Ideas and Policy-Making in Early Twentieth Century
São Paulo, Brazil
Anna B. Faria†
George Mason University
September 9, 2016
Abstract
How do ideas affect development? This papers uses Dani Rodrik’s (2014) framework to explain how the popularization of liberal ideas changed the political
equilibrium in nineteenth-century Brazil. The rise of liberal ideology led to the
implementation of market-preserving federalism in 1891 and thereafter states had
fiscal autonomy to finance local projects. In São Paulo, the self-financing feature of federalist constitution allowed local elites coordinate and solve collective
action problems that before had been politically unfeasible. I argue that the
new political economy of the coffee state of São Paulo at the turn of the century
relaxed economic constraints on local actors and allowed for greater cooperation,
exchange and eventually economic development. In the paper, I explore two policy examples under the Rodrik framework: immigration subsidization and coffee
valorization.
Key words: Ideas, Federalism, Collective Action, Brazil
JEL classification: N16, N46, O43
†
Anna B. Faria is a Ph.D. candidate at George Mason University, Mercatus Center Ph.D. Fellow and
Institute for Humane Studies Fellow. Contact email: asanch17@gmu.edu. An earlier version of this paper
was presented at the Association for Private Enterprise Education Conference, Las Vegas, NV, April 2016.
I would like to thank the participants at the session for their comments and criticisms. In addition, I thank
Peter J. Boettke and Philip Heap for useful comments and criticism.
1
Introduction
How do changes in the ideological sphere affect long run economic outcomes? At the
turn of the twentieth century, Brazil became a federalist republic inspired by the American
experiment. Before the advent of the republic, political elites were unable to credibly commit
to provide policies that benefited local interests, creating a constraint on solving collective
action problems. With the signing of the 1891 federalist constitution, local elites gained
direct taxing powers. With the power to tax locally, states could credibly commit to ”good”
local policies in exchange for tax revenues. In the case of São Paulo state, local elites
created policies that favored the development of the coffee economy. In this paper, I argue
that the new political economy of the coffee state of São Paulo at the turn of the century
relaxed economic constraints on local actor and allowed for greater cooperation, exchange
and eventually economic development. I provide two policy examples that typify this new
political economy equilibrium.
The purpose of this paper is to provide a political economy explanation for the rise of
São Paulo state as the leading economic driver of the country’s economy. This paper adds
to the literature on Brazilian economic growth as it explores a potential fundamental cause
of development, namely the role of ideas in supporting good institutions and policies. So
far, the literature has sought to explain the disparities in Brazilian economic development
by focusing, for the most part, on economic factors in each region at different points in time.
Yet, standard economic factors do not capture all the variation in economic performance. In
recent years, Brazilian scholars have turned their attention to differences in informal norm
developments in each region (see, for example, Naritomi, Soares & Assunção, 2012), the
role of turn of the century immigration (see, for example, Stolz, Baten & Botelho 2013,
De Carvalho Filho & Colistete 2010, De Carvalho Filho & Monasterio 2012) and land tenure
(see, for example, Summerhill 2003, 2010). These studies have not directly addressed the role
of changing ideas in relaxing political constraints that can increase efficiency and promote
growth. While most of these works build on each other and are complementary, the main
contribution of this paper is to fill a lacunae in the literature with a political economy
explanation not previously commanded.
My approach lays out the mechanisms of ideological change in local Brazilian politics
and their consequences for local economic development. My thesis is that the absorption
of European and North American (USA) liberal ideology increased acceptance for the creation of a federalist government system at the turn of the twentienth century and that had
federalism not been implemented, the local political elite in São Paulo would have been unable to credibly commit to promoting growth enhancing policies. The newly implemented
state power to tax changed the political constraints on policy-making that in turn loosened
economic constraints in São Paulo.
I use Dani Rodrik’s (2014) framework to study how the shift in ideology in the mid- to
late-nineteenth century relaxed constraints on the political elites by effectively dismembering
the decision-making process into local units. Until the advent of the federalist system,
1
political power concentrated in the hands of the Emperor and states had little independence
to design policies favoring local interests. In fact, during the Empire, taxing powers rested
by and large with the central government in Rio de Janeiro and an overwhelmingly large
share of government expenditures went to investments in the capital city. Once liberal ideas
gained popularity with intellectuals and politicians, a new set of policies became feasible to
local elites that could then employ them to change the political and economic equilibria.
Each of the local units (states) could choose its own tax structure and internal economic
policies. In this paper, I show how liberal ideas and market-preserving federalism allowed
São Paulo state solve their local collective action problems. I use two policy examples, the
immigration subsidy program and the coffee valorization policy of 1906, to illustrate the new
emerging equilibria.
2
General Framework
How do ideas influence political and economic equilibria? According to Rodrik (2014),
ideas influence all three components of the standard political economy optimization problem,
namely preferences, constraints and choice variables. ”In the political sphere,” he argues,
”the choice of what is to be maximized is much less evident” than in a market setting in
which ”the maximand is clear.” (p. 191) In politics, deciding who belongs to what group,
and whose preferences, or whose interests, matter in decision-making, is dependent on the
ideas of how people perceive themselves. The way people interpret reality, that is their
assumptions about how the world operates, is highly dependent on their ideology. Thus the
constraints imposed on policy models too depend on what ideological views decision-makers
hold.
