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Brazil: Stock Markets and Corporate Credit Now Driving Financialization?

The present article seeks to demonstrate that, despite the steep deterioration in social and economic indicators in the midst of an unprecedented social, political, and economic crisis, Brazil seems to have entered a new stage of the process of financialization, now shaped by the dynamics of the capital market. We briefly recall the different phases of financialization in Brazil from eliticized- to mass-based, underlining how the sharp decline in the prime rate as of late led to a strong valuation of financial assets in the stock market. We test the hypothesis of a new financialization pattern, now driven by the stock market, using in our regression model a sample of 81 different segments (non-financial) from the Economatica platform, from 2010 to 2019. The results indicate a change of command in the finance-dominated accumulation regime in Brazil, that is, corporate financialization is now also determined by the stock market valuation process, due to the fall in return on financial investments (notably government securities). Selic-driven financialization has been substituted by other forces, such as corporate credit and—a relevant new factor—investments in shares.

This trend became more pronounced during the 2000s. While the socialdevelopmentalist thought was advancing, driven by the commodities cycle that inaugurated a new period of economic growth (2003)(2004)(2005)(2006)(2007)(2008)(2009)(2010)(2011)(2012)(2013), signaling promising developments, a critical scholarly emerged drawing attention to a little-studied phenomenon that had been gaining central importance: the process of financialization of the Brazilian economy and of the sphere of social reproduction. Although still few in number then, these studies suggested that one of the causes of the low growth that prevailed after the achievement of economic stabilization was the fact that Brazilian companies progressively shifted their investments to capital markets. Preference was given to government securities remunerated by the Central Bank's sky-high base interest rate.
The present article seeks to demonstrate that, despite the steep deterioration in social and economic indicators in the midst of an unprecedented social, political, and economic crisis, this period saw a new stage of the process of financialization in Brazil, now shaped by the dynamics of the capital market. The most severe contraction in the Brazilian economy in the past century, marked by a deep recession in 2015-2016 (negative GDP growth of 7.2%), followed by three years of economic stagnation (growth of around 1.1% p.a. for the 2017-2019 period), with an international context of near-zero interest rates, led to a shift in macroeconomic policy. The prevailing economic paralysis dispelled the myth of the Brazilian Central Bank's base interest rate as an anchor of stability. The Selic prime rate was knocked down to record-breaking lows, compromising the rentier profits indexed to it, which embodied the long-standing, powerful coalition of rentier and financial interests (Bresser Pereira et al., 2019;Lara-Rezende, 2017;Erber, 2011) at the helm of the Brazilian State. We argue that a new phase of corporate financialization (Erturk, 2020) was ushered in, marked by competition amongst firms now taking place on the capital market, and focused on the valuation of their financial assets.
In what follows we provide empirical evidence to support that assumption, after synthesizing the paths taken by financialization in Brazil. After this brief introduction, section two overviews the recent debate on financialization in Brazil pointing to the growing convergence among certain swatches of heterodox scholars that high Selic rates, and consequently, wide spreads have encouraged the financialization of non-financial firms, by guaranteeing significant financial profits. Section three recaps in a nutshell the capital market's ups and downs in Brazil over 30 years, from the mid-1990s until 2021. This section also highlights regulatory mechanisms that had contributed to bring about a structural shift in the regime of accumulation. There, we present the opposed trajectories of the Bovespa Index and the Selic rate since 2016-2017, leading, in our view, to a change of command within the finance-dominated accumulation regime: from L. Lavinas et al. DOI: 10.4236/tel.2022.124059 1076 Theoretical Economics Letters financial investments in government securities towards stock ownership.
To test this hypothesis, the following section builds on a dynamic panel data model using the Generalized Method of Moments (GMM). Data were drawn from Economática. We brought together on an unbalanced data panel of non-financial companies from 81 different segments, from 2010 to 2019. The findings corroborate our assumption that, in the aftermath of the 2015-2016 sharp economic recession, corporate financialization shifted course, this time driven by the logic of shareholder value primacy and the stock market valuation process, along with financial gains in credit markets. Finally, by way of conclusion, we raise concerns as to whether this trajectory is sustainable in the medium and long term if the Selic rate would revert to grow.

Taking Stock of Financialization in Brazil
In an early analysis, Braga (1985) was the first to capture the precocious financialization of the Brazilian economy, which had been underway since the mid-1970s. With the end of the so-called economic miracle, led by marked GDP growth, Braga indicates that wealthy households, companies, and banks began prioritizing the accumulation of financial assets to the detriment of financing productive investment-which would have meant tying up capital during a period of widespread uncertainty. As Bruno et al. (2011) and Araújo et al. (2012) have confirmed, this process was aided by the creation of institutional mechanisms for the monetary correction of prices and salaries and financial assets that made it possible to compensate for past inflation, fueling its steep rise.
