Governing discretion: overcoming the clash between state capitalism and democratic controls

• Grant number: 14/06104-5
• Support Opportunities: Scholarships abroad - Research
• Effective date (Start): August 04, 2014
• Effective date (End): January 26, 2015
• Field of knowledge: Applied Social Sciences - Law - Special Rights
• Principal Investigator: Mario Gomes Schapiro
• Grantee: Mario Gomes Schapiro
• Host Investigator: Kevin Davis
• Host Institution: Escola de Direito de São Paulo (DIREITO GV). Fundação Getúlio Vargas (FGV). São Paulo , SP, Brazil
• Research place: New York University, United States

Abstract

Situated at the intersection of Law and Development and Comparative Administrative Law, this project explores potential contradictions between state capitalism and democracy. Evidence suggests that state capitalism can lead to economic innovation under authoritarian conditions. But in democratic regimes there may be a tendency for state capitalist regimes to prefer existing industries (incumbents) and strategies (Ricardian approach) over those that create those new forms of comparative advantage that are necessary for long term growth (Schumpeterian approach). Starting from the assumption that this is happening in Brazil, the project seeks to identify new institutional arrangements that could ensure that state-directed policies in Brazil foster new industries and products as well as strengthening existing lines. The focus is on Brazil but the research should be of value to other developing countries and even to OECD countries engaged in state directed stimulus policies. There is a clash between economic development and democratic controls in Brazil due to failures of institutional design. Economic decisions are subject to short-term political pressures that encourage short-term, low risk decision-making. Existing control mechanisms fail to counteract this tendency and-indeed-aggravate it. The result is policies that favor existing industries and threaten to keep the economy at a low level equilibrium. While the Brazilian state plays a central role in economic decision-making, the main policy makers are subject to short-term political considerations and timetables. These encourage support for existing industries and interests. Mechanisms of control and accountability exist but rather than offset the tendency to short-term, low risk decision-making, they tend to confirm them. The control system, operated primarily by the Ministerio Publico (Public Prosecutor) and the Accounting Court, focus on formal requirements for decision making not on the substance of the decisions and reinforce the tendency to short term, low risk choices.The project assumes that a combination of empirical research in Brazil and comparative legal study can reveal better options for the governance of development policy. I explore two basic alternatives (a) shielding the development-related decisions from the immediate political competition, thus emulating the Central Banks experience or/and (b) keeping the development-related decision inside political competition, but improving its horizontal political accountability. In addition to empirical study in Brazil, I plan to study other cases which may offer lessons for Brazil: they include the governance of Indian industrial policy, the governance of the US recovery program and EU regulations for state-aid. (AU)