Title: Fiscal federalism in Brazil
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Title: Fiscal federalism in Brazil
Physical Description: xiii, 322 . : illus. ; 28cm.
Language: Spanish
Creator: Mahar, Dennis John, 1943-
Publisher: University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: 1970
Copyright Date: 1970
 Subjects
Subject: Finance, Public -- Brazil   ( lcsh )
Fiscal policy -- Brazil   ( lcsh )
Politics and government -- Brazil   ( lcsh )
Economic conditions -- Brazil   ( lcsh )
Economics thesis Ph. D
Dissertations, Academic -- Economics -- UF
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )
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Thesis: Thesis--University of Florida.
Bibliography: Bibliography: . 308-321.
Additional Physical Form: Also available on World Wide Web
General Note: Manuscript copy.
General Note: Vita.
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Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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Resource Identifier: alephbibnum - 000136120
oclc - 01741743
notis - AAQ2176

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FISCAL FEDERALISM IN BRAZIL
















By
DENNIS JOHN MAHAR














A DISSERTATION PRESENTED TO THE GRADUATE COUNCIL OF
THE UNIVERSITY OF FLORIDA
IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF DOCTOR OF PHILOSOPHY













UNIVERSITY OF FLORIDA
1970













ACKNOWLEDGEMENTS


Many persons have contributed rrost welcome advice

and criticism during the various stages of preparation of

this dissertation. 1While conducting my initial research

in Brazil, the staff of the Getlio Vargas Foundation in

Rio de Janeiro graciously offered the use of their excel-

lent facilities. Ruy M. Paiva and Margaret H. Costa must

be singled out for special] thanks in this respect.

Professors Elton Hinshav; and Werner Baer of Vanderbilt

University also provided useful advice during my period

of residence in Brazil. On a personal level, Professor

and Mrs. Paulo Rnai were greatly appreciated for their

u:fa.i.ling aid in times of need.

In the United States, much heip was given by my

supervisory committee consisting of Professors Irving

Goffman, Robert Bradbury, Ralph Blodgett and Richard

Preto-Rodas. Special thanks also go to Professor Eul-soc

Pang of California State College at Hayward for his hospi-

tality in Brazil and his extensive comnients on Chapter IV.

Finally, I would like to thank the Department of Economics,

the Center for Latin American Studics and the NDEA program

at the University of Florida for the financial aid which

made the completion of this dissertation possible.














TABLE OF CONTENTS


Page

ACKNOWLEDGEMENTS .................................... i i

LIST OF TABLES ..................................... v

KEY TO ABBREVIATIONS AND TERMS
USED IN THE TEXT .................................. ix

A1STRACT .................................. .......... x

INTRODUCTION ....................................... J

Chapter

1. THE THEORY AND PRACTICE 0O- FISCAL
FEDEiRALISM ................................ 8

The Fede, ral Principle .................... 9
FederalZism as a Process .................. 11
The Direction of Change .................. 12
Thc Major Prbc'erms of
Federal Finance ........................ 15
Summary ................................... 4

II. THE BASIS FOR A BRAZILI N
FEDERALISM ................................ 51

Unity and Diversi:y ..................... 52
Summ 'ar ................................... 83

III. CONSTITUTIONAL AND LEGAL ASPECTS
OF BRAZILIAN FISCAL FEDERALISM ........... S5

The Ccnstitution of 1891 ................. 85
Decree 19 398 of November 11,
1930 .................................. 90
The Ccn titution f 1934 ................ 93
The Constit. ution of 19i ................ 101
The Consti.ution of 1946 ................. 110
Sum ary .................................... 121











TABLE OF CONTENTS-Continued


Chapter Page

IV. BRAZILIAN FISCAL FEDERALISM IN
PRACTICE (1): THE FIRST
REPUBLIC, 1889-1930 ...................... 124

Political and Economic
Division .f Power ...................... 124
Public Fina:nc al Patterns ................ 127
The Fiscal Provisions of
the 1891 Constitution:
Disagreements and
Interpretations ......................... 1S2
Summary .................................... 161

V. BRAZILIA N FISCAL FEDERAL ISM IN
PRACi'TCE (2): THE REVOLU-
TION OF 1930 AND THE CONSTI
TUTION OF 1934 ........................... 166

The Collapse of the First
Republic ............... .... .......... . 166
The PubZic Sector Ur.der
Vcrgas: An Overview ................... 168
The Provisional Government,
1930-34 ...................... ... 172
The Brazilian P:oblic
Sector, 1934 .......................... 18S
The Return to Ccnstir.utona.
Democracy, 1934-.37 ..................... 190
The Public Finances. 1934-37 ............. 192

VI. BRAZILIAN FISCAL FEDERALISM IN
PRACTICE (3): THE ESTADO
NOVO, 1937-45 ............................. 202

Economic and Financial
Direct.ves ... ............................ 204
SociaZ Directives .......................... 214
Th-e Evolution of Budgetary
Finances ................................. 219
Summary of the Vargas Era ................ 224











TABLE OF CONTENTS-Continued


Chapter

VII. BRAZILIAN FISCAL FEDERALISM IN
PRACTICE (4): THE POSTWAR
YEARS, 1946-64 ...................

The Transition to Democratic
Government .....................
The Public Sector in the
Postwar Years: An
Overview .......................
The Rise of the National
Government .....................
Attempts at Vertical and
Horizontal Fiscal
Adjustment .....................
Summary ..........................


Page


226


.... 227


.... 229

.... 237


.... 250
S. ... 284


VIII. CONCLUSION .................................

Historical Trends ........................
The Brazilian Experience in
an International Context ...............

APPENDIX ...........................................

BIBLIOGRAPHY .......................................

BIOGRAPHICAL SKETCH ................................


287

287

293

299

308

322













LIST OF TABLES


Table Page

1. Selected Regional Characteristics,
1960 .......................................... 70

2. Division of Exclusive Revenue Sources
in the Constitution of 1891 ................ 91

3. Division of Exclusive Revenue Sources
in the Constitution of 1934 ................ 98

4. Division of Exclusive Revenue Sources
in the Constitution of 1937 ................ 108

5. Division of Exclusive Revenue Sources
in the Constitution of 1946 (Pre-1964)...... 116

6. Tax-Sharing Arrangements in tho
Constitution of 1946 (Pre-1964) ............ 119

7. Revenues and Expenditures by Adminis-
trative Level as a Percentago of the
Totals Collected and Spent by the
Public Sector, Selected Years,
1907-30 ..................................... 129

8. Revenues and Expenditures of Sao Paulo,
Minas Gerais and Rio Grande do Sul as
a Percentage of the Totals Collected
and Spent by the States, 1987-1930 ......... 131

9. Per Capita State Revenues and Expendi-
tures in Six Selected States, 1930 ......... 132

10. Regional Distribution of Federal
Revenues and Expenditures, 1928 ............ 141

11. Taxes on the Foreign Sector as a
Percentage of Total Federal and
State Revenues, Selected Years,
1900-30 ..................................... 146











LIST OF TABLES-Continued


Table Page

12. Distribution of Federal Expenditures
by Ministry in Selected Years,
1900-29 ................................... 149

13. Functional Distribution of State
Expenditures in Selected Years,
1914-15- 1930 .............................. 151

14. Federal, State and Municipal Foreign
Debt Balances Outstanding, Selected
Years, 1912-32 ............................. 159

15. Federal Expenditures as a Percentage
of Total Budgetary Expenditures,
1930-45 .................................... 170

16. Expenditures of the Public Sector,
1930 and 1933-34 ........................... 189

17. Federal, State and Municipal Revenues,
1935-37 ................................... 193

18. Regional Distribution of Industrial
Production, 1920 and 1938 ......... ......... 197

19. Regional Distribution of Federal
Revenues and Expenditures, 1936 ............ 200

20. Indexes of Federal, State and
Municipal Revenues at 1939
Prices ...................................... 222

21. The Public Sector and the Gross
Domestic Product, 1947-64 .................. 231

22. Expenditures of the Public Sector's
Component Parts, 1947-64 ................... 233

23. Federal Income Tax Sharing with the
Municipalities, 1948-64 .................... 257


vii










LIST OF TABLES--"Continued


Table Page

24. Percentage Distribution of Tax
Revenues among the Federal, State
and Municipa] Governments Before and
After Tax Sharing, 1948-59 ................ 266

25. The Number of Municipal Governmcnts
in Selected Years, 1939-64 ................ 270

26. Per Capita Revenues and Expcnditures
of State and Municipal Governments in
Six Selected States, 1960 ............... 274


v ii













KEY TO ABBREVIATIONS AND TERMS
USED IN THE TEXT


Autarquia Semiautonomous public institute
operating at the national or state
level

BNB Banco do Nordeste do Brasil (Bank of
the Northeast of Brazil)

BNDE Banco Nacional do Desenvolvimento
Econ8mico (National Development Bank)

CDPA Comissao de Defesa da Produqao
Acucareira (Comunission for the De-
fense of Sugar Production)

CEF Centro de Estudos Fiscais (Financial
Studies Center of the Getlio Vargas
Foundation)

CHESF Companhia Hidroeltrica de So Fran-
cisco (So Francisco Hydroelectric
Company)

CNC Conselho Nacional do Caf (National
Coffee Council)

Companhia Mista Semipublic corporate entity

Cruzeiro Standard unit of Brazilian currency
adopted in 1942

CVSF Commisao do Vale do Sao Francisco
(Sao Francisco Vailey Commission)