What choice variables are available in what Rodrik calls the ”strategy space,” that is
what politics and politicians can actually do, is itself subject to the whims of current ideology.
He provides many examples this, such as the Meiji Reformation and the dual-track policy
reform in 1970s China. (p. 199) With no changes in the distribution of political power,
changes in ideology can affect what choice variables become feasible within the strategy
space. Ideas influence whose preferences are taken into account in political decision-making,
how decision-makers view the consequences of their actions, and what political actions are
feasible at any given point in time.
In standard political economy models, inefficiencies arise from three basic conditions
characteristic of political systems: first, special interests guide policy preferences, that is
interest groups capture the polity; second, the distribution of political power gives more (or
less) weight to particular sets of preferences and; third, political institutions become focal
points for a specific equilibrium within a set of equilibria. Yet, according to Rodrik, those
conditions do not explain inefficiencies. Instead, those conditions only ”explain redistribution
from less-powerful to more-powerful groups.” (p.195)
In Rodrik’s model, inefficiencies require at least one of two additional conditions: first,
2
compensation is unavailable and; second, the political power of elites is be conditioned on
policy efficiency, meaning elites can be worse off as policy efficiency increases. Both conditions suggest that improvements are possible as long as the elites can be theoretically
compensated or have the right incentives to promote more efficient policies. Figure 1 shows
a graphical representation of Rodrik’s model. Points A and B lie on the economic possibilities frontier (EE), which shows the resource distribution between elites and citizens or
the politically powerless. Points A and B are Kaldor-Hicks efficient in the standard political
economy and Rodrik’s models. Elites may choose to redistribute resources from citizens
to themselves (B to A) as long as compensation is at least possible. If political power is
exogenous, then elites need not fear losing it in light of policy changes, as they hold veto
and agenda-setting powers.
Figure 1: Rodrik’s Political Possibilities Frontier
If, however, neither compensation nor exogenous political power exist, then inefficiencies
arise. Neither A nor B are achievable. Policy decisions constrain economic outcomes if elites
stand to lose by allowing for more efficient policies without compensation or a credible commitment on the part of citizens to redistribute some of the efficiency gains to the now weaker
elite. In Figure 1, the political transformation frontier (PP) shows all the combinations of
resource distribution possible given political preferences, constraints and choice sets. The
PP represents analogously the amount of rents the elites receive given any distribution of
resources.
Elites choose particular policies such that they receive the largest possible share of total
resources without undermining their political power. The shape of the PP indicates that this
point will be inside the EE, and thus clearly economically inefficient. In Figure 1 this case
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is shown as point S, where the elite receive the highest possible resources given the political
constraints. Policies that increase citizens’ wealth but remove political power from the elites
are depicted at any point to the right of S. Every point to the left of S shows increasing rents
to the elites as citizens’ wealth increases, in what Rodrik qualifies as ”golden eggs effect.”
(p. 196)
Given that for every decision making process there exists a political transformation frontier, there exists one resource distribution combination that is economically efficient (point
C in Figure 1). However, as long as the optimal elite decision in PP does not meet with the
EE, inefficiencies will remain. Yet, efficiency improvements are possible if either preferences,
constraints or choice variables change. Figure 2 shows an improvement in allocation of resources. The PP has shifted out to indicate that elites are willing to create better policies.
Point S’ is closer to EE than point S. As Rodrik puts it: ”Just as we think of technological
ideas as those that relax resource constraints, we can think of political ideas as those that
relax political constraints, enabling those in power to make themselves (and possibly the
rest of society) better off without undermining their political power.” (p. 197) Rational elite
players choose a policy set that increases citizens’ wealth as it raises elite rents.
Figure 2: Shifting Rodrik’s Political Possibilities Frontier
Every point inside the EE is economically inefficient. Some are more inefficient than
others. The standard political economy model does not tell us how political decision can
lower or increase those inefficiencies. They generally do not account for endogenous political
power or the inability to credibly commit to compensating losing parties. They also assume
away ideas, taking them as exogenous and more often than not, holding them constant
by abstracting from them completely. Rodrik’s model builds on the standard models to
4
endogenize political power and ideas. Ideas are the fundamental cause of political change.
Understanding the mechanisms through which ideas can shift the political transformation
frontier does not tell us anything about when those shifts will happen. According to Wayne
A. Leighton and Edward J. Lopez (2013), political changes come about through the actions
of political entrepreneurs. Political change can emerge slowly or at a moment of crisis. At
first, they argue, ”a scribbler pens up the right idea.” Then ”an intellectual spins an issue for
public consumption.” Finally, when ”madmen in authority” or policy-makers seek political
change, they act as entrepreneurs, adopting new ideas to ”change the rules of the game.”
The success of an idea depends on the political timing not only of its introduction, but also
of its development.
Ultimately, ideas legitimize political action. Elites act when changing the rules of the
game are in their interest and when there is legitimate support for them. The latter requires
ideological consensus. Ideas constrain and relax policy-makers’ ability to use the political
sphere to allocate resources. They bound interest and shift the political transformation
frontier. In the following section I address two remaining questions before moving on to the
Brazilian case: first, how do other scholars understand the link between ideas and political
and economic changes and; second, does, and if so how, federalism reduce inefficiencies?
3
Ideas, Federalism and Growth
The lack of consensus among development economists on the fundamental causes of growth
has led to a fruitful debate. Some argue that growth pattern differences stem from geography.
