Brazilian FederalismCentralization vs. Decentralization

Class 14, September 25, 2012

Colonial Period (1500-1822):

• Portugal, that colonized Brazil, faced huge difficulties to have political and territorial control (more than 8,5 million km2).

• Portugal was obliged to divide the colony in small areas (capitanias hereditárias) administrated by a noble who represents the Crown.

• This system had great influence in Brazil. Informal pacts with regional political leaders, “coroneis”

Monarchy (1822-1889)• Independence from Portugal (Pedro I), first

kingdom

• Pedro II (Regency Periods)– Parliamentarism– Separatism and revolts against the central

government – 1835-1840 (Farrapos-South; Cabanagem-North; Sabinada-Northeast; Balaiada-North)

• 1840 Pedro II became legally an adult and the second Emperor

First Federalist Republic (1889-1930):

• The demand for a federal system was a natural consequence.

• The most developed provinces (SP, MG, RS) want more influence and power over the central regime.

• “Política dos Governadores” = The federalism used to work as a way to decrease the power of the central government.

• The modernizing elite also had a negative view of the emerging Brazilian federalism.

1930 revolution - 1937:

• The oligarchic federalism was weakened by Getúlio Vargas.

• The autonomy of the sates was reduced by “state interventions” replacing governors.

• However, some states continued to have some indirect influence (revolt of São Paulo in 1932).

• The regional deputes among state elites made the life of Getulio Vargas easier (The auto-coup of 1937).

Estado Novo (1937-1945):

• The central government improved its power that state flags were burned symbolizing the end of the states

Democratic Republic (1945-1964)

• The federalism was reestablished.

• However, with a new competitive party.

• The governorship was democratically disputed.

• The great source of conflict among elite groups.

The Authoritarian regime (1964-1985):

• The Congress was not closed as during the ‘Estado Novo’ nor imposed state interventions (bionic governors)

• Governors started to be elected indirectly by state assemblies.

• The direct and free elections to governors (1982 e 1986) occurred before than the direct elections to president. This aspect helped to strengthen the power of state governors during the new republic.

Transition to democracy and constituent assembly (1985-1989):

• The governor’s influence was really strong. • O ICM, state tax, was collected at the sate level.• The influence of the national executive as almost null

(Sarney).• Fiscal crises. • The state debts were negotiated with generous

contracts• The governors had control of the state banks.• The governors had strong influences over the career

of legislators: “gubernatorial coattails effect”

Cardoso’s administration (Recentralization of the game) 1995-2002 :

• Fiscal Responsibility Law

• Social contributions – new tax (CPMF)

• Emergency founds that translated in more flexibility for the national government

• The state banks were privatized

• The Real plan worked as a shock.

Is Brazil a case of public policy success?

• The pessimism of the policy reform literature• A dual picture:I. National level: reform laggard, policy inertia,

fragmentationII. Sub-national level (municipal): loci of political

innovation (participatory budgeting etc)• However most of the municipal innovations are part

of national level strategies (sectoral councils, fundef, bolsa escola etc)

• These are second generation reforms and this all the more paradoxical

Puzzle

• Which questions explain Cardoso’s success in implementing 2nd generation reforms (institutional and social policy)?

• Highly acclaimed programs such as bolsa escola (US 1.5 bi, 27 million people), Fundef, Family health programs (PSF and ACS), Fund for Fighting Poverty

• And this in a context of severe fiscal constraints

Current explanations

Based on two assumptionsSecond generation reforms are typically difficult to pass because: low costs of non-reform, no sense of urgency they involve complex tasks and long term realignments of

incentives(Graham 2000); have no direct models to follow (Nelson 2000); require the cooperation of many actors (veto players) (Gridle 2001;

2004)

Current explanations (cont.)

Brazil’s fragmented political system hinders the approval and implementation of reforms (Ames 2001; Samuels 2002)

Multiparty presidentialism

Open list proportional representation/large district magnitude

Weak party discipline

Robust Federalism and subnational veto players

hypotheses• Presidents had the incentives and the capability to implement

reforms• Incentives : electoral incentives to improving social indicators

and poverty alleviation• Capability: Strong presidents, decree authority; agenda powers; line item veto, discretionary execution of budget;

appointments powers ...• but had to reconcile these preferences with political demands

from coalition partners (coalition management) fiscal constraints (sustainability of Real Plan)

• Difficulties claimed in the literature were exaggerated• Incorrect characterization of post 1988 Brazil

Cardoso’s strategy in the social sectors

i. Making comprehensive changes in the Constitution in other to revamp Brazilian federalism

ii. Flexibilization of the federal budget (FSE; FEF and DRU) and increasing taxation (increase of 9% of GDP) without sharing with the states (contribuições sociais)

ii. Hardwiring sub national spending

iii. Insulating key core social policy bureaucracies from political logrolls

Responding to shocks: the constitution of 1988 as a shock

• The President could not use his institutional prerogatives (agenda powers, etc)

• A weak president (vice-president took over)• and powerful governors elected in 1982 (before the president)• Presidents internalize fiscal considerations • The consequences: • prevalence of subnational interests • expansion of social rights and entitlements led to increased

expanding • Constitutional rigidity

Constitutional amendments

• An intensive reformist effort in Cardoso’s first year of office (Cardoso’s constitutional “big bang”).