DASP Departamento Administrativo do Servico
Pblico (Administrative Department of
the Public Service)

DNC Departamento Nacional do Caf (National
Coffee Department)

DNOCS Departamento National de Obras Contra
as Secas (National Department of Works
Against the Drought)










ECLA


ELECTROBRAS


FGV


IAA


IBGE


Milris; Conto
de Ris


Mine iro

Paulista

PETROBRAS


SALTE





SPVEA




SUDENE



SUMOC


United Nations Economic Commission
for Latin America

Government owned and operated electric
power company

Fundagao Getlio Vargas (Getlio Vargas
Foundation)

Institute do Arcar e do Alcool (Sugar
and Alcohol Institute)

Institute Brasileiro de Geografia e
Estatstica (Brazilian Institute of
Geography and Statistics)

Standard unit of Brazilian currency
until 1942. A conto de ris was
equivalent to one thousand miZris

A resident of the state of Minas Gerais

A resident of the state of Sao Paulo

Government owned and operated petro-
leum company

Program of federal expenditures pro-
posed in 1948. An acronym of the
Portuguese words for health (sa.de),
food (a'limentaqao), transportation
transportt) and energy (energia)

Superintendncia do Plano de
Valorizagco da Amazonia (Superintend-
ency of the Plan for the Valorization
of the Amazon Valley)

Superintendencia do Desenvolvimento
do Nordeste (Superintendency for the
Development of the Northeast)

Superintendencia da Moeda e Crdito
(Superintendency of Money and Credit)










Abstract of Dissertation Presented to the Graduate Council
of the University of Florida in Partial Fulfillment of
the Requirements for the Degree of
Doctor of Philosophy


FISCAL FEDERALISM IN BRAZIL


By

Dennis John Mahar


June, 1970


Chairman: Irving J. Goffman
Major Department: Economics


The purpose of this dissertation is to describe and

analyze the evolution of Brazilian fiscal federalism from

1889 to 1964. In doing so, the author empr-asizes those

factors which have been the prime contributing forces

underlying changes in the basic fede'ral-statc-local finan-

cial relationships. A secondary purpose of the dissertation

is to compare the Brazilian experience to those of other

federations, both mature and emergent.

The method of analysis utilized is basically insti-

tutional, that is, it considers not oniy the economic

aspects of the public sector, but also its political, cul-

tural and social aspects. Substantial use is made of finan-

cial statistics obtained from both primary and secondary

sources as we]] as literature in economics and related

disciplines.










The dissertation is divided into eight chapters.

Chapter I contains a survey of the past and present

theories of fiscal federalism and a brief description of

the finances of several non-Latin American federations.

Chapter II describes and assesses the basis for feder-

alism in Brazil with emphasis on the major forces for

national unity and disunity. Chapter III outlines the

constitutional and legal bases for Brazilian fiscal fed-

eralism through a description of the financial] provisions

of the four national constitutions and various lays in force

during the period of study. Chapters IV through VII are

concerned with describing and analyzing the changing nature

of Brazilian fiscal federalism during four distinct periods

of the nation's history. Chapter VIII contains a summary

of the findings and some concluding comments.

Several major conclusions were reached by the

author. The most basic of these was that Brazilian fiscal

federalism has not been a static concept since its forma-

tion in 1889, but rather a pliable concept continually

adapting to changing internal political, economic and social

conditions as well as influences emanating from abroad.

Another major conclusion was that significant changes in the

nature of the federal finances before 1946 were almost

inevitably associated with crises, namely, the two world


xii










wars and the Great Depression. After 1946, the changes

were almost entirely attributable to the postwar drive

for accelerated national economic development.

Other conclusions concerned certain readily

distinguishable tendencies of the Brazilian federal fi-

nances revealed during the 1889-1964 period. Among the

most important of these were a marked growth of the public

sector in absolute terms, and, relative to the national

product, a centralization of public activity at the national

level and a proliferation of public and semipublic en-

tities operating at the national level but outside the

regular federal budget.


xiii












INTRODUCTION


There is no shortage of material on the general

topic of federal finance in the literature of economics and

related disciplines. What is available, however, most cer-

tainly has a geographical and/or a cultural bias. Most of

the books, monographs and articles on the subject are con-

cerned with analyzing or describing some aspect of inter-

governmental fiscal relationships in the "classical

federations" of North America and Europe or in the "emerging

federations" of Asia and Africa. This obvious bias is pri-

marily a reflection of a long-standing interest of British

or British-trained scholars and functionaries in the nature

of federalism, both academically and as a practical solution

to a nation's administrative problems.

The Latin American area has so far elicited very

little scholarly attention in the field of public finance

in general and the field of federal finance in particular.

This may seem surprising since Mexico, Venezuela, Argentina

and Brazil are all important Latin American countries which

have adopted federal systems. The explanation of this

apparent neglect can be traced in part to the relative

scarcity of reliable economic and financial statistics

and in part to the fact that none of them conform to the

strict classical mold of federalism.


- 1 -






- 2 -


The purpose of the present dissertation is to

examine the historical evolution of fiscal federalism in

Brazil, the largest and most populous nation in Latin

America. In doing so, an effort is made to emphasize both

the uniqueness of the Brazilian experience and its simi-

larity to other federalisms. Certain basic characteristics

and tendencies of Brazilian fiscal federalism will thus be

described and analyzed. Included among these are the

social, cultural and political origins of Brazilian

federalism, its constitutional and legal aspects,. the

question of centralization versus decentralization, the

evolution of revenue and expenditure structures and the

continual process of adjusting responsibilities to revenue

sources among the various governmental levels and between

given governmental levels in different regions of the

country. The time period chosen for discussion, 1889 to

1964, coincides with the initial formation of federalism

in Brazil to its nost recent destruction in the aftermath

of a military coup.

Although Brazil could never be characterized as a

federation by the strict definition of the term and has

only recently made available several types of important

statistical data, these factors were not deemed sufficient

causes for ignoring the topic. The first of these potential

impediments was dismissed rather easily by the adoption of






- 3 -


a flexible working definition of the term "federalism."1

The second potential difficulty, the lack of reliable

statistics, proved more difficult to surmount. Social

accounts and price indexes are largely a post-World War II

phenomenon in Brazil and hence certain analyses and

measurements are impossible to perform for the preceding

periods. Fortunately, however, data on the budgetary

finances of all levels of government are available for

the whole period of the study. These statistics are prob-

ably quite reliable, but more detailed breakdown of revenue

and expenditure categories would have been desirable in

some circumstances.

The present dissertation is organized into eight

chapters. The first two introduce the subject of federalism

and assess its appropriateness to Brazil. Chapter III out-

lines the constitutional and legal aspects of Brazilian

fiscal federalism by examining the financial provisions

of the four constitutions and various decrees which were

in effect between 1889 and 1964.

Chapters IV through VII constitute the main body

of the study and follow a progression based on distinct

historical periods. Close attention is given to the rela-

tionship between the constitutional and legal foundations


'A discussion of the definition chosen for use in
the.present work is included in Chapter I.






- 4 -


of Brazilian fiscal federalism and its actual workings.

The merits of such an approach were recognized in an early

standard work on federal finance. B. P. Adarkar, writing

in 1933, stated that it was "extremely difficult to infer,

a posterior, from the constitutional provisions, the actual

day-to-day fiscal relations of the federal government and

the states; these can only be understood with the help of

the crystallised experience of fiscal practice."2

In describing the "crystallised experience" of

Brazilian fiscal practice, the present author has made

ample use of previously completed studies in disciplines

often considered outside the economist's realm. Treatises

in political science, history, sociology, anthropology and

even linguistics were consulted in the writing of the

present dissertation. Since these "noneconomic" variables

at times challenged the "purely economic" variables in their

importance to the public finances, even the most ardent

"analytical" economists will probably find their use

justifiable.

In the final chapter, the evolution of Brazilian

fiscal federalism is discussed on the basis of the historical

hindsight outlined in the preceding chapters. Emphasis is


2B. P. Adarkar, The Principles and Problems of
Federal Finance (London: P. S. King E Son, Ltd., 1933),
p. 35.











en: th in fCC.J actors lJij'ch have fostered i-ts present stat.e.

In ac1."iditio, CoiPari sos aro made betw-ee the J3riian

e:prsric.n~c ar^ ze e-:-ueri--Tces of c>:,hor beotraisrabs, boi,

niatire and eiucrgent.


A ;ote on the Brazilic2z PvubZli Setor


Before proc:eedif-to, :t S usefu! to c.ritv thio

concept of the uublj.c sector in Brazi1, since in somie Ways

it diffcrs fror; tliat of ihe Unted StatS. iii its Ibarest

fcrrn the raz ijar: public sector is three- .i d being

coiqc)nrLprse of a national goverrininit, twc nty-two states an

_one fojir ti ,usiind local governrncnet:3 ca lled nzirios.