To scholars such as Jeffrey Sachs, climate, topography and other natural features determine
the economic fate of societies. Others place formal institutions, such as rule of law and
property rights security, at the forefront (see, for example, North & Thomas 1973a, Engerman
& Sokoloff 1994, Acemoglu, Johnson & Robinson 2001). Douglass C. North introduced
the concept of institutions as rules of the game as the fundamental cause after the failure
of standard neoclassical models to explain the lack of convergence between poor and rich
countries. According to North & Thomas (1973b), the neoclassical growth model tells us
what growth is, but not what causes it. Physical and human capitals, technological change
and economies of scale are outcomes of economic processes that economists had not yet
attempted to explain or formalize. To them and other new institutional economists, property
rights security and rule of law are the fundamental causes of growth.
Now there is an extensive literature on the role of institutions on growth (for a thorough survey, see Acemoglu et al. 2005). Yet, some have doubted the evidence used to
support the new institutional theories. To those scholars, property rights security and rule
of law are growth outcomes and not causes. Edward L. Glaeser, Rafael La Porta, Florencio Lopez-de-Silanes & Andrei Shleifer (2004) find that in horse race estimations, human
capital accumulation wins over institutional quality in explaining development. Others have
advanced similar theories (see, for example, Galor & Moav 2006, Galiani & Schargrodsky
5
2011). Despite this growing body of evidence, researchers are not much closer to finding an
empirical answer to the fundamental cause than they were early on.
In recent years, some economic historians have proposed an alternative explanation for
development. Deirdre McCloskey and Joel Mokyr have separately advanced the theory
that ideas are the fundamental causes of development. However, their research projects
differ, with McCloskey focusing on the public’s rhetoric changes in England in the eighteenth
century and Mokyr on the role of increased scientific exchange and technological innovation
from the fifteenth to eighteenth centuries. Mokyr’s argument rests on the development of a
market for scientific ideas that provided the right incentives to trigger a scientific revolution
in Europe. (Mokyr 1990) His theory does not provide much insight into the role of ideas
in political decision-making, but it places ideas before institutions. Mokyr’s is a story of
acceptance of technological, rather than political change.
It is in McCloskey’s work that the issue of ideology in policy-making receives treatment
directly. In her books (2006, 2011, 2016), she argues that the popularization and acceptance
of bourgeois values, such as prudence, hope and justice, were the fundamental causes of
the English Industrial Revolution. Once bourgeois values spread, the Great Enrichment
happened and the Western world shot up the hockey stick of growth. (McCloskey 2006, p. 22)
To paraphrase McCloskey, neo-institutional theories are standard neoclassical growth theory
in different clothes. Institutions are static, whereas ideas are dynamic. Again, paraphrasing
Matt Ridley in McCloskey, ideas have intercourse with one another. (2016, p. 120-22) Any
given institution operates as intended only when ideas are there and widespread enough to
support it. The better these institutions are perceived to work, the stronger the ideological
support for them will become. Only once the rhetoric of bourgeois values took over were the
British able to take advantage of the institutions they had in place which helped trigger the
industrialization process.
Another economic historian has also, perhaps unintendedly, pushed forth an ”ideas as
fundamental cause” argument. Barry Weingast (1995) suggests that market-preserving federalism created the right conditions for development in England and the United States because
it solved the fundamental dilemma of politics, which is that ”a government strong enough to
protect property rights and enforce contracts is also strong enough to confiscate the wealth
of its citizens.” (p. 3) The foundation of federalism’s credibility, he argues, rests on the
public interest in monitoring the central government against transgressions. Once the public
no longer hold similar beliefs or ideas about the role of government, federalism collapses or
becomes a de jure institution with no de facto applicability. According to Weingast, this
non-applicable de jure federalism is the type in existence in Brazil, which explains, in his
view, why Brazil has not grown as a country in the way England and the United States
(and perhaps China) have. (p. 29) Ultimately, a political system relies on an ideological
consensus to maintain its legitimacy and operability.
Weingast’s work on market-preserving federalism is doubly relevant to this paper. His
paper addresses not only the revelance of ideas and beliefs as the foundations of political
systems, but also the nature of market-preserving federalism and its role in development,
6
the final question of this section. His analysis of the features of market-preserving federalism
that allow for economic growth are precisely those that, under the Rodrik framework, explain
the loosening of the political constraints on more efficient policy-making. His is a theory
of creating credible commitments to limit government encroachment. A limited government
means the sovereign does not have the powers or the support necessary to expropriate any
groups without challenge from non-affected groups. Market-preserving federalism supports
the development of markets precisely because it prevents the authorities from encroaching on
the economic rights of citizens. It also encourages inter-jurisdictional competition. Marketpreserving federalism is self-enforcing when there exists a national consensus, when the
citizens believe in the limited role of government intervention. (Weingast 1995, p. 20) When
market-preserving federalism works, the PP shifts outwards.