The fiscal and external-debt crises of the 1980s helped to pave the way for a financial expansion and unprecedented banking concentration, sparked by inertial inflation. It is worth recalling that over the 1980s, the inflation rate per year rose from 95. 62% in 1981 to 1972.91% in 1989. In the year preceding the implementation of the Real Plan (1993), it reached 2477.15% (IBGE, Contas Nacionais, Historical Series). With the backing of a State burdened by debt in foreign currency and unable to rein in devaluation, the banking and financial sector during this period developed off the inflationary gains derived from the public debt in overnight operations . The returns were constantly updated by the mechanism of monetary indexation (adjusted by the national consumer price index). The implementation of "indexed-based money" or "financial currency", as it was known, kicked off the process of financialization in Brazil, led in this first period by inflationary gains. While the process remained incipient throughout the 1980s and early 1990s, it would attract and benefit elites and non-financial companies, fortifying the growing protagonism of the banking and financial sector with grave consequences for income inequality and gross fixed capital formation (GFCF).
A historical analysis of the investment rate in Brazil reveals near-unflagging growth from 1930 to 1979, going from 9.67% of GDP to 23.4% over the period in question (IBGE, Contas Nacionais, Historical Series). This performance was stoked by political and legal decisions, among which macroeconomic policies designed to expand gross domestic fixed capital formation, expansionist fiscal policy, and low-interest, pro-credit monetary policy. These decades also brought a rise in the rate of public investment in the manufacturing industry, with the government deepening its intervention into the configuration of the country's productive system and its capacity for sustaining demand. This explains why the 1980s brought the peak of investments in Brazil.
What followed was a rupture in the pattern of Brazil's growth, as well as in state intervention in the economy. By the same token, as stated by Lavinas et al. (2019), "the banking and financial sector, consolidating itself as a hegemonic sector, guided the institutional transformations that led to the commercial and financial liberalization of the 1990s" (page 4).
Starting in the 1990s, a macroeconomic regime based on neoliberal precepts, privileging price controls, worked to eliminate mechanisms for economic intervention, pared back public investment, and curtailed not only private investment but also growth, as seen in the modest expansion of Brazilian GDP after the return to democracy (1985) 2 . For years on end, austere inflation-control targets were used to justify sky-high real interest rates, sparking the second phase of financialization in Brazil-now rooted in interest-based and other financial incomes (Bruno et al., 2011). The latest front for financial accumulation became derivatives and fixed-income securities tied to the public debt, at nominal and real interest rates that were much higher than their international counterparts (Araújo et al., 2012). Party administrations  and subsequent acceleration in the indebtedness of non-financial companies and, above all, households, an unprecedented phenomenon in Brazil. In parallel, the country's deindustrialization process continued to accelerate.
This second phase of "mass financialization" prevailed from 1995 to 2016. Under an inflation-targeting regime adopted in 1999, inflationary gains have been substituted by high interest income 3 . Figure 1 shows the spread between the IPCA (Consumer Price National Index) and the Selic base interest rate, set by the Central Bank. It should be underscored that throughout the 2000s, Brazil's internal public debt has been heavily concentrated in both fixed (Selic-indexed) and floating interest rates securities, the return on which has tended to outpace the base interest rate, except from 2019.
Initially focused on assets connected to the internal public debt (driven by the Selic prime rate), changes in the monetary regime also set the macroeconomic groundwork for the interests of high finance to increasingly highjack public services and social security . Rising public and private indebtedness became the basis for a new pattern of rentier growth.