A-lthriciiah th-ie sLczes zre simJlair in Surjdj a ructutre lo

the PJ."er-ican stiz;.tes, th7 concept oi' rationa-ii? uovermncn

and! "1l.oca.l" governneiint eiltlc ad1ei ticnai exipanaticn

The Uninis trutive u-nit Ji th t .-e w: est terri tj c al

j urisdi.cti ort (re ered tc in the, -text z.s ena-,itionaal,"

"_Fedora1" or ":ion' g.verii-.lent) is organiz-ed inteo a c^nura-l

authori ty whichh dispenses a wide rarge o' functlonal respon-

S4biljtie5 on- a r1atiornal scale an.d a number of sr,;aliar

en-tt; 3es cal led avarq2r.d or corpanhias Mi,,tase c'r~iing

more spcializeci functions. The autarcuias arc semiautononlous

insti:utos operating at the na-tional level with their ow.,n


3There are also three territories ~na a Federz.i
District (the city cf PrasI-J a)


- 5 -






- 6 -


budgets, but receiving aid and subsidization in varying

degrees from the central authority. Beginning their initial

growth in the 1930's, their range of activity now spans

many fields. Included among these are education and culture

(the federal universities, for example), public utilities

(federal railroads and shipping lines, for example), com-

modity control and regulation (coffee, sugar, alcohol and

pine, for example), regional development, social security

and others.

The third component of the public sector at the

national level, the companhias mistas, are "mixed" semi-

public enterprises of which the federal (or state) govern-

ment often owns more than 90 per cent of the shares.

Largely arising during World War II and the postwar years,

they are also now engaged in many fields (petroleum, steel

and banking, for example), but are generally characterized

by greater budgetary and administrative independence than

the autarquias. The companhias mistas are also claimed to

operate in a more businesslike manner, since they must

publish reports as separate corporate entities and are not

subject to the laws governing the hiring and remuneration

of public employees.


4Werner Baer, Industrialization and Economic
Development in Brazil (Homewood, 11.: Richard D. Irwin,
Inc., 1965), pp. 94-95 .






- 7 -


The municpio (loosely translated in the text as

"municipality") is the basic unit of local government in

Brazil. In contrast to the North American municipality,

the municipio is not an incorporated town or city but

something which more resembles our county. Like North

American counties, the Brazilian municipio is divided into

two distinct parts, the seat (sede) and some surrounding

territory. In contrast to the general American practice,

however, the seat of a municipio is never incorporated.

In further contrast to the common administrative arrangement

in the United States, a prerequisite to the division of a

municipio into a smaller unit (distrito de paz) is the

existence of a population and/or commercial center (called

a vila) separate from the sede of a municipio. An additional

feature is that the seat of a municipio always has the same

name as the municipio and the vila of a distrito de paz

always has the same name as the distrito de paz.'












5T. Lynn Smith, Brazil: People and Institutions
(rev. ed.; Baton Rouge: Louisiana State University Press,
1963), pp. 569-70.













CHAPTER I

THE THEORY AND PRACTICE OF FISCAL FEDERALISM


It is the purpose of the present chapter to outline

some of the salient features of federal finance. A compre-

hensive study of the topic is far beyond the scope of this

dissertation, but it is felt that a summary of its more

important aspects will serve to elucidate the ensuing

discussion of the Brazilian experience. The method of

presentation will be both theoretical and empirical. The

theoretical part deals with the general nature of federalism

with emphasis on its fiscal aspects. Empirical examples

will be interspersed with the theoretical presentation in

an attempt to show the variety of experiences among the

principal federal nations of the world in dealing with the

special problems of federal finance.1 Through these ex-

amples it is hoped that the reader will appreciate the

fact that the terms "federalism" and "fiscal federalism"

are by no means unambiguous concepts and may vary consid-

erably in meaning between countries and through time.


'The United States, Canada, Australia and the
Commonwealth federations formed after World War II will
be employed as the primary examples.


- 8





- 9


The Federal Principle


An immediate problem which arises in dealing with

federalism is deciding upon a suitable definition for the

term itself in light of the fact that its interpretation

may vary from country to country and from time period to

time period. K. C. Wheare, in his standard work on federal

government, differentiates a federation from other types of

associations in that the former embodies what.he terms the

"federal principle." The "federal principle" is defined as

"the method of dividing powers so that the general and

regional governments are each, within a sphere, coordinate

and independent. "2 William S. Livingston offers a more

general definition: "Federal government is a form of polit-

ical and constitutional organization that unites into a

single polity a number of diversified groups or component

polities so that the personality and individuality of the

component parts are largely preserved while creating in the

new totality a separate and distinct political and con-

stitutional unit."

Each of these definitions basically implies that

the two or more levels of government in a federation will


2K. C. Wheare, Federal Government (4th ed.; New York:
Oxford University Press, 1964), p. 10. Wheare uses the term
'"general government" to denote the central unit and the term
"regional governments" to denote the state (provincial) and
local units.
3William S. Livingston, Federalism and Constitutional
Change (London: Oxford University Press, 1955), p. 9.






- 10 -


be called upon to perform functions within a prescribed

field. Wheare's strict definition, however, holds tliat

these areas of responsibility should be independent, while

Livingston's seems to allow for some overlapping. In ad-

dition, there is an assumption, implicit in the first

definition and explicit in the second, that a desire for

unity and for diversity exists side by side within a given

geographical area. The division of responsibilities between

the central and state-local governments is thus a response

to the demands of those persons wishing services providing

benefits on a national scale and those persons (the same

group) demanding public services whose benefits extend to

a more locally defined arca.

The formal division of powers between the center

and the state-local units is normally contained in a written

constitution which "will be more or less federal in accord-

ance with the relative strength of the two demands," that

is, the demand for unity and the demand for diversity.,

The demand for union may be the result of a widespread

desire for increased military strength, economic advantage

or other factors such as a common language or nationality.

The desire for the preservation of diversity, on the other

hand, may emanate from geographically dispersed differences

in wealth, culture, race and historical backgrounds.

4William S. Livingston, "A Note on the Nature of
Federalism," Political Science Quarterly, LXVII, No. 1
(1952), 90.





- 11 -


In addition to a written constitution and a formal

distribution of powers, Livingston lists four other instru-

mentalities usually found to be essential in federal systems.

They are constitutional interpretation (commonly by the

judiciary), state representation in the legislature, dual

citizenship (national and state) and the federal executive.5


Federalism as a Process


A requisite of a successful federalism is

adaptability. This view is held by Carl J. Friedrich who

prefers to see federalism as a process and not as a static,

legalistic concept.6 Since social, economic and political

conditions are constantly changing, it follows that "any

federal relationship requires effective and built-in ar-

rangements through which [the] rules can be recurrently

changed upon the initiative and consent of the federated

entities."7

The method through which this change is manifested

differs between nations. Alterations in the federal rela-

tionship may come about through formal amendment to the

constitution, an act of the legislature, judicial review


SLivingston, Constitutional Change, pp. 10-11.

6Carl J. Friedrich, Trends of Federalism in Theory
and Practice (New York: Frederick A. Praeger, 1968).

7Ibid., p. 173.






- 12 -


or simply through changes in customary practices.

Livingston states that "the formal procedure of amendment

is of greater importance than the informal processes be-

cause it constitutes a higher authority to which appeal

lies on any question that may arise."8 Constitutional

amendment, though, is often a cumbersome process and there

is no consensus of opinion as to how it should ideally be

carried out. A minimum requirement generally agreed upon

is that the constitution may not be changed without the

consent of both the general and regional governments. If

either the national government or the state governments

could amend the constitution by itself, a true federal

system would probably no longer exist.


The Direction of Change


The "classical" federations of the United States,

Canada, Australia and Switzerland have adapted to a changing

environment in different ways. While judicial interpretation

of the constitution has been an important factor in the first

three of these countries, it has been less significant in

the fourth. Switzerland has made relatively greater use of

the formal amendment than has either the United States or

Australia. The Canadian constitution contains no provision.

for amending itself and, as a result, governmental change


8Livingston, Constitutional Change, p. 13.






- 13 -


in this nation has largely come about through "evolving

habits and customs, new conventions replacing old."9

One common feature of these older federations is

that the direction of their governmental change has been

toward centralization. This trend has generally been a

reaction to the combined influences of war, economic

depression and the emergence of the welfare state.10

Alan T. Peacock and Jack Wiseman make note of this tendency

in their study of public expenditure growth in the United

Kingdom and term it the "concentration process."''1 W ile

recognizing the centralizing pressures brought about by

war, depression and the welfare state, these authors

hypothesize that there are certain factors associated with

economic growth which produce the same effect. Most im-

portant aniong these factors are improvements in transportation

and communication. Such improvements encourage the central-

ization of public responsibility by generating demands for


SIbid.

1F. G. Carnell, "Political Implications of Federalism
in New States," in U. K. Hicks et al., Federalism and Eco-
nomic Growth in Underdeveloped Countries (New York: Oxford
University Press, 1961), p. 17.

1'Alan T. Peacock and Jack Iiseman, The Growth of
Public Expenditure in the United Kingdom (Princeton:
Princeton University Press, 1961), pp. 29-30. Although
originally devised to describe the experience of a unitary
country, the concept of the "concentration process" would
seem to be equally applicable to a federation.






- 14 -


uniformity of service standards and by allowing a larger

unit of government to be more efficient in carrying out

certain functions.

William H. Riker submits that increasing

centralization is essential to the very survival of a

federal nation.12 He contends that the demise of an

initially "peripheralized" federalism (where most powers

are allocated to the regional units) is almost certain

since there is a tendency for the component governments to

increase their powers to the point where their union dis-

integrates. This disintegration weakens them militarily and

hence makes them easy prey for their enemies.'3 Initially

centralized federations, like the United States, tend to be

more durable. The national government of such nations will

commonly make use of its originally superior power to acquire

still more power over time. The union thus grows stronger

and is better able to cope with those forces, from within

and without, which seek to destroy the system.

In the newer federations, an additional force for

centralization is the drive for economic development.