Weingast’s theory applies directly to the brief experience of Brazilian de facto federalism
at the turn of the twentieth century. Even though Brazilian federalism failed and it did
so precisely because of the loss of consensus on the role of the government in the economy,
the first few decades of the experiment were successful. The 1891 Constitution had all
five characteristics of market-preserving federalism. Articles 63 through 68 guaranteed a
hierarchy of governments by delineating states’ and municipalities’ rights. Articles 4, 6,
7, 9 and 62 granted political autonomy to states. Articles 5 and 6 assigned governance
and self-financing responsibilities to states. Articles 9 (paragraph 2), 11 and 34 (item 5)
prevented states from erecting trade barriers between states, establishing a common market
within the federation. Finally, Article 7 (paragraph 1) constrained state budgets by granting
the federal government the monopoly rights over money issuance, and article 5 guaranteed
states could not resort to the federal government for credit, except in limited cases of state
of emergency. (Brasil 1891)
Another feature of the 1891 Constitution helped perpetuate federalism. Article 90 (paragraph 4) prohibited Congress from approving any constitutional changes that undermined
the republican federalist system or changed the equal state representation in the Senate. This
clause made illegal any action to undermine the federalist system. In fact, the end of federalism came through unconstitutional means, with the 1930 Revolution. The Revolution centralized power in the hands of the federal government and remove all the market-preserving
characteristics of Brazilian federalism. The Federalist Republic of Brazil continued to exist
de jure, but market-preserving federalism was no longer the de facto system of government.
The collapse of the federalist system stems precisely from the loss of popularity of liberal
ideas. After World War I, nationalism and positivism gained popularity among the intellectual elite. As João Cruz Costa (1964) puts it, ”[gradually], and mainly during the early
years of the twentieth century under the influence of a diffuse Positivism and Spencerian
evolutionism, sociological preoccupations began to impose themselves on the Brazilian intellect.” (p. 217) The increasing ”sociological preoccupations” strengthened the concept of
a Brazilian national interest over local ones. This nationalism undermined the legitimacy of
the federalist constitution and the wave of anti-federalist ideology originated in states that
saw instability instead of prosperity during that period, that is from where these ”sociological
7
preoccupations” were greatest.
The nature of the social problems certain states faced varied. In the South, domestic market producers were angered by the federal government’s exchange rate policies, which favored
exporters and harmed net importers. Federal import tariffs contributed to their discontent.
In the Northeast, state leaders faced social problems related to their grim taxing powers.
Without a strong export sector and refusing to tax property, northeastern policy-makers
did not have a reliable tax revenue stream. Tax authorities resorted to exorbitant taxes on
commercial transactions, transportation and other non-agricultural activities. Northeastern
interest groups, such as sugar growers, constantly appealed to the federal government for
assistance and protection, but the federal government mostly ignored those claims. (Levine
1997, p. 128-29) The discontent with the unequal outcomes of the federalist administration
was shared across the country. This discontent translated into a political revolution that
ended market-preserving federalism both de jure and de facto.
Alongside the ideological shift came a discontent with the imperfect enforcement of
the 1891 Constitution. Not all discontentment with the federal system was unfounded.
From 1891 to 1930, there were many occasions in which the federal government did act
to privilege some interests over others. According to Percy Alvin Martin (1938), this had
two main shortfalls: ”the blameworthy intervention of the executive power in the states for
the purpose of forcing upon them the rule of factions favored by the authorities in Rio de
Janeiro, and the toleration of flagrantly unconstitutional acts by state governments enjoying
the favor of the national executive.” (p. 157) The system was imperfect and after World
War I, it became clear that the commitment to limit the scope of action of the federal
government had been broken by all parties, including the federal government itself. The
1920s saw several federal interventions, including a major constitutional amendment in 1926
that removed several constitutional barriers to direct federal intervention. (Ribeiro 1967) In
1930, market-preserving federalism expired.
For the first two decades of the experiment, market-preserving federalism worked in
Brazil. São Paulo state politicians took advantage of its workings to promote policies that
helped the local economy grow. This occurred precisely as Weingast (1995) proposes. In
discussing the English case, he argues that limiting the central government’s power was a
”critical political component of the industrial revolution, for it allowed local governments to
ignore, avoid, or repeal the regulatory restrictions on the local economy that economic historians have emphasized were crucial to the success of the new entrepreneurs and enterprises.”
(p.19) Market-preserving federalism relaxed the political constraints on local actors both in
England and in São Paulo and had largely positive unintended consequences.
McCloskey, Mokyr and Weingast put together suggest that the emergence and survivability of a growth-promoting system depends on the ideological, rather than geographical or
institutional, climate. Ideas create political and economic change. In the following section,
I apply Rodrik’s model to the political economy of Brazilian federalism at the turn of the
twentieth century to show how the political transformation frontier shifted outwards.
8
4
Brazil Before Federalism
Under the auspices of an absolutist monarchy, a slow move towards liberal ideology occurred in nineteenth century Brazil. Prior to 1808, there were no printing presses in the
territory, no higher education institutions and limited contact with the external world, except Portugal. The sons of the Brazilian elite were educated at Portuguese universities.
Their European education, restricted to the University of Coimbra, was limited to what
Christian Edward Cyril Lynch (2007) calls ”metropolitan estatist values.” (author translated) Following the opening of the ports in 1808, the Brazilian elites came in close contact
with liberal ideas, mostly imported from France and England, the latter having become the
colony’s main trade partner. Without Portuguese restrictions on trade after 1808, the flow
of ideas increased as contact with other European nations intensified. (Fausto 1999, p.125)
While the concept of liberalism existed in Brazil before 1808, it was closely connected
to Natural Law thinkers, such as Thomas Aquinas, characteristic of the Catholic-inspired
teachings of Portuguese universities. This early conceptualization legitimized political privileges and absolutism. According to Cyril Lynch (2007), it was not until after independence
in 1822 that modern concepts of liberalism spread among intellectuals in Brazil. (p.5-7) In
fact, it was not until the 1820s that a Brazilian intellectual class emerged independent of
Portugal’s. The strengthening of this independent intellectual class in Brazil results from
Portuguese return home in April of 1821 and the separation of the Brazilian and Portuguese
empires in 1822.