The second decade of the 2000s was marked by the rise of austerity policies 4 , leading to a chronic underfinancing of social programs-a trend that has compromised the quality and coverage of a broad range of public services in healthcare and education, to say nothing of repeated alterations to the pension system.  The tendency to the real appreciation of the exchange rate then observed-undermining the performance of the industrial sector, which worsened drastically-was a consequence of the persistence of extreme high interest rates in the Brazilian economy. High real interest rates are the main factor in attracting speculative capitals, which promote the accumulation of international reserves. Because the financialization process expanded in a context of high real interest rates, the appreciation of the exchange rate compromised Brazil's external industrial competitivity and ended up pushing further a premature de-industrialization. 4 Reforms approved after 2015 not only implied lower economic security and social protection, but also led to a reduction in the provision of public services. In 2016, the new fiscal regime, also called the spending ceiling, was turned into a constitutional amendement. This meant that federal expenditures for each year cannot increase beyond the inflation of the previous year. Such a measure implies a real freezing of the total expenses of the Federal Government for the next 20 years. This change, in addition to configuring a package of reforms that presents a certain "institutional rigidity", is also in legal terms "irreversible" in the short and medium term (See Pinto, 2016 andOrair &Gobetti, 2017). Theoretical Economics Letters As a consequence, financial markets have taken over public provision; those able to pay (to access private education or purchase private health insurance) and those able to go into debt (by taking out student loans, using consumer credit, or paying by installments) were thrown into the arms of financial markets. The transformation of social policy into collateral (Lavinas, , 2020 has deepened the process of indebtedness that ballasts rentierism even as it facilitates the re-commodification of the sphere of social reproduction, converting the middle and working classes into consumers of an endless variety of financial products and services. The collateralization of social policy means cutting the transactional costs and the risks inherent to the expansion and diversification of financial markets. Hospitals, laboratories, healthcare plans, and private colleges came into the sights of major international and domestic capital-market investors. This meant that the provision of services-once the constitutional duty of the State-was given a new priority: shareholder profit. In the Brazilian case, those shareholders were major international financial groups. Slowly but surely, fund managers became the indirect managers of social policy (Lavinas & Gentil, 2018). Similar conclusions may be found in Feijó et al. (2016). Upon examining the relationship between financial integration and structural change, the authors observe that in the case of Brazil, the financial liberalization that followed the opening of the Brazilian economy in the 1990s did not strengthen industry in the production structure. On the contrary, they associate Brazil's premature deindustrialization to a growing dependency on foreign savings, which entailed maintaining high real interest rates and non-competitive real exchange rates. As a result, the macroeconomic context failed to stimulate capital accumulation, and incentivized the financialization of non-financial firms.

Amidst Multiple Crises, the Stock Market Surges and Credit Picks up
Ever since the era of major privatizations under the Cardoso administration (1994)(1995)(1996)(1997)(1998), which took place at the same time as the financial opening of the  (Gentil, 2020). The Bovespa Index represents the average performance of leading shares traded over recent months on B3 S.A., the São Paulo stock exchange. According to B3's website, the index "is comprised of stocks and units of companies listed on B3 that meet the criteria described in its methodology, accounting for about 80% of the number of trades and the financial volume of our capital markets." Theoretical Economics Letters

An Empirical Investigation into the Different Waves of Financialization in Brazil
The The so-called macroeconomic matrix tried unsuccessfully to stimulate the economy through a combination of three economic policy instruments: low interest rates, devalued currency, and cost-cutting, the latter associated with massive tax breaks that favored capital Lavinas & Gentil, 2020). Theoretical Economics Letters cent years may be seen in its remarkable performance (Figure 4)  Dec-95 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 B3 BNDES

BNDES Stock Market (B3) Theoretical Economics Letters
As indicated above, the most relevant factor would seem to be the monetary policy of low interest rates along with the atrophy of Brazilian public banks, the national development bank (BNDES) chief among them. With real short-and long-term interest rates in freefall in Brazil and in core countries, the stock market has become the latest route to profitability for financial capital. Likewise, it has also attracted individual investors (mostly young middle-class people) who once held treasury bonds but saw their profitability fall with the decline in the prime rate.
Furthermore, lower interest rates encourage companies to take out loans to buy back their own shares and/or invest in other companies' shares. In the first case, the goal is to reap profits for their own managers, who are remunerated through those stocks, as are their shareholders. In the second case, the aim is to bring in speculative profit from the stock market. In this new phase of financialization, rather than promoting productive investment by companies, rock-bottom real interest rates have reinforced shareholder gains and undermined the recovery of the real economy.
It should be emphasized that international financial conditions played a crucial role in cementing this trend. Policies of quantitative easing and near-zero interest rates in developed economies fed demand for higher-risk shares, boosting foreign investors' acquisitions of shares on the Brazilian stock market.
Again, this shift in the role of public banks (deprived of their leading role as financial agents of development) and the deepening of the neoliberal agenda (taken to even more radical lengths in the post-impeachment period) encourage firms in the productive sector to replace subsidized public credit with fundraising on the capital market, the result being an expansion of follow-on offerings.
The acceleration of mergers and acquisitions-or, in other words, of the process of concentration and financialization-has tended to increase high-income households' asset liquidity, leading to new turnover of that capital on the stock market.