12William H. Riker, Federalism: Origin, Operation,
Significance (Boston: Little, Brown and Company, 1964),
passim.
13The examples of the city-states of ancient Greece
and the military federations of medieval Italy and Germany
are cited as proof of this hypothesis. Riker, Federalism,
p. 8.






- 15 -


Often making use of national economic and social planning

to reach this goal, the developing nation finds tat the

federal government must play an increasingly larger role.

At the same time, however, there are usually strong divisive

tendencies in these countries emanating from various polit-

ical and social factors. Cultural, religious and ethnic

differences and the rapidity of political change are

generally greater in the newer federations as compared to

the nineteenth century federations at the time of their

inception.'4 Hence it is difficult to generalize about

the "net" direction of change in the newer federations.

In India the centralizing forces (national economic plan-

ning being one of them) have predominated wil.c in Nigeria

we find the opposite situation.


The Major Problems of Federal Finance


All nations, whether federal cr unitary, must make

some provision for the financing of the services they

choose to undertake. In a completely unitary country all

political and fiscal power rests at the center. Although

the local units of government may generally impose laws,

regulations and taxes on the individual citizens, they do

so only as "agents" of the central government. Inter-

governmental fiscal relations in a unitary nation are thus

1UU. K. Hicks, "Epilogue," in U. K. Hicks et al.,
Federalism and Economic Growth, pp. 153-54.







- 16 -


simplified since the central government alone decides what

public functions are to be carried out as well as the method

cf financing them.15

In a federation, matters are complicated by the

fact that independent political and fiscal authority is

divided between two or more levels of government. Foi-

lowing Wheare;s strict definition of a federation, though,

there is no federal-state-local fiscal problem. This is

because total adherence to the "federal principle" requires

that revenue sources be divided among the several levels

of government so that each will enjoy sufficient resources

to carry out its exclusive functions. Fiscal difficulties

do arise in reality because ]Wheare's "ideal" case rarely

(if ever) exists. The basic problem of federal finance is

the imperfect. reaching of allocated revenue sources and

c. Zocated funcvions. A multitude of subsidiary problems

eiianate from this basic one, since every federal nation

must face the inevitable task of adjusting public respon-

sibilities to available resources. The following discussion


'5In unitary nations where significant financial and
political autonomy exists at the local level, however, inter-
governmental relationships may become very complex. See, for
example, Alan Williams, 'Centralization and Decentralization
in Public Finance with Special Reference to Central and Local
Government in England and Wales," in U. S., Congress, Joint
Economic Committee, Revenue Sharing and Its AZternatives:
What Future for Fiscal Federalism? Joint Committee Print,
3 vols. (I':ashington, D. C.: Goverr.ment Printing Office,
1967) I, 592-623.






- 17


seeks to analyze this question from both a theoretical

and empirical viewpoint.


Lack of Correlation Between Functions
and Revenue Sources


A discussion of the basic problem involves a more

thorough study of a matter previously mentioned. This is

the question of what should be the principles governing the

division of functions to be performed by the national, state

and local units and what should be the principles governing

the division of revenue sources among these levels. Both

questions have political and economic aspects.


Distribution of Functions

Theory

With respect to the allocation of functions, James M.

Buchanan states in a general sense that "the economic or

efficient division of responsibility among the separate

levels of government depends upon the geographical range

of the spillover effects of collective action" (italics

added).'6 In other words, the division of functions among

the various levels of government should be made in accord-

ance with tlie spatial distance over which the benefits of

these functions spread. Using this criterion, one could


'6James M. Euchanan, The Public Finances (rev. ed.;
Homewood Ill.: Richard D. Irwin, Inc., 1963), p. 504.






- 18 -


justify federal jurisdiction over defense and foreign

policy (where the benefits are national in scope) and

state and/or municipal jurisdiction over local recreational

facilities (where the benefits are more locally confined).

An important qualification is attached to the above

generalization. This reservation stems from the fact that

the benefits from some public services, although accruing

primarily to a local area, do effect people in other regions.

Education is a prime example of this type of service. Its

benefits are of greatest interest to the citizens. of the

community in which the school is situated, but they also

effect, to a greater or lesser degree, the state, region or

nation. Transportation facilities, such as roads and air-

ports, and some health facilities exhibit similar qualities.

The paramount question, then, is which governmental

functions are in the national interest and which are in the

state-local interest? The answer is that many services fall

into both categories. This quandary has prompted Buchanan

to note that in the United States "the extent of the national

interest, that is, the interest of the whole population, in

particular public services performed traditionally by state-

local units, looms as one of the most important problems in

the current stage of federal-state relationships."'7


17Ibid., p. 509.






- 19 -


A consideration of importance in this respect

concerns the size of the governmental unit needed to obtain

economies of large-scale production in performing various

functions. Obviously, all public services do not obtain

these economies at the same level of government. Whereas

defense, foreign affairs and monetary and fiscal policy

reach full economies of scale only at the national level,

such services as education, courts and fire and police

protection can be efficiently provided locally.' Some

services, such as transportation facilities, may be per-

formed at the local level but reach full efficiency only

when coordinated with the systems of other communities.19

This is not to say, however, that delegating a certain

responsibility to a larger unit of government will neces-

s.arily produce economies. Large governmental units often

experience the same problems as large industrial firms like

red tape and lack of communication. Such factors may produce

diseconomies of scale which may wholly or partially negate

any increases in efficiency resulting from large-scale


'8For a brief survey of this general topic see:
Harvey Shapiro, "Economies of Scale and Local Government
Finance," Land Economics (May, 1963), pp. 175-86.

19Such coordination, however, is not always the
best policy since "on the usual economic welfare grounds,
municipal integration is justified only if more of any
service is forthcoming at the same total cost and without
reduction of any other service." Charles M. Tiebout, "A
Pure Theory of Local Expenditures," Journal of Political
Economy, LXIV, No. 5 (1956), 423.







- 20 -


production of the particular service. Hence, it is usually

the best policy to allocate the responsibility of performing

a given function to the smallest unit capable of efficiently

carrying it out.20

The division of functional authority among the

levels of government in a federation is further complicated

by political factors; the primary one being that the state

boundaries are normally drawn according to political] and/or

historical guidelines which rarely coincide :with economic

realities. As a result, inefficiencies and duplication are

common as given states attempt to confine the benefits of

their services to their own politically defined areas.

When interstate migration is pronounced, the standard of

pub.iic services may be lwer than might otherwise be the

case. This is because those in the state experiencing the

outflow of population might feel that they are subsidizing

the states receiving the inflow. This aspect would seem

to be most relevant wi.h respect to expendituies on

education.21

Some problems calling for public action comprise

a geographical area which does not conform to political

boundaries. A nation, for example, may contain one or

2"John F. Due, Government F-nanee (3rd ed.; Homewood,
II1.: Richard D. Irwin, Inc., 1963), p. 437.
21An interesting discussion of this problem can be
Ex-t--- E nal -1-. oi: PubZli
fouud in: Burton A. Weisbrod, Exina Bnefi of Pubic
Education: An Economic Analysis (Princeton: Industrial
Relations Sectioi, Princeton University, 1964).






- 21 -


more chronically depressed regions which deserve special

attention. The Appalachian area of the United States and

the "drought polygon" of Brazil are cases in point. In

addition. a region may support an industry, the regulation

or control of which is vital to the interestsof the states

involved. The petroleum industry of the American Southwest

may be cited in this respect. Similar difficulties arise

in the control of interstate crime and the supervision of

the use of ports, rivers and lakes which serve the needs

of several states. The port of New York and the .Columbia

and Ohio River basins are examples of the latter. Also,

the provision of special forms of public services may be

needed by ethnic groups (Negroes, Mexican-Americans and

Indians in the United States) whcse patterns of settlement

encompass many states or regions.

Practice

In the major federations of the world, the guidelines

for the division of responsibilities outlined above have been

roughly followed. Such functions as national defense and

foreign affairs have generally been the sole responsibility

of the national government, while police and fire protection

have been provided by local governments. Few public serv-

ices, however, have been independently supplied by one level

of government.22 This has been especially true with respect

22This tendency has prompted one writer to compare
(in reference to the United States) the federal system to
a marble cake rather than a three-layered cake.






- 22 -


to the "social services" (including education, health,

welfare and related fields). Since the shift in adminis-

trative jurisdiction over these services from the state-

local units to cooperation among all three units has been

a singularly important step in the development of modern

fiscal federalism, a detailed discussion of this trend has

been included below.

The constitutions of the United States, Canada,

Australia and India (in their original forms) generally

empowered the regional governments to legislate on matters

pertaining to the social services.23 In all cases, however,

the national government has increased its role in this field

through constitutional amendment, judicial interpretation

and/or grants-in-aid to the states and municipalities.

This administrative centralization has been partially a

result of the inherent characteristics of the social services;

they are costly and national uniformity is commonly desired

in their provision. Revised public opinion toward the con-

cept of the "welfare state" has also been an important con-

tributing factor. The final result has been for all levels

of government- to enter into the provision of social services

to a greater or lesser degree.

Education.--Education has traditionally been a

joint responsibility of state and local authorities. The

23Wheare, Federal Government, pp. 145-46.