• Cardoso submitted in 1995 half of the amendments proposed in his two terms of office

• and over a third of those submitted for the whole post-1988 period.

• Annual amendment rate of 3.3 during 1988-2004.

Number of Constitutional amendments

1 13

0

6

1

17

43

2

5

21 1

21

0

24

6

810

12

1416

18

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

year of submission

Revamping federalism

• Nearly half (42%) of the constitutional amendments passed since 1988 refer directly to aspects of Brazilian federalism

• Half of the amendments proposed by Cardoso involved federalism (48.5%) and about ¼ to social policy and rights.

• Of the total amendments pertaining to federalism more than half (53%) are also related to social policy or social rights.

Constitutional amendments by issue

0

1

2

3

4

5

6

7

8

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year of Presentation

Fiscal Control Institutional Matters Social Policy and Rights Federalism Economy

Cardoso’s strategy

i. Making comprehensive changes in the Constitution in other to revamp Brazilian federalism

ii. Flexibilizing the federal budget (FSE; FEF and DRU) and increasing taxation (increase of 9% of GDP) without sharing with the states (contribuições sociais)

ii. Hardwiring subnational spending

iii. Insulating key core social policy bureaucracies from political logrolls

Figure 3 – Evolution of Earmarking of Budgetary Revenues, 1979-2003.

0

20

40

60

80

100

Year

%

Earmarkedtransfers to statesand muni.Earmarkedrevenues

De-earmarked viaDRU

Not earmarked

Budgetary revenue

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

35,0%

40,0%

Brazil Argentina

Hardwiring subnational spending

How to expand social spending and at the same time constrain it?

controlling subnational agency losses:

fiscal responsability law and Administ crime law

fundef

health care constitutional amendment

a new appointment pattern (economists as ministers and key managers).

“blindagem” - shielding

Lula’s government: more continuity than rupture

• Strong policy continuity in fiscal/ monetary policy• Credibility costs and macroeconomic management• Sharp increase in primary surplus • Continuation of reform agenda • Aproval of social security reform • Tax reform: stalemate• Judicial reform

•

•

More continuity than change

• Social policy initiatives

• Fome Zero as policy fiasco but strong mobilization mechanism

• Bolsa familia: policy continuity

The current crisis and policy paralysis

• Weakening of the executive?• The same institutional framework in place• Elite conspiration? • Economic elites are key to the current coalition• Towards an institutional explanation:• Mismatch between party representation and cabinet

positions • The highest disproportionality of all of the 20 cabinets

after 1988

party Number of ministries

% Number of deputies

%

PT 21 60 91 18

PMDB 2 6 78 15

PSB 1 3 20 4

PPS 1 3 20 4

PC DO B 2 6 9 2

PV 1 3 6 1

PL 1 3 43 8

PTB 1 3 51 10

NO PARTY

5 14 _  

TOTAL 35 100 318  

fundef• What triggered reform? • Low costs of non-reform – crises do not play a role• Honey moon effect • Cardoso’s “big bang” – packaging • The costs of reform were distributed across different (also unclear) cleavage

lines : • Inter-municipal: large, urban versus smaller and rural municipalities, • Inter-state: rich versus poor states, • Intra-state: states with large school networks versus

• (non-unionized teachers, school directors,

Who benefitted from Fundef?

• rural and small municipalities in states with small state networks (eg. Municipios in Ceará, Rio, Rio Grande do Sul)

• Poor states receiving equalization funds (Paraiba)• States with large networks (São Paulo, Paraná). • Teachers, school directors, municipal secretaries

for education.

Losers

• States with small school networks (Ceara, Maranhao)

• Municipalities in states with large networks (São Paulo)

• Who opposed fundef :• Unions (on ideological grounds)...• But federalism diffused the representation of

teacher’s interests: no federal unions•

Approval and sustainability:

• Support important for sustainability not to introduce and pass reforms

• 1 year in Congress: procedural hurdles

• Reform by stealth? Technicalities

• Concessions: university reform clause deleted

• Federalization of teachers´ strikes

Credibility issues

• Constitutional protection: intertemporal rigidity

• Compensation to losers? Short term pay hikes for teachers (SP and PR)

• Program for building schools

• E.g Apeosp union in São Paulo

Table 3 . Minimum per capita spending with Fundef

year Minimum value (R$) Annual growth

Inflation rate (IPCA)

Number of states receiving equalization funds

 

1st to 4th grade

5th to 8th grade

1st to 8th grade

       

1997     300,00 - -    

1998     315,00 5,0 1,65 7  

1999     315,00 0 8,94 8  

2000 333,00 349,65   7.9 5,97 5  

2001 363,00 381,15   9,0 7,67 4  

2002 418,00 438,90   15.1 12,5 4  

accumulated

      42,1 42,1    

Table.4 Equalization funds from the Federal Govt.

Year Budget allocation (in millions of reais) (A)

Executed (B)

% B/A % B/total fundef

1998 - 486.6 - 3.22

1999 685.3 579.9 84.6 4.43

2000 682.6 485.4 71.1 3.99

2001 675.4 391.5 58.0 2.77

2002 663.9 431.3 65.0 2.32

2003 657.5 394.9 60.1 -

average 67.8