Fiscal policy rooted in the logic of "expansionary austerity" (Alesina & Perotti, 1995;Giavazzi & Pagano, 1990) exerts an important influence over the optimism of the financial market. The core concept is that financial austerity would be able We used the Bovespa Segment because it is, of all of these, the most disaggregated and corresponds to a classification that we felt was most appropriate to examine Brazil's productive structure.
With this objective, a dynamic panel data model was considered using the generalized method of moments (GMM) proposed by Arellano and Bond (1991), which is appropriate in cases involving 1) a linear functional relationship; 2) a lagged dependent variable, which means a dependent variable influenced by prior values; 3) potentially endogenous explanatory variables; 4) individual fixed effects; 5) heteroscedasticity and autocorrelation within groups of individuals; and 6) the possibility of "internal" instruments based on their own lagged variables.
The estimated model attempts to capture the various determinants of financialization in Brazil, as summarized in the following equation: where Finn is the variable that stands for the process of financialization in Brazil, given by the relationship between financial assets and companies' net equity; re_finn is companies' financial revenue; div is the companies' short-term debt; GDP is the GDP growth rate; and drive represents the driving force behind financialization in Brazil. Here, 3 models will be estimated, each with a different Theoretical Economics Letters drive: selic in model 1 9 , credit in model 2, and Ibovespa in model 3 10 . α is the constant and β are parameters that capture the relationship between the explanatory variables and the proxy for financialization; i stands for each sector on Economática (1 to 80) 11 ; t is the annual period of time, and u is random error 12 .
This proxy for financialization is inspired by Durand (2017), for whom financialisation can be understood as a reorientation of capital accumulation away from productive activities and toward financial activities. He uses three kinds of indicators to check if an economy is being financialized: 1) the weight of the financial sector; 2) the importance of this sector's profits relative to overall profits; and 3) the dynamic of financial profits in non-financial firms.
In the scope of this paper, we sought to identify available variables that would provide, as stressed above, a proxy for the frame proposed by Durand, though aware that they do not fully encompass it. Thus, we set up the following proxy: the first is calculated as the gross value added of financial insurance and real estate activities (percent of GDP); the second derives from the gross value added by financial and insurance activities (percent of GDP); and the last reflects financial and insurance activities' gross operating surplus (as a percent of total gross operating surplus). All these variables are in percentage terms so as to reveal whether the financial sector is growing in relation to the economy as a whole or in relation to a company's other activities.
The choice of three different models over a single one with the three different drivers of financialization is justified by the attempt to obtain a model that does not fall into overparameterization, given the sample size used for the estimates. Table 1 shows that the explanatory variables were statistically significant in explaining financialization, with the exception of the variable for financial reve- nue. An increase in economic growth is seen to reduce financialization, which may be explained by the fact that increased activity in the real economy would reflect an increase in productive investments by companies, instead of financial investments. The short-term debt variable, meanwhile, appears tied to a rise in financialization; in a scenario of falling interest rates, companies turn to debt to buy back their shares (and thus secure future appreciation) and speculate on other companies' shares.
As for the multiple variables chosen to act as the drivers of financialization, 9 Again, in the Brazilian economy, the Selic rate is the basic interest rate of the economy. It is the main instrument of monetary policy used by the Central Bank to control inflation. It influences all interest rates in the country, such as interest rates on loans and long run interest rate. 10 A full description and the sources for each variable in the model may be found in the Appendix, Table A1.

11
Note that Economática has 81 segments; we opted to exclude banks from the model here. Nevertheless, models were estimated for the database with and without the presence of banks in the sample, and the results did not change significantly: the main result was to reinforce the negative effect of GDP on financialization. Note that the econometric model used here is efficient even in light of the endogeneity bias present in the relationship between GDP and financialization. 12 We tried to estimate a model that with a regression specification in which the three "drivers" of financialization are included together, rather than separately. However, the three different drivers of financialization were not significant together, making it difficult to interpret the results. Note 1: Standard errors in parentheses; ***p < 0.01, **p < 0.05, *p < 0.1. Note 2: description of the variables in the table: l.logfinn is the log lag of the variable finn; logre_finn is the logarithm of the variable re_finn; logdiv is the logarithm of the div variable; l.gGDP is the lagged growth rate of the GDP variable; l.logselic is the log lag of the selic variable; l.logibovespa is the log lag of the variable ibovesta; l.logcredt is the log lag of the credt variable.
the model's results confirm our hypothesis that in recent years, Selic-driven financialization has been substituted by other forces, such as an expansion of corporate credit and-a relevant new factor-investments in shares. The former can be explained by drops in loans costs (falling Selic rate). This double replacement may be observed by the non-significant coefficient of the "Selic rate" variable, and by the positive and significant coefficients of the "corporate credit" and "Ibovespa" variables. It is worth emphasizing that the coefficient for "corporate credit" is the highest, indicating that the expansion of credit and the con- It is also noteworthy that all models were robust and that Sargan's test, which is used to identify whether the constraints of a model are valid, confirmed the validity of the instruments used in the models.