- 23 -


propriety of state and local jurisdiction over education

is perhaps most clear in countries like Canada and

Switzerland where significant religious and/or language

diversities exist. In Switzerland, the constitution does

not guarantee the right to have denominational schools,

but in practice the cantons have been quite tolerant in

this respect. Most cantons offer both state and denomina-

tional facilities.2" Canada has experienced somewhat greater

difficulties. Although apparently maintaining the right of

the provinces to provide separate denominational schools if

they existed before federation, the Canadian constitution

is unclear as to whether the provinces not among those in

the original federation should be included. As a result,

controversy arose over this question when Manitoba, Sas-

katchewan and Alberta were admitted as provinces. By and

large, these difficulties were alleviated through compromise;

Manitoba, for example, was allowed to provide religious

training in state schools.25

In the United States, the provision of public

education remains overwhelmingly local, although the ex-

pansion of higher educational facilities has increased the

role of the states. In 1962, local governments accounted

for 78 per cent of total direct spending on education, with

24Ibid., p. 154.

25Ibid.






- 24 -


the states and federal government spending 19 per cent

and 3 per cent respectively.26 These percentages obscure

the fact, however, that the federal government's grants-

in-aid earmarked for education amounted to 15 per cent of

the $7 billion in total grants paid in that year.27 The

federal government has also assisted education through

granting scholarships, subsidizing research, the school

lunch program and such activities as the Job Corps and Head

Start. It has also enforced national legislation in the

schools pertaining to civil rights and religious training.

The Indian constitution reserves the power to

legislate on education, including the university leve], to

the states. The federal government, though, retains juris-

diction over certain universities and types of training

deemed to be of "national importance."28 The Union assists

the states by grants-in-aid and coordinates the resources

devoted to education in the National Plans.29

Health.-The area of health services has generally

been a state, local or private responsibility. In virtually

26Frederick C. Mosher and Orville F. Poland, The
Costs of American Governments: Facts, Trends, Myths (ew Yorl<:
Dodd, Mead & Company, 1964), p. 46.
27Ibid., p. 53.

28B. M. Sharma and L. P. Choudry, Federal Polity
(New York: Asia Publishing House, 1967), pp. 216 and 227.

Asok Chanda, Federalism in India: A Study of
Union-State Relations (London: George Allen & Unwin Ltd.,
1965), pp. 288-92.






- 25 -


all federations, however, the national government has aided

by sponsoring medical research, offering health insurance

programs, passing pure food and drug acts, providing

veterans' benefits and controlling the international

aspects of health.

In the United States, the trend has been for the

federal government to increase its role in the field of

health and hospitals. Between 1927 and 1962, this level

of government increased its relative share in the total

public sector in this functional category froi 18 to 29

per cent.30 The growth of federal responsibility has been

primarily the result of increased spending on veterans'

hospital services and the subsidization of medical research

through the National Institutes of Health.31 The provision

of a comprehensive system of national medical insurance has

yet to be enacted, although in 1965 medical care for the

aged (MEDICARE) vas offered through the social security

program.

Canada and Australia have also experienced a

tendency for the federal government to enter the field

of health. In both countries, this trend has generally

been a postwar phenomenon, since before World War II the

prime responsibility for this service rested with the


30Mosher and Poland, American Governments, p. 47.

31Ibid., pp. 124-25.






- 26 -


:e'tionai governments and/or the private sector (although

a portion of the unconditional federal-state [provincial]

counts was undoubtedly used for health services).32 In

Canada, the Dominion has been subsidizing provincial health

activities since 194S (mainly in hospital construction) and

in 1957 a national health insurance system was enacted which

is financed cn a joint Dominion-provincial basis.?3

The basis for the entrance of the /ustralan.

federal government into the health field was the constitu-

t:ional amendment of 1946 qhich enabled the Commonwealth

parliament te legislate in the area of the social services.'4

This amendment was necessary because the constitution had

originally allocated only the power to legislate with

respect to "invalid and old age pensions" to the Commonwealth

governr:ent.ii An Unemployment and Sickness Benefits Bill,

a Pharmaceutical Bonefits Bill, a Hospital Benefits Bill

and a Tuberculosis Bill were enacted in 1944 and 1945,


2A. H. Birch, FederaZism, Finance and Social
Legislation n Canada, Australia and the United States
(London: Oxford University Press, 1955), passim.

33Irving J. Goffmnan, Some Fiscal. Aspects of Public
Welfare in Canada, Queen's University Papers in Taxation and
Public Fin:ace, No. 1 (Toronto: Canadian Tax Foundation,
1965), p. 26.

3Birch, Social Legislat.ion, p. 234.

3"The Australian constitution, like that of the
United States, reserves residuary poesrs to the states.






- 27


but their constitutionality had been in doubt.36 The 1946

amendment solved these legal problems and made possible the

National Health Service Act of 1948, a piece of legislation

which greatly expanded Commonwealth powers in the provision

of public medical and dental services.7 At present, the

federal government provides a medical benefits scheme, a

hospital benefits scheme, a pensioner medical service,

pharmaceutical benefits and pharmaceutical benefits to

pensioners.38 In addition, there are Commonwealth subsidies

for combatting tuberculosis and polio and grants-in-aid to

the states for the construction and improvement of mental

hospitals. 9

In Switzerland, the national government has also

extended its powers to legislate in the social sphere through

constitutional change; the Constitution of 1848 had orig-

inally allocated only the powers to conduct a federal

university and a federal polytechnic school. Referenda

passed in 1890, 1897 and 1913 empowered the Swiss federal

government to deal with accident and sickness insurance,

regulate the sale of foods and deal with contagious and


36Birch, Social Legislation, pp. 230-34.

37Ibid., pp. 261-67.

3%Australia, Department of the Interior, Official
Handbook-1962 (Canberra, 1962), pp. 76-79.

"Ibid., pp. 73-76.






- 28 -


infectious diseases and epidemics.40 This country was a

pioneer in the field of medical insurance, having had a

compulsory and voluntary accident insurance plan and a

voluntary sickness insurance plan since 1911. The former

is operated as a federal monopoly and the latter is the

responsibility of nonprofit insurance agencies, although

both may receive federal subsidies.4

Article 246 of the Indian constitution gives the

states exclusive power to legislate on the matter of "public

health, sanitation, hospitals and dispensaries."'2 Once

again, however, the central government has provided assist-

ance to the lower governmental units. A Central Council of

Health "deals with all questions of health such a co-ordinated

nation-wide campaigns] for the eradication of malaria and

other diseases prevalent throughout the country" and "is

also responsible for recommending the distribution of

grants-in-aid for health purposes."43

WeZfare.-The area of public welfare encompasses

such functions as the alleviation of poverty, unemployment

compensation, old-age and invalid pensions, maternity


40Wheare, Federal Government, p. 147.

41George A. Codding, The Federal Government of
Switzerland (Boston: Houghton Mifflin Company, 1961), p. 146.

42Sharma and Choudry, Federal Polity, p. 255.

43Chanda, Federalism in India, pp. 110-11.






- 29 -


allowances and the like. As a rule, these services are

very costly to provide and are thus reserved mainly for

wealthy countries. The United States, Canada, Australia

and Switzerland have fairly developed public programs in

this area, while in India they are almost totally lacking.

It is interesting to note, however, that the emergence of

national welfare programs in the four older federations has

been a fairly recent occurrence, especially in Canada.

In these older federal nations, a primary stimulus

to the national provision of welfare programs was the

worldwide depression of the 1930's. During this period

the need for such services rose rapidly at the same time

state and local finances were declining. The respective

federal governments were called upon to fill the vacuum

s.nce they generally possessed the most lucrative sources

of revenue and were better able to engage in deficit

financing. 'While the federal government of the United

States responded to the crisis immediately with compre-

hensive new legislation, the respective federal governments

of Canada, Australia and Switzerland played somewhat lesser

roles.

The state of social welfare services in the United

States before the depression is described by A. H. Birch.44


44Birch, Social Legislation, p. 27.






30 -


Poverty arising from unemployment was dealt with by
private charity and by state poor laws of the Elizabethan
type, together with poverty arising from old age, physical
disabilities, and other causes. Responsibility for the
relief of such poverty rested with the municipalities
and rural local authorities. There were no old-age
pensions, maternity benefits, child allowances, or
health insurance schemes. The state governments organ-
ized employment services, but they varied greatly in
efficiency and there was no interstate service.

This situation changed, however, as widespread economic

hardship placed extreme demands on local welfare agencies.

As a result, local governments quickly exhausted their

relief funds and turned to the states for aid. The states

attempted to fill the gap, but wcre in turn forced to seek

assistance from the federal government. President Roosevelt

responded to this plea by creating the Federal Emergency

Relief Administration in 1933. This body wCs empowered to

make grants to the states to cover their resource defici-

encies in dealing with relief problems. In 1935, the

federal government withdrew these types of grants and

sought to counter unemployment through the Works Progress

Administration. In the same year, the Social Security Act

was passed (to go into effect in 1937), a piece of legis-

lation which was to form the basis for much of the national

welfare schemes which followed.45


45U. S., Department of Health, Education, and Welfare,
Social Security Administration, Social Security Programs in
the United States (Washington, D. C.: Government Printing
Office, 1966), pp. 5-6.





- 31 -


Originally the Social Security Act was to provide

for old-age and survivors insurance and unemployment com-

pensation, but subsequent revisions have included disa-

bility benefits (1957) and medical care for the aged (1965).

The Act also provided for grants-in-aid from the federal

government to the states to support the needy aged, blind,

widowcd and orphaned, physically and mentally handicapped,

maternal and child health services, services for crippled

children and child welfare services."6 These grants were

to be administered by the states and often required that

they provide matching funds.47 The Economic Opportunity

Act of 1964, the basis of a fairly comprehensive "War on

Poverty," is acting to expand and supplement existing

public assistance programs.