In the Constitutional Assembly of 1823, the classical and modern concepts of liberalism
clashed. The supporters of the latter wanted a neutral, almost powerless monarch, while
the former justified granting absolutist powers to the monarch in order to unify the country and avoid the emergence of small despotic provincial governments. (Cyril Lynch 2007,
p.15-16) After dissolving the Constitutional Assembly, Pedro I imposed a constitution based
on the more classical concept, granting the himself, as the Emperor, near-absolutist power.
Yet, as modern liberalism expanded, it became the leading ideology against the centralized
powers of the monarchy. Inspired by the American federalist experiment, there were several
attempts to undermine the Emperor’s power in the nineteenth century, including a federalist revolution in the southern state of Rio Grande do Sul between 1835 and 1845. After
the revolutionaries’ surrender in 1845, federalist ideas lost some of their momentum with
intellectuals and politicians.
By 1850, Cruz Costa (1964) argues, ”[l]iberal ideas were winning over the new governing
class.”(p. 109) In the 1850s and 60s, the push towards republicanism and federalism regained
strength, with electoral victories for members of the Liberal Party. Joaquim Nabuco, a
leading liberal intellectual and politician at the time, described the rebirth of republicanism
in the 1860 elections: ”In Rio de Janeiro the campaign was ardent, enthusiastic, popular...
the youth of the country took a hand in it... it meant, in fact, the resurrection of the
Liberal party with new leaders and new ideas stronger than individuals or differences of
opinion.” (as cited in Cruz Costa (1964, p.84)) It was during this second wave of federalist
9
ideology that intellectuals began to refute the feasibility of a federative monarchy, and fuse
republicanism with federalism. In 1871, the Republican Party was founded and federalism
came to the forefront of its propaganda. The Republican party influenced the realm of
ideas significantly while being politically relatively small. Its members had little role in
undermining and removing the monarchy, but rose to politically powerful positions after the
1889 coup. (p.110)
It took another thirty years for federalist ideas to really solidify. As the abolitionist
movement gained strength in the late 1870s and throughout the 1880s, the federalist agenda
gave way in intellectual and political discussions. (Martin 1938, p. 154) The slavery question ended in 1888 with abolition. By then, the health of the elderly Emperor raised a
new question about succession. The possibility of a Frenchman, the Emperor’s son-in-law,
becoming the effective ruler of Brazil following the imminent death of Pedro II did not fare
well politically. The federalist discussion returned with full force to the intellectual debate.
After 1888 thinkers on both sides, that is republicans and monarchists, supported decentralization of powers. The republicans still held the position of the impossibility of federalism
within the monarchic system, its legitimacy reliant on the Emperor’s superiority over the
other branches. The monarchists, on the other hand, saw in federalism the only chance
to stop a republican revolution, now that they had lost the support from economic elites
who were unhappy with the non-compensatory nature of the abolition bill. (Cruz Costa
1964, p. 110) Creating a federal monarchic system would stop the advance of republican
ideals by satisfying the popular clamor for provincial autonomy. (Martin 1938, p. 154) As
the succession of the empire came under scrutiny and post-abolition discontent increased,
the monarchy lost its legitimacy. With popular support, the republicans won, with many
monarchists joining the republican side at the dusk of the Empire.
5
São Paulo Under Federalism
The main source of discontent with the monarchy since independence stemmed from the
strong centralized moderating power of the Emperor. This ”poder moderador” worked as
a fourth government branch and theoretically existed as a check on the other three. The
Emperor, sole holder of moderating powers, had the authority to intervene in social and economic policies directly. According to the 1824 Constitution, the Emperor was ”unassailable,
and sacred: He is not subject to any responsibilities.” (author translated) (Brasil 1824) The
Emperor had the power to nominate provincial presidents and remove them without due
process. He also had the power to dissolve Congress at will, which Pedro II, as Emperor, did
eleven times between 1841 and 1889. (Câmara dos Deputados 2008) The 1824 Constitution
gave the Emperor and his Cabinet members strong influence over policy-making, including
monetary and fiscal policy. This centralizing feature of the monarchy irritated local elites
and policy-makers who did not have much say in local affairs, as the Emperor handled them
from far away Rio de Janeiro.
10
When designing fiscal policy, the central government set import and export taxes for the
entire country and determined what share of those taxes went to provincial governments.
Only the central government had borrowing rights and provinces relied on Rio de Janeiro
for revenues. Province-level policies depended on national-level agreements. The different
demands of each province meant that there were few policies that would obtain full or
sufficient support. The growing São Paulo elites had to rely on the political willingness of
the Emperor and of provinces long past their prime, whose desires were to heal their own
local economies rather than promote another’s. The lack of self-financing ability limited
each province’s capacity to create policies to alleviate local problems, which often remained
unaddressed. There were few alternatives for local groups to coordinate.
In addition to the lack of self-financing abilities, the fact that local governments retained
only part of the tax revenues from their local activities did not provide the incentives for
local policy-makers to create economic policies to facilitate trade and grow the economy. Any
provincial policy that boosted the local economy did not increase tax revenues proportionally,
as the central government collected taxes and apportioned only part of the total to each
province. Locally-funded policies allowed the central government (and other states) to free
ride on local success. When the benefits accrued to free riders, local policy-makers refrained
from promoting such policies, as those were costly. This potential free riding from the
national government limited the discretion and willingness of local policy-makers to design
growth-facilitating policies.
With the expansion of coffee culture in the mountains of Rio de Janeiro and São Paulo
in the early and mid-nineteenth century, strong political and economic interests formed. In
the decade after independence, coffee represented 18% of total exports, and that share rose
to over 40% in the following decades. The new coffee interests were broad. They ranged
from land ownership structure to labor recruitment to transportation to fiscal and monetary
policies. (?, p. 168-71) While coffee interests were strong and well-organized relative to older
interests, they were unable to promote their policies at the national level during the Empire,
because of its centralizing character.
Immigration subsidization and coffee defense policies, successful policy pursuits of local
interests later in the federalist period, failed to attract enough political attention in the
Empire. With the eminent abolition of the slave trade and slavery itself, labor scarcity presented itself as a major problem to the ever-expanding coffee sector. Crises of overproduction
haunted coffee producers, whose production planning depended on weather conditions too
far removed in time. With the uncoordinated expansion of coffee area, valorization policies
would work as insurance or temporary relief in times of overproduction.
The monarchy halfheartedly attempted to attract European immigrants in the midnineteenth century by creating immigrant settlements, mostly in southern Brazil. The policy, while capable of attracting a few thousand Europeans, was neither broad nor successful
enough to prove sustainable and solve the eminent labor problem in Brazil. Even local
attempts in São Paulo were largely unsuccessful. In 1871, coffee planters created the Association to Aid Colonization and Immigration or Associação. The provincial legislature passed
11
two laws in 1871 and 1872 to aid planters in bringing free workers from abroad to the coffee
farms, but the state government was constrained by its limited power and budget. In the
immigrant settlements that were created, the conditions were reportedly so poor that some
European countries forbade emigration to Brazil for some years. Even on the eve of abolition
and of the advent of the Republic, the scale of the immigrant programs was small relative
to what would follow after 1889. (Holloway 1980, p. 35-9)
It was also only after 1889 that coffee price control, or valorization, policies took effect
in São Paulo. Between 1822 and 1889, the only support the coffee interests received from
the national government was an authorization for the creation of agricultural credit in 1873.
According to Topik (1987), ”until 1888 the federal government offered no subsidies in the
form of loans, tax exemptions, or profit guarantees” and ”[i]n fact... hampered the rural
credit market by absorbing a large part of available liquid capital with its Treasury bonds
and by failing to regularize land titles and mortgage registries.” (p. 60) Despite the political
and economic strength of coffee interests, the centralized government effectively limited the
actions of those interests. It did so by preventing the São Paulo interests from capturing the
national government and by limiting political decision-making power at the provincial level.
The coffee interests’ inability to capture the national government in effect stopped them
from imposing on other provinces the fiscal burden of their industry-specific policies. During
the federalist period, coffee interests still attempted to shift the burden of valorization policies
to other states and failed. Federalism weakened the central government, limiting its ability
to act arbitrarily for any particular cause. Bargaining costs increased as special interests
now had to capture multiple states’ polities to be able to promote policies at the national
level. Yet, local polities solved collective action problems under federalism that would have
been unfeasible prior to 1889.
It is clear that without the introduction of the federalist system, the São Paulo polity
would have been constrained and the immigration subsidy program and valorization policies
would not have existed to the extent that they did. Particularly in the case of immigrant
subsidization, the impact in the short and long run for São Paulo’s economy was extremely
positive. Without immigrants, coffee farmers would have faced a severe labor shortage that
would have hindered or at least significantly delayed the expansion of the coffee sector.
They may also have resorted paternalism and the oppression the local labor force as did the
Northeasterners and the American southerners following abolition. (Alston & Ferrie 1993)
The impact of the temporary coffee valorization policies during the federalist period appears
smaller, though in the short run, they likely contributed to provide stability to coffee growers,
especially smaller scale producers.
The main innovation of the 1891 Constitution was the decentralization of taxing powers.
Under the new constitutional rules, states gained the power to tax exports and contract debt.
States became financially independent from the national government, which now collected
taxes mostly via import tariffs. With fiscal independence from Rio, São Paulo state policymakers could work with local interest groups to solve collective action problems, such as the
labor supply and overproduction problems. Did federalism shift an undue burden of local
12
policies from national ”losers” to local ones? No. São Paulo state at the turn of the century
was an undiversified, export-oriented agricultural economy. It imported its foodstuffs and
even transportation means (mules) from other states. Coffee was São Paulo and São Paulo
was coffee.
By imposing export taxes on coffee, policy-makers tied their revenues to the coffee economy. The better the coffee sector did in terms of production, the higher the tax revenues.
