After decades of economic disorder, monetary chaos and financial repression under military rule and protracted transition, and following reforms during the 1990s, Brazil's resistance to crisis and stronger growth since 2004 have attracted attention. In Experiments in Financial Democracy, Aldo Musacchio argues that stock markets and corporate governance in late nineteenth- and early twentieth-century Brazil provide important lessons about shareholder rights for finance and growth. Unfortunately, his analysis of corporate bylaws and boardrooms fails to control for alternative explanations and mistreats data. Brazilian historiography and good judgment are ignored to suggest that boardroom democracy produced financial development, while outrageous assertions follow that deviations from orthodoxy were responsible for Brazilian underdevelopment.
The book contains 11 chapters. We are first taken back to law and finance debates from the 2000s (mired in fallacies of aggregation and prejudice) and read that two ‘pushbacks’ provide the most promising explanations for financial development: formal analysis of political economy and economic analyses of political institutions. Thereby sealing debate to the hermitic confines of orthodoxy (ignoring classic and contemporary theories such as those of Shonfield, Dickson, and Allen and Gale), Musacchio proceeds down the ladder of abstraction to find that, despite the lack of both proper legal protection (apparently changing his mind in the empirical chapter on creditor rights) and political institutions capable of deepening finance, the corporate bylaws of Brazilian publicly traded firms nonetheless sustained democratic corporate governance and caused financial development in the period 1882–1950.
Musacchio misrepresents economic and financial data, ignores the boom and bust cycles that emptied capital markets and repeatedly broke investors small and large, and erroneously infers financial development while ignoring the fundamentals of underdevelopment in Brazil. Capitalisation of stock exchanges is measured punctually, thereby ignoring the bubbles and crashes that destroyed savings and reproduced financial and economic underdevelopment during this period.
Moreover, Musacchio's micro causes remain absent in most of the 1882–1950 period promised in the title. The reader soon finds that boardroom democracy (supposedly) drove finance during a much more limited time span (1892–1912?). Massive losses from financial crises in 1853, 1859, 1864, 1875 and 1890 surely invalidate claims about capital market development and democratic governance under slavery, monarchy and empire until 1888–9. And the record changes little under republican rule. Amidst further crises stayed by a funding scheme from London banks in 1898, and a devastating financial market crisis in 1913, Musacchio's dependent variable of financial prosperity proves an illusion. Decades of sustained research have focused on the core reality of this period: cycles of boom and bust driven by macro matters and the importance of innovative coffee schemes and state subsidies designed to reduce volatility and market failures. Musacchio's mistaken micro assertions about boardrooms and finance fail to control for these broader issues of state intervention and macro-economic management.
And instead of the analysis holding through 1950, we learn that politics produced a great reversal in financial development after 1929. Saying that politics, and not the 1929 crash and its devastating consequences, caused capital market reversals is so patently absurd that its meaning is only apparent to true believers that markets always work and politics are always to blame. Once again, the accumulated knowledge of research about single state parties and oligarchic authoritarianism in the 1920s, the 1930 revolution and the forging of bank-centred national populism that drove import substitution industrialisation and social inclusion are simply ignored by Musacchio in what can only be seen as an attempt to maintain in-vogue illusions of orthodoxy.
But it gets worse. Within the tiny time span reserved by our author to support his argument, unsuitable Granger tests for a very limited number of years and descriptive data are used to compare correlations between loans and securities on finance. Classic explanations for this period are once again ignored: restricting the question to the apparent capitalisation of loans or securities in a select number of years ignores core questions of volatility and the importance of massive subsidies for coffee through official price support programmes.
The problems of this book go beyond periodisation. The abuse of Brazilian history and bending of data to support micro claims about experiments in financial democracy (is this a paraphrase of Skidmore?) in Brazilian boardrooms ignores hard-won understanding of underdevelopment in Brazil. Centralised monarchy (with ‘moderating power’), military repression and brutal top-down patronage machines under empire and slavery become limited government. Speculative bubbles become evidence of financial development. Worthless paper (often stuck on Musacchio's small investors) is taken at face value. Alternative explanations in comparative and historical financial economics (such as Dickson's Financial Revolution or Allen and Gales’ comparative framework) are ignored. I have violated Thumper's mother's law (if you don't have anything nice to say, don't say anything at all) in this review because enough is enough. Instead of sober reflection useful for our post-crisis world, this book reflects a juvenile fascination with a single micro variable that is out of place. It is only through the bending of data, time frames and reality that the simple-minded orthodoxies of hermetic debates among self-declared liberal economists may distract scholars and policy-makers from the urgent tasks of reconstructing markets and banks.
Brazil is not a role model for orthodoxy. Brazil remained, by far, one of Latin America's poorest countries during the period examined, devastated by imperial reaction, slavery, oligarchic authoritarianism and vicious cycles of underdevelopment. Brazilian studies matter because they have produced profound understanding of underdevelopment and clarified the creative heterodoxy of muddling through terrible conditions. It is this trajectory of skewed banking, finance and growth that counts. Focusing on corporate bylaws is an anachronism we cannot afford while markets have crashed down around us in the twenty-first century. Nor are single-paragraph comparisons and playful counterfactuals acceptable. One reads in fear and disbelief that this focus on corporate bylaws and boardroom democracy may spread to explain financial development elsewhere, even in Nazi Germany (sic!). Please stop.