In Canada, the hardships of the depression did not

produce a national commitment to provide welfare services

anywhere near the level experienced in the United States.

Burdened with constitutional problems and the tradition of

provincial-municipal jurisdiction over public assistance

programs, the Dominion Parliament did not enact a single

piece of permanent legislation in this area during the

46Ibid., p. iii.

47The state and local governments also continued
to provide independently financed and administered social
welfare services including workmen's compensation programs.






- 32 -


1930 to 1940 period. During these years, federal aid to

the states for the support of relief works, single homeless

men, unemployed workers, western farmers and youth was

embodied in eleven temporary arrangements.48

During World War II, some social legislation was

enacted, including the Unemployment Insurance Act of 1940

(which required a constitutional amendment) and the Family

Allowance Act of 1944. Although undoubtedly representing

a change in public opinion concerning the merits of the

"welfare state," this wartime legislation was also in-

fluenced by the implications of J. M. Keynes' writings.49

It was only in the postwar years that the Canadian people

appeared to fully embrace the concept of the "welfare state."

In 1951, an amendment was added to the Canadian constitution

which empowered the Dominion to legislate concerning old-age

pensions and such a program was put into effect in the fol-

lowing year. Four years later, in 1956, legislation was

passed which provided for federal assistance to the provinces

for the unemployed and unemployables. In addition to the

provision of a national hospital insurance scheme mentioned

previously, recent legislation also includes a revised and

improved federal old age pension plan.so

48Goffman, Public Welfare, p. 22.
4gIbid., p. 24.
soThe new scheme provides for uniform benefits and
contributions and is completely portable throughout the
country. Ibid., p. 27, n. 48.





- 33 -


The federal governments of Australia and Switzerland

entered the field of social assistance before those of the

United States and Canada. By 1912, the Australian Parliament

had enacted old-age pensions, invalid pensions and maternity

allowances.51 The Swiss constitution as early as 1890 had

been amended to allow for a federally supervised program of

sickness and accident insurance. Both nations, however,

left the relief problems emanating from the depression to

the states (cantons), although federal grants-in-aid were

commonly employed to alleviate some of the financial problems

of these component units.52 As in Canada, however, the

experience of the depression apparently fostered greater

public acceptance of the "welfare state" in these two

countries. This is evidenced by the legislation creating

the Swiss Old Age and Survivors Insurance Act of 1946 and

the amendment to the Australian constitution in the same

year, which made possible a greatly expanded role of the

federal government in social affairs. Since 1946, Common-

wealth legislation in the social services field has expanded

to include rehabilitation service (1948) and child endowment

(1950). 53


51Birch, Social Legislation, pp. 205-06.

52Wheare, Federal Government, pp. 150 and 158.

53Australia, Official Handbook, p. 67.






- 34 -


In the foregoing discussion, it has been indicated

that the nature of the functional division of responsi-

bilities among the component units of a federation has

been changing in recent decades. While some services

generally continue to be performed by one level of govern-

ment or another, it can be noted that more and more are

being carried out on a cooperative basis. Although the

experience of the principal federations in dealing with

the provision of social services was selected for more

intensive analysis, the same tendencies can be noted to a

greater or lesser degree in such areas as natural resource

conservation and highway construction among others. The

same tendency toward intergovernmental cooperation can

also be noted with respect to the financing of these various

public services. It is to this general topic that the

discussion now turns.

Distribution of Revenue Sources

Besides deciding upon a suitable distribution of

functions, a federation must confront the problem of

allocating revenue sources. These sources may be of many

types including taxation, borrowing, monopolies and

commercial undertakings. Since the latter two revenues

are generally of little relative consequence, only the

principles governing the first two will be outlined.






- 35 -


Theory

Taxation-As with the division of functions between

governmental units, there is no one principle guiding the

apportionment of tax sources. It is clear, though, that

certain taxes may be more efficiently imposed and collected

by one level of government than by another. As a general

rule, "most taxes can be collected with the highest degree

of effectiveness by the federal government, while very few

can be administered in even a tolerable fashion by the

local governments. The states occupy an intermediate

position."54 The validity of this statement stems from

the fact that the national government has jurisdiction

ovcr the largest territorial division of the tax base and

because centralized collection of taxes often involves

economics of scale.

Having a large territorial jurisdiction is crucial

in a federation because of the possibilities of tax base

migration. When taxation in a given state, county or city

is unusually high, persons may well be persuaded to move

to a different geographical area. Taxes imposed by the

federal government are not so easily escaped (unless one

desires to relinquish his national citizenship). Further-

more, the federal government is generally better equipped


5"Due, Govcrnment Finance, p. 438.






- 36 -


to monitor the tax liabilities of those persons owning

property, receiving income, making purchases, etc., in

several states and/or communities. Hence tax evasion may

be better controlled.

One principle with which there is general agreement

concerns the fiscal aspects of interstate and/or inter-

community commerce.55 Since one of the advantages of a

federation is the enlargement of markets (with the ac-

companying benefits of specialization), it follows that

taxes which may tend to impede internal trade should be

prohibited or at least used in moderation. In the area

of international trade, a coordinated national tariff

usually requires that the central government control the

levying of customs duties.

Borrowi.g--The problems of borrowing in a federation

are essentially twofold.56 First there is the problem of

deciding upon suitable constitutional provisions regarding

the borrowing powers of the federal, state and local

governments. Secondly, agreement must be reached concern-

ing administrative control and coordination of these

borrowing powers.


55See, for example, B. P. Adarkar, Federal Finance,
pp. 43-44 and Geoffrey Sawer, "Taxation in a Federation,"
in Federalism and the New Nations of Africa, ed. by David
P. Currie (Chicago: University of Chicago Press, 1964),
p. 263.

56Adarkar, Federal Finance, pp. 266-75.






- 37 -


The first question has several ramifications.

According to B. P. Adarkar, the constitutional provisions

pertaining to public borrowing "may be classed under three

heads: (a) those relating to borrowing powers themselves;

(b) those relating to federal assumption of prefederation

state debts; and (c) those relating to concerted control."57

A federal. form of government complicates these basic de-

cisions. This is because the writers of the constitution

must contend with the (possibly conflicting) desires of

two or more independent administrative levels.e8 When the

propensities to borrow these component units are widely

divergent, the second problem mentioned above (adminis-

trative control and coordination) may become insoluble.

In a situation where state and local governments borrow in

foreign markets, severe difficulties may arise, especially

if the debtor units default on their interest and amorti-

zation commitments. If this latter situation occurs,

repercussions of an international nature may cause

embarrassment to the federal government, since the lower

administrative units do not normally have the authority

to deal in the area of foreign affairs.


57Ibid., p. 266.

58In a unitary nation such problems do not arise
since the central government is customarily allocated the
exclusive power to borrow.






- 38 -


Although a federal constitution may allow for

unlimited borrowing at all levels of government, all

levels may not, in reality, have an equal opportunity to

sell debt. In most cases the central authority will have

an advantage over the state and local units. Due to its

larger collateral base, the federal government may be in

a better position to offer more attractive terms to po-

tential investors. Legal provisions such as federal

guarantees of state and local debts and exemptions from

federal taxes on income emanating from this debt, however,

may partially or wholly offset any advantages held by the

federal government.

Practice

The "old" federations-Considerable similarity may

be noted in the original constitutional division of tax

sources between levels of government in the "older"

federations (the United States, Canada, Australia and

Switzerland).59 As a general rule, the distribution of

tax jurisdictions in this group of countries was character-

ized by few allocations of exclusive revenue sources to

the respective federal and state-local units. In order

to maximize the benefits of economic union, the constitutions


59The United States adopted the federal form of
government in 1787, while Canada, Australia and Switzer-
land took their present forms in 1867, 1900 and 1848,
respectively.






- 39 -


of the older federations reserved the collection of customs

and excises for the exclusive use of the national government;

the other taxes generally being left to concurrent juris-

diction. Since customs and excises represented the most

lucrative sources of revenue at the time, the federal

governments of these nations generally started out with an

adequate financial base. The relative balance of financial

power between the national government and the state-local

units, though, varied among the four countries.

The fiscal power resulting from these original

constitutional provisions was especially favorable to the

central government in Canada. In that country, the British

North Amcrica Act of 1867 empowered the Dominion to raisc

revenue through any "mode or system of taxation."60 The

provinces were only allowed to collect direct taxes "within

the province in order to the raising of a revenue for pro-

vincial purposes"61 and "shop, saloon, tavern, auctioneer,

and other licenses in order to the raising of a revenue for

provincial, local or municipal purposes."62 As a result of

these provisions, the Canadian federal government initially

absorbed virtually all of the productive tax sources.63

6Sec. 91 (3).
61Sec. 92 (2).
62Sec. 92 (9).
63Dominion control over customs and excises was a
particularly severe loss to the provinces, since before
federation somo of them, like Nova Scotia, were receiving
over SO per cent of their total revenues from these taxes.
Birch, Social Legislation, p. 80.






- 40 -


At the other end of the spectrum was Switzerland;

the United States and Australia were somewhere in between.

In the Swiss Constitution of 1848 the federal government was

empowered to collect only customs duties, the remaining tax

sphere being reserved to the cantons.64 Ostensibly the

cantons were given the widest range of tax sources to finance

their activities. In reality, however, customs duties

represented a very important source of income and were

able to provide a sufficient level of income to the federal

government until World War I.