The export tax on coffee was not tied to the market price of coffee at any given time. Instead,
the tax rate a fixed amount per weight. This tax structure effectively insured the government against price adjustments and created incentives to stimulate production. During the
Empire, any provincial attempt to provide public goods suffered from other provinces free
riding on the success of the coffee economy, as the national government retained half of all
export taxes levied on agricultural products. Without free riders, São Paulo state politicians
got to work. In fact, immigration and valorization policies were only two examples of how
the state polity worked to solve their collective action problems.
In the next subsections, I elaborate on those two policies. Why those two in particular?
First, both policies occurred relatively early on in the federalist period, which lasted from
1891 to 1930, but which had significantly deteriorated in its legitimacy and de facto operation after World War I. It was in its earlier years that federalism functioned well, or at least
as close to its de jure formulation as ever. Second, state politicians developed these policies
without the direct intent of developing the state. Instead, both policies served local interests
in the most self-serving and shortsighted way, that is without long-run or distributional considerations of any kind. Policy-makers designed immigration subsidies and coffee valorization
policies to suit the interests of the coffee sector, not to promote the state’s economy directly.
In fact, the third and final reason for choosing these policies is that the unintended consequences of one policy (immigration) were undoubtedly good for economic development in
the state, while the other’s (valorization) impact in the long run was probably nil. These two
policies show a clear interest by local policy-makers to solve local collective action problems,
some which allowed markets to expand and other that worked to correct a single problem.
5.1
Immigration Policies
In the late nineteenth century, São Paulo was growing fast. Coffee production expanded
quickly, but the external pressures to abolish slavery threatened to put a damper on São
Paulo’s economy, as coffee farms relied extensively on slave labor. Faced with a potential
labor shortage, coffee growers began to search for alternatives. Some attempted to revive
the moribund system, to keep it on life support for as long as possible. For example, in Rio
de Janeiro’s declining coffee areas, coffee growers created and enforced strict fugitive slave
laws and purchased slaves from the Northeast. ((Stein 1985, p. 169) and (Conrad 1972, p.
123)) Others sought new labor arrangements to supplant slavery in the farms, particularly in
the newer São Paulo coffee areas. Potential alternative labor sources included forcing former
slaves to work in farms after abolition, hiring free (white or mixed) native laborers, utilizing
13
Asian (Chinese) or European immigrants. All alternatives but the latter failed.
Between 1893 and 1920, São Paulo state subsidized approximately 725,000 immigrant
trips across the Atlantic or a little over 65% of total arrivals. (Holloway 1980, p. 56) So
what changed under federalism that would allow for such a significant program to solve
the coffee labor problem? Why was this program unsuccessful prior to 1891? The São
Paulo provincial government could not commit to fund a large subsidization program. It
did not have the ability to borrow funds independently from the national government. Any
large scale investment from the provincial government that boosted the coffee economy had
positive externalities to the central government, meaning the national and other provincial
governments could free ride on São Paulo’s dime.1 Under the federalist system, the state
government reaped all the benefits from investments in the immigration program, as higher
coffee production translated to higher export tax revenues for the state, with no redistribution
to non-contributing parties, such as the national government and other states. Thus, the
federalist constitution worked to solve this collective action problem by reassigning residual
claimancy rights over tax revenues. (Leeson 2011)
The immigration subsidization program lasted from 1893 until the late 1920s. In its
first ten years of the program, over 90 percent of all entries into the São Paulo immigrant
hostel were subsidized. During that period, on average 55 thousand immigrants, mostly
Italians, went through the hostel every year. (Holloway 1980) The Associação, founded by
growers in 1871 to subsidize immigration, set up an office in Genoa to organize immigrant
trips to the coffee areas, now with resources from the state’s coffers. The Associação had
rules and guidelines for eligibility. Coffee growers wanted to attract entire Italian families
with agricultural or rural background rather than young, single males from the cities who
would be unfit for farm work. In fact, half of all arrivals at the port of Santos between
were families. Successful applicants received free travel and guaranteed job contracts. Upon
arrival in Santos, these families headed to the Associação’s hostel in São Paulo city to receive
a job assignment in the coffee farms. After fulfilling their initial contracts, these immigrant
families had several alternatives. They could continue working in the same farm, move to
another farm, purchase land or move to the cities.
The availability of alternatives to immigrants, whose presence was large but often not
sufficient to fulfill the labor demand of the farms, had positive consequences for the economic
development of São Paulo state. In order to attract and keep immigrants working in their
farms, growers provided some public goods, such as schools and churches, as well as some
land grants. Granting land to immigrant families tied them to a specific area, preventing
them from moving to other coffee areas. In fact, since coffee production then required new
lands every thirty years or so to guarantee high yields, coffee growers donated old coffee farms
to immigrants as they moved the coffee frontier further west. Immigrant landownership and
public goods provision, studies indicate, had positive effects for the development of São
1
Free riding also prevented private investment in immigration subsidization. Coffee growers who paid
for immigrants’ travels had few guarantees that those immigrants would work in their farms long enough to
pay for those travel costs.
14
Paulo.