The model confirms our hypothesis that beginning in 2017, corporate financialization entered a new phase in Brazil. The nation's path out of the wrenching crisis in which it had found itself since 2015 did not involve an attempt to restore growth through productive investment and innovation, but rather deepened and broadened the scope of financialization. As Erturk (2020) has described, in Brazil as well, non-financial firms began turning their backs on product market performances, such as sales growth, and shifting their competitiveness "from production cycles to the external stock market valuation process" (p. 44)-none of which promoted growth, rates of which remain anemic 13 .
Similarly, Brazil became host to what that same author-Erturk (2020)

Concluding Remarks
Our findings point to the prominence of corporate credit expansion and share ownership as novel drivers of financialization in Brazil in the period under scrutiny (2017-2021). A recent study by Mader (2022) comes to very similar conclusions regarding credit expansion. Combining the fictitious capital frame (Durand, 2017) we also referred to, with an enterprise level of analysis, the author asserts that security income has been replaced in the 2020s by spread income, the latter derived from the expansion of credit lines. Mader demonstrates the strong correlation between the declining nominal Selic rate and the increase of profits from interest income in virtue of large spreads applied to bank loans directed at the corporate sector 14 .
What lies ahead for Brazil, now devastated by an unprecedented health crisis, with one of the worst performances in the world in managing the coronavirus pandemic, second only to the United States? By early July 2021, the official number of deaths caused by COVID-19 stood above 530,000, with nearly 20 mil-13 It is worth noting the GDP growth rates recorded over the last four years: 1.32% in 2017; 1.78% in 2018; 1.41% in 2019 and −4.06% in 2020 (IBGE, National Accounts, Historical Series). 14 Mader does not assess in his study how declining Selic rates impact the performance of the capital market, a dimension we have integrated into our analysis. Theoretical Economics Letters lion confirmed cases. While stunningly high, these figures are notoriously underestimated, given the near absence of testing. The true situation is thus even more worrisome, raising doubts as to the speed and quality of the post-pandemic economic recovery.
The capital market, meanwhile, seems to inhabit a world set apart from the pandemic and the recession (−4.9% GDP growth rate in 2020). The collapse of B3 in mid-March 2020 at the same time as the first COVID-19 fatality in the country, seemed poised to definitively interrupt a virtuous cycle begun 3 years earlier in which the stock market had become the fresh driver of financialization in a stagnant economy, against a backdrop of rising inequality and falling productive investment. But a V-shaped recovery was soon underway: in January of 2020, just before the coronavirus outbreak, Ibovespa hit a historic high (119,527 points). It then dropped sharply and spent the rest of 2020 oscillating wildly.
However, since mid-May 2021, Ibovespa has outpaced its strongest 2020 performance and has since broken new records, crossing the 130,000-point mark.
Another sign of the recent exceptional dynamism of the capital market is the number of IPOs that took place in 2020 alone: 28 companies went public, the highest such number since 2007.
It seems plain that the Brazilian stock market has taken on an unprecedented dimension. In 1995, the volume traded on the stock exchange corresponded to 6.7% of GDP. In 2019, it reached 52%, according to Economática; and that figure rose to 93.1% of GDP in 2020, a year of falling output.
It is still too soon to say, however, whether this trend will hold. For its part, economic policy has been inept, sluggish, and insufficient in tackling financial speculation and the current calamity. The handcuffs of the spending cap remain, evidence that policy is still an ideological hostage of fiscal austerity. On the monetary front, interest rates are on the rise due to a slight rebound in inflation. Between January and June of 2021, the Central Bank raised the Selic from 2% to 4.25%, signaling that government bonds may once again provide higher profitability. It is worth recalling that the fight against inflation is justified, under financialized capitalism, for preserving the supremacy of financial markets, whose profits depend on the valuation of financial assets. As stated by Epstein, keeping inflation low and under control, "increase the share of income going to rentiers" (Epstein, 2019: p. 385).
The upward trend of the Selic, if confirmed, could come to question this study's central assumption that the capital market has become a new drive of financialization in Brazil. The future configuration of the dynamics of financialization will hinge on a series of factors. However, this exploratory analysis indicates that it is highly likely that the stock market along with new waves of private credit expansion will keep up being relevant triggers at that.