protection rights and corporate governance transparency that marked the period between the wars through 1950 was the result of decisions that were politically pragmatic but not economically strategic. All of which goes to prove Musacchio’s main point — the particularities of the civil law legal system and its colonial origins had nothing to do with it.Beyond the specific case of Brazil, Musacchio’s book demonstrates the fallibility of cross-country growth comparisons and the danger of explaining complex economic processes as the outcome of colonial origins and legal regimes. In this, Musacchio joins Gail D. Triner, Anne G. Hanley, Zephyr Frank, and Maria Bárbara Levy among other excellent Brazilian historians, to analyze economic development from a regional perspective using models that rely on deep archival research and an intuitive approach to economic models. Musacchio’s book is a welcome addition to Brazilian history, economic history, business, corporate and legal history, and it deserves all the praise it no doubt will receive

Bankruptcy · Colonialism · Corporate governance · Democracy · Economics · Latin Americans · Legal history · Political economy · Political science · Politics · Shareholder · Statute · Economic Theory and Policy · Finance · Law

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