2
5.2
Valorization Policies
While the immigration subsidization policy had unintended positive consequences for São
Paulo in the long-run, coffee valorization is an example of a policy intended to solve a local
collective action problem that led to ”few long-range institutional changes,” as Steven Topik
(1987, p. 73) puts it. In fact, the 1906 valorization scheme is an example of a policy that
failed to at the national level but succeeded locally in times when liberal ideology was popular. During the first two decades of the federalist republic, a laissez faire attitude towards
the economy still dominated. At that time, as Topik (1987) puts it, ”[i]nterventions were the
products of rescue operations caused by economic crises rather than of developmental planning.” Interventions, such as the 1906 valorization, were temporary. ”Although the state’s
proper economic role was gradually redefined,” Topik continues, ”interventions continued to
be seen as efforts to salvage the laissez faire export model.” (p. 163) The 1906 valorization
policy is an example of a short term local solution to a short term local problem.
The perceived need for a valorization policy arose for the first time in 1905 when São
Paulo coffee growers anticipated a bumper crop in 1906. Several characteristics of coffee planting make preventing bumper crops impossible. Coffee planting is problematic for
medium- and long-run planning, particularly when there exist thousands of producers. Coffee is a perennial crop requiring five years between tree planting and the first harvest. Since
trees produce beans for up to thirty years, cutting back on production by planting fewer
trees or cutting them down does not work as it does with other crops such as wheat or sugar
cane. Productivity varies year by year, with a bumper crop harvest followed by years of
smaller yields. Once picked and dried, coffee does not spoil and storage is easy.
Even though storage is easy, no individual coffee grower had the incentive to remove
their product from the market to limit supply without compensation from other growers.
Demand for coffee at the turn of the century was, as it still is today, relatively inelastic,
which led to lower revenues as prices decreased and quantity demand did not rise in the
same proportion. Collectively, all growers would have been better off if they stored some of
their harvest, thus preventing prices and revenues from collapsing. Yet, no grower was large
enough to affect prices by cutting or expanding production individually. This meant that
each individual grower had the incentive to sell his entire harvest regardless of what other
growers’ did. They faced a collective action problem.
With the 1906 bumper crop on the horizon, growers convened in the city of Taubaté,
São Paulo to create a credible commitment device for coordination. This device would allow
each grower to benefit from higher revenues by removing the incentive to defect. In fact,
the plan consisted mainly of buying up part of the coffee harvest to prevent prices from
collapsing. Since all growers paid taxes, they could not free ride or defect. The Taubaté plan
2
See, for example, De Carvalho Filho & Colistete (2010), Wegenast (2010), De Carvalho Filho & Monasterio (2012), Rocha et al. (2015).
15
forced each grower to cooperate by buying up part of everyone’s crop. Beyond creating a
commitment device, the Taubaté plan also called for a tax on new coffee trees for all states,
the creation of a coffee exchange to control the grading of coffee, which exporters had done
up until then, and an advertising campaign abroad to stimulate consumption.
Initially, São Paulo growers wanted the national government to implement the Taubaté
plan and São Paulo politicians attempted to convince other large states of the necessity of
a national valorization. However, even other coffee producing states declined to support the
São Paulo plan. Even Minas Gerais politicians, São Paulo’s closest allies, refused to sign off
on a federal valorization plan. Others opposed it on the grounds that the financial burden
was too great, the risks too high and the reasons (protection of the coffee economy) too
narrow to justify a federal policy. At the end of the Taubaté convention, the São Paulo
planters had no one but themselves and the São Paulo state government.
So in 1906, the São Paulo state government took out a loan from a German bank, to
be repaid in one-year with funds from an additional coffee tax. (Topik 1987, p. 71) The
temporary valorization program was successful and the growers avoided an overproduction
crises. The 1906 program was the period’s largest and most extensive valorization plan, but
it was also temporary. The growers needed an insurance policy and paid for it with higher
coffee. The program did not inflict a burden on non-coffee producing states nor did it set
the precendent for uncontrolled government intervention in the interest of coffee.
The 1906 coffee valorization program is an example of local coordination made possible
by the existence of and support for a federalist system. Had an imminent bumper crop hit
São Paulo either before or after the federalist period, growers would have had to resort to the
central government to solve their local problem. Whether they would have been successful in
capturing the government hinges on many factors, including the ideological predispositions
of the men in power, their ties to coffee and ultimately on their willingness to impose a tax
burden on non-coffee sectors to fund a valorization program. Under federalism, minimal
welfare damage occurred. Growers needed a credible commitment device, they paid for it
and they got it.
Unlike the immigration subsidization program, the 1906 valorization plan had few if
any long run effects. The success of the program at the state-level may have inspired the
Positivist-inclined intellectual or politician to push for more systematic interventions, though
World War I seems a more likely candidate for inspiration. In fact, systematic interventions
increased only after the war and culminated with a revolution in 1930 that ended federalism.
(Topik 1987, p. 43) By then, nationalist, collectivist and authoritarian ideological currents,
inspired by European socialist intellectuals and by Comtians, had taken over the Brazilian
intellectual space. In 1930, the Brazilian PP shifted back.
16
6
Conclusion
Standard political economy theories put very little emphasis on ideas. Their seeming
intractability and nonmeasurability has put ideas in the ceteris paribus box of politics, leaving
political economists free to focus on interest-only theories. This paper seeks to break ideas
from their box and place them in at the core of the process of political and institutional
change. Employing the political framework developed in Rodrik (2014), I have shown how
liberal ideas led to the implementation of a federalist regime at the turn of the twentieth
century in Brazil. This institutional change allowed for increased local coordination in the
state of São Paulo, where at the time coffee interests dominated. The main implications
here is that ideas can have a causal effect on institutional quality because they generate the
momentum and give support to political change.
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