Provisions allowing for both federal and state-local

borrowing were included in the constitutions of all four

nations. In addition, state debts were assumed by the

national government almost immediately after federation

in the United States and Canada.65 They were also assumed

by the Australian federal government, but only after three

decades of nationhood had elapsed.66

Any problems which might have arisen as a result of

the financial arrangements in the older federations were

minimized by the fact that they were formed during an era

of laissez fire. With the public sector performing only

6W heare, Federal Government, p. 103.
65James A. Maxwell, The Fiscal Impact of Federalism
in the United States (Cambridge: Harvard-University Press,
1946), pp. 8-9 and Birch, Social Legislation, pp. 54-56.
66Birch, Social Legislation, pp. 112-14.





- 41 -


a meager number of services, the need for revenues was

consequently low. The same factors which created a greater

demand for public services (war, depression and the welfare

state), however, also made increased revenues necessary.

A lasting influence on the tax systems in all four

federations was World War I. Up to this time relatively

adequate financing had been forthcoming at all levels of

government. The central governments of these countries

had been receiving large revenues from customs duties and

often enjoyed large budgetary surpluses. The state-local

governments, on the other hand, were generally able to

carry out their responsibilities through their own tax

sources plus grants-in-aid from the federal government.67

During World War I, mounting costs at the federal

level came just at the time revenues from customs were

falling. The consequent financial need obliged the national

governments in all four federations to seek new revenue

sources. A solution to this problem was thought to lie in

the area of direct taxation. As a result, the United States,

Canada, Australia and Switzerland made extensive use of the

income tax in the war years, with the national governments

of the latter three nations entering this field for the

67Revenue transfers from the national government to
the states were much less prevalent in the United States
than in the other three older federations, largely because
of the American states' superior ability to exploit their
constitutionally allocated tax sources (especially property
taxes).






- 42 -


first time.6E When the war was over these taxes remained

important and growing sources of federal revenue; this

tendency for the national governments to increasingly enter

the field of direct taxation proceeded to alter the near

complete separation of tax sources which existed before

the war.

The federal encroachment into the arcas of taxation

traditionally reserved to the states coincided with increased

public demands for services customarily performed by the

state-local units. This problem was clearly brought out

in the depression of the 1930's. The cooperation among

the levels of government in carrying out certain functions

(especially the social services) during these years was, by

necessity, extended to financial cooperation. The two

methods most commonly employed to secure this cooperation

were tax sharing and grants-in-aid (beth voluntary and

obligatory). All four federations, however, did not make

equal use of these methods.

Although both the American and Swiss federal

governments made extensive use of voluntary grants for

transferring funds to the states, only the latter nation

employed tax sharing. In Canada and Australia, obligatory

subsidies from the federal government to the states had

been included in their respective constitutions and,


81\heare, Federal Goverrnment, pp. 103-04.





- 43 -


supplemented by voluntary grants, remained as the most

important method of intergovernmental fiscal cooperation

in those countries.69 Voluntary grants, potentially the

most flexible type of federal aid to the states, increased

in al] four federations during the depression. By 1939,

they comprised 15 per cent of total state income in the

United States, 10 per cent in Canada, 12 per cent in

Australia and 25 per cent in Switzerland.70

This increased financial cooperation during the

1930's had apparently implanted itself since it continued

during World War II and into the postwar ycars. During

the war years the use of grants from the federal government

to the states was especially significant in Australia and

Canada. In those countries, the financial demands generated

by large defense expenditures necessitated arrangements

whereby the states would vacate the income tax field in

69Both federations made increased use of special
assistance to the poorer states during the depression. In
Canada, the Duncan grants augmented financial aid to the
maritime provinces and special grants were also awarded to
the prairie provinces. The Australian federal government
likewise made additional grants to the "claimant" states
of Western Australia, South Australia and Tasmania and in
1933 set up the Commonwealth Grants Commission to systematize
the distribution of these subsidies. A. Milton Moore,
J. Harvey Perry and Donald I. Beach, "The Financing of
Canadian Federation," p. 411 and Eric J. Hanson, "Federal-
State Financial Relations in Australia, pp. 530-33; both
in U. S., Congress, Joint Economic Committee, Revenue
Sharing, Vol. I.

70Wheare, Federal Government, p. 110.






- 44 -


return for compensating grants from their respective

federal governments.7" The use of federal to state grants

was less significant in the United States. Federal grants

as a proportion of state income (not including the insur-

ance trust funds) in that country stabilized after the

mid-1930's and remained at about 16 per cent until the

late 1950's.72 By 1960 this figure had risen to over

22 per cent, with the increase largely due to expenditures

on the federal highway program.73 The Canadian provinces

were receiving approximately the same percentage of their

income from the federal government as were the American

states, while in Australia the comparable figure in the

1959-60 financial year was 37.5 per cent.74 The Swiss

cantons received only about 10 per cent of their incomes

from federal grants in 1960, but were, in addition, enjoying

sizeable amounts of revenue from tax sharing schemes.75

The "new" federations.--The fiscal systems of the

post-World War II federations (India, Pakistan, Malaya,

Rhodesia and Nyasaland, Nigeria and the West Indies) were

conditioned by a different set of factors than were those


71Ibid.

72Mosher and Poland, American Governments, p. 55.

3bid.

74 Where, Federal Government, p. 111.

s7Ibid.










of the older federations. Perhaps benefiting from the

experience of the older federations and/or responding to

the implications of the "revolution of rising expectations,"

the framers of the constitutions in these newer nations

generally foresaw a greater economic and social role for

the public sector.

As a result of this attitude, greater care was

taken in delineating the sources of revenue to be employed

by the federal and state governments. In general, the

constitutions of these modern nations separated the tax

sources of the governmental units to a far greater degree

than was noted in the United States, Canada, Australia and

Switzerland. Whereas the constitutions of the latter group

of nations left wide areas of taxation open to concurrent

jurisdiction, the trend in the former group was to enumerate

all national government taxes and leave the others to the

states.7"

Except for the short-lived West Indian federation,

all of the postwar federations chose to have the national

government in the dc.'inant financial position. The greatest

degree of centralization can be noted in Malaya. In this

country, the national government was given jurisdiction over


7M. M. Watson, "Federalism and Finance in the Modern
Commonwealth," Journal of Commonwealth Political Studies-
III, No. 2 (1965), 119.


- 45 -






- 46 -


almost all conceivable types of taxation including the

personal income tax, corporation tax, import and export

duties, excises, sales taxes, land taxes, stamp duties and

vehicle taxes. The state governments were only empowered

to obtain revenue from licenses, lands and mines dues and

forestry dues.77 The West Indian federal government, on

the other hand, was given no exclusive tax sources and was

allowed to exploit the personal income tax, corporation tax

and import duties only in competition with the states.78

Following the example of the older federations, the

constitutions of the new federations generally conferred

the power to borrow on both the federal and state governments.

Federal restrictions on state borrowing, however, were some-

what greater in the latter group of countries. External

borrowing by the states was completely prohibited in India,

Malaya and Nigeria and was subject to federal control in

Pakistan. The power to borrow abroad was open to the states

only in the West Indian federation; in Rhodesia and Nyasaland

it was controlled by a Loan Council based on the Australian

model.79 This federal control over external borrowing may

prove to be a primary centralizing force in these countries


7-Ibid., pp. 125 and 127.

78Ibid., p. 120.

79R. L. Watts, "Comment," in U. K. Hicks et. al.,
Federalism and Economic Growth, pp. 143-44.






- 47


as most of them will probably have to rely on foreign

credit for their development needs for many years.s8

Duc to the initially superior financial position

of the federal governments in the new federations, the

lower units of government have generally been left with

few independent sources of revenue. Since both the federal

and state governments are called upon to perform large

numbers of functions, the problem of disequilibrium between

functions and revenues arose early in the history of all

six postwar federations. In anticipation of this problem,

provisions for the transfer of resources from the center to

the units were included in their constitutions.

The primary methods chosen to carry out the task of

distributing funds were tax sharing and grants-in-aid. The

first method has been especially important in India, Pakistan

and Nigeria, although the state governments in each of these

countries were to receive a portion of their revenues from

grants-in-ajd. Grants-in-aid, however, have only been

important sources of state revenue in India, Pakistan and

Malaya. They were totally absent in the federations of

Nigeria, West Indies and Rhodesia and Nyasaland.


8"0ne author speculates that federal control of
external borrowing in the new Commonw\ealth federations may
have as great an impact on intergovernmental relations as
did the growth of the social services in the oider feder-
ations. Peter Robson, "Patterns of Federal Finance in the
Newer Federations," Finanzairchiv, XII (April, 1962), 425-26.






- -S -


Summary


Perhaps the most important aspect of fiscal

federalism brought out in the preceding text is its changing

character. Experience has shown the value of studying

federalism as a process. The intergovernmental financial

relationships which presently exist in the United States,

Canada, Australia bear little resemblance to those which

were originally in effect. The "ideal" federalism of

Professor Wheare has given way to a cooperative federalism

under the pressures of war, economic depression, rising

aspirations and the welfare state. Expanded public activity

in almost every area has necessitated this occurrence.

After many years of trial and error, it has been

realized that the goal of precisely matching public respon-

sibilities with independent resource's at all levels of

government is a utopian task. This realization has prompted

the increased use of revenue transfers between the federal

government and the states and between the states and the

local units. Centralization of revenue collection by

itself, however, need not destroy federalism. The ever

present danger of state-local subservience to the federal

government can be avoided if these units are able to maintain

control over the performance of the several functions which

they perform best. In order to accomplish this task, the

state and local governments must be allowed to spend a






- 49 -


sizeable portion of the revenues they receive from higher

levels of government in an independent manner.

As a result of the apparent need for extreme

financial centralization in the developing countries, the

applicability of a true federal system in these nations is

open to question. The expression of any political autonomy

at the state and local levels will become meaningless if

adequate independent revenues are not available to them.

The existence of a voluntary grant system from the national

government to the lower units is, like in the older feder-

ations, the most likely avenue of eventual federal domination.

In this respect, one author has remarked tlat "if the strong

rise in the proportion of grants in total revenue manifested

in India and Pakistan during the last few years were to con-

tinuo, it would not be long before the units became in this

respect subordinate to a degree hardly admissable in a

federation, even allowing for a fairly flexible interpre-

tation of the modern co-operative definition."'' The al-

leviation of this particular problem may lie in the imple-

mentation of an impartial grants commission patterned on

the Australian example. Financially weakenring the federal

government to the benefit of the states is probably not a


81Watson, "Modern Commonwealth," p. 129.






- 50


feasible solution, as the demise of the West Indian

federation seems to indicate. 2










































82For background information on the failure of the
West Indian federation see: E. Wallace. "The West Indies:
Improbable Federation?," Canadian Journal of Economics and
Political Science, XXVII, No. 4 (1961), 444-59.













CHAPTER II

THE BASIS FOR A BRAZILIAN FEDERALISM


In the preceding chapter it was stated that the

adoption of a federal form of government depends upon

certain prerequisites. The most fundamental of these being

a desire for unity concurrent with a desire for the preser-

vation of regional diversities. When a particular balance

between these demands exists in a nation, federal government

may be appropriate. If the desire for union overwhelms the

desire for diversity, then a unitary form of government may

be more suitable. A confederation, on the other hand, may

be the administrative solution in a society which, above

all, prizes regional diversity.

The present chapter seeks to assess the appropriateness

of federal government in Brazil. More specifically, it at-

tempts to isolate and analyze the federal qualities of

Brazilian society. The constitutional and legal aspects

of federalism in Brazil are temporarily ignored as they

will be more thoroughly discussed in the following chapter.

The omission of this facet of federalism, however, need not

detract from the goal of the present discussion since "the

essential nature of federalism js to be sought for, not in

the shadings of legal and constitutional terminology, but


- 51






- 52 -


in the forces-economic, social, political, cultural-that

have made the outward foris of federalism necessary."1


Unity and Diversity


One of the foremost characteristics of Brazil is

its sheer immensity. The Brazilian nation, comprising an

area of over three million square miles, is the giant of

South America. Its territory covers almost one-half of that

continent and is larger than the United States in terms of

contiguous land area. The population of the country, now

surpassing 90 million inhabitants, is the eighth largest

in the world (after China, India, Russia, the United States,

Indonesia, Pakistan and Japan). Furthermore, Brazil's annual

rate of population growth, presently in excess of 3 per cent,

is greater than that of the seven countries which have numer-

ically superior populations. Estimates indicate 200 million

Brazilians by the end of this century.2

As might be expected, there is much diversity within

this huge country in terms of topography, climate, race,

resource endowment, income levels and historical background.

Moreover, these diversities are generally dispersed according

to geographical regions. In addition to this diversity,


'Livingston, "Nature of Federalism," pp. 83-84.
2Artur Hohl Neiva, "The Population of Brazil," in
Population Dilemma in Latin America, ed. by J. Mayone Stycos
and Jorge Arias (Washington, D. C.: Potomac Books, Inc.,
1966), p. 56.






- 53 -


however, there is a strong sense of national unity. A

common language, religion, law and general culture have

nurtured a society which is in many ways more homogeneous

than the successful Swiss federation or the newer Indian

federation.

Ostensibly, then, Brazil would seem ideally suited

to the federal system if we are to accept the belief that

a successful federation requires the twin attributes of

unity and diversity. An evaluation of this hypothesis in

reference to Brazil, however, must be delayed to-the final

chapter, since only the hindsight made possible by histori-

cal analysis can prove or disprove this contention. For

the present, it will suffice to sketch in somewhat greater

detail those forces for union and disunion which have

influenced the particular variant of federalism found in

Brazil.


Pre-Federation Historical Background


The Colonial Period

The three hundred years of Portuguese colonial rule

left an indelible imprint on Brazil. Besides implanting

the unifying influence of Iberian culture, the patterns of

settlement and methods of administration utilized during

this era introduced the basis for regional diversity.






- 54 -


In 1533, three decades after the discovery of

Brazil, the Portuguese Crown made its first serious attempt

to colonize its new domain. To this end, large tracts of

land (donatarias) were divided as hereditary captaincies.

The twelve recipients of these grants (donatrios) were to

develop and defend their territories in addition to being

the administrative agents of the Crown. Due to various

factors, only two of these land grants (So Vincente and

Pernambuco) ultimately flourished, but the original cap-

taincy system had a lasting influence.3 That is, "the

fragmentation of Brazil into separate colonies in the 1530's

gave birth to the concept of many Brazils that persists in

the deeply ingrained sense of regionalism in the nation."4

The failure of the captaincy system less than two

decades after its inception set the stage for an adminis-

trative centralization. After 1549, Portuguese control

over Brazil was increased through several methods. Among

these were the appointment of a captain-general, the limi-

tation of the political powers of the original donatrios

and the establishment of a colonial capital in Bahia

(changed to Rio de Janeiro in 1763).5

3Six present-day states (Maranho, Cear, Rio Grande
do Norte, Pernambuco, Bahia and Espirito Santo) retain the
names of the captaincies from which they developed.
4Rollie E. Poppino, Brazil: The Land and People
(New York: Oxford University Press, 1968), p. 53.
5Hubert Herring, A History of Latin America (2nd
ed. rev.; New York: Alfred A. Knopf, 1967), p. 221.






- 55 -


Portugal's system of indirect rule through viceroys,

captains-general, governors and majors-general6 remained in

effect throughout the colonial period, but was never really

adapted to the needs of a vast, underpopulated country.

Public officials were concentrated in the principal cities

and towns, thus leaving large areas of settlement virtually

devoid of any royal authority. Although a governor was

theoretically empowered to exercise a wide array of controls

over his respective captaincy, his actual authority was

diminished through the interference of the home government,

lesser officials and administrative organs and the general

unruliness of the population.7

As a result of these shortcomings of colonial

administration and the lack of adequate transportation and

communication among the several captaincies, Brazil ulti-

mately care to be ruled by the large plantation owners

(fazendeiros) and not by the Portuguese Crown.8 Despite

6These titles were all essentially similar in that
they designated the administrative head of a captaincy. The
title of "captain-general" or "governor," however, was given
to the head of a "principal captaincy" while the "subordinate
captaincies" were governed by "captains-major" or simply
"governors." After 1763, the captain-general of Rio de
Janeiro was known as the "Viceroy of Brazil" although his
de facto authority was no greater than that of the other
governors. Caio Prado, Jr., The Colonial Background of
Modern Brazil, trans. by S. Macedo (Berkeley: University
of California Press, 1967), p. 357.
7Ibid., pp. 359-61.
8Herring, History of Latin America, p. 227.






- 56 -


these factors which tended to fragment the Brazilian

population, however, a semblance of national consciousness

began to appear well before the end of the colonial period.

An abortive uprising in 1788 signaled the beginning of

organized opposition to Portuguese rule. One author spec-

ulates, though, that "federation, had it been applied at

this time, would have spelled the break-up of Brazil. .."

The Empire

Independence from Portugal was finally achieved in

1822, but a system of federal government was not to be

adopted for sixty-seven years.10 Instead, the country was

ruled as an empire. The Constitution of 1824, which was

in effect during this period, was centralist in nature,

although it did provide for popularly elected provincial

apd municipal assemblies. These assemblies, however, were

subject to the control of presidents appointed by the emperor.

In addition, the central government retained virtually com-

plete control over the nation's public finances. These new

arrangements between the central government and the subor-

dinate units prompted one author to state that:

9Percy A. Martin, "Federalism in Brazil," Hispanic
American Historical Review, XVIII, No. 2 (1938), 144.
'OIn 1808, John VI of Portugal fled to Brazil to es-
cape the invading armies of Napoleon and set up a government-
in-exile which lasted until 1821. A Brazilian historian has.
remarked that "the establishment of the Portuguese court in
Rio de Janeiro favored a rapprochement of the captaincies and
marked in a certain fashion the beginnings of the country's
unity." Jos Honrio Rodrigues, The Bramilians: Their Char-
acter and Aspirations, trans. by Ralph Edward Dimmick (Austin:
University of Texas Press, 1967), p. 81.






- 57 -


Under the constitution of 1824, . the provinces
were in reality mere administrative subdivisions of the
empire, without either political or economic autonomy
of their own. The central government in the exercise
of its power to determine all forms of taxation and to
fix the amount of expenditures in the provinces as well
as in the national government stifled the economic
development of the former in the interests of the
latter .1

During the early years of the empire, many regional

revolts took place and in 1834 the constitution was modified

by granting a degree of autonomy to the provinces. Through

this amendment (the Ato Adicional) the provincial assemblies

were empowered to legislate in several arcas pertaining to

provincial and municipal affairs including public works,

police protection, education, highways and navigation.

Powers to finance these responsibilities were also included,

although they were somewhat limited.'2 This constitutional

modