Case Study: Brazil, Capital Market Reform, and the Economic Miracle Brazil: Economic Miracle and Capital Market Reform

Case Study: The Brazilian Stock Market

Brazil: The Economic Miracle and Capital Market Reform

Capital Market Reforms of 1964-1970

One of the priorities of the revolutionary government in 1964 was to build a domestic capital market.

There were two reasons for this, political and economic.

Foreign capital and loans were rationed under a system that discouraged foreign portfolio investment in Brazilian equities in favor of organized direct investment in basic industry.

Rio Stock ExchangeForeign portfolio investment was not important in the early development of the Brazilian capital market

Because of barriers to foreign portfolio investment, the Brazilian equity market was almost entirely domestic, although a few foreign expatriates played important roles.

In the 1960s, it was not widely understood that a capital market could be created from scratch in developing countries in a relatively few years. Many in the United States (including 'Engine Charlie' Wilson of General Motors) said that if businesses in developing countries needed capital they should come to New York. Some sociologists even thought that capital markets could develop only in countries that met certain legal, religious, ethnic, and even climatic conditions.

Nevertheless, Brazilians were willing to use imagination and commonsense in developing their own capital market. In this they were successful.

The country was fortunate to have three pragmatic finance ministers presiding over the fifteen years of the Economic Miracle: Octávio Gouvêia de Bulhões, Antônio Delfim Netto, and Mário Henrique Simonsen.

In early 1960s, many ideas for capital market modernization and support for implementation came from individuals in the private sector, mostly in their twenties and early thirties, usually based in Rio de Janeiro and working informally on an ad hoc basis with government economists.

DÍnio NogueiraDênio Nogueira, the first president of Brazil's Central Bank, played a key role in reforming the capital market

This group included, among others, Pedro Leitão da Cunha, Ary Waddington, Geoffrey Ainsworth Langlands, Júlio César Belisário Viana, John Oswin Schroy, Jorge Paulo Lemann, and Roberto Teixeira da Costa.

The government of Castelo Branco, 1964-1967, was a time of extraordinary innovation and progressive reform of the capital market:

With regards to capital market development, leadership was provided by a group of carioca economists associated with the Fundação Getúlio Vargas and SUMOC, including Octávio Gouvêia de Bulhões, José Garrido Torres, Dénio Nogueira, and Mário Henrique Simonsen.

By 1970 Brazil had become the largest securities market in Latin America, a position that it retains to this day, although the location of the principal exchange has shifted from Rio de Janeiro to São Paulo.

Despite the rapid increase in prices since the 1950s, stocks of solid companies still traded in 1970 at five to ten times earnings, while paying attractive dividends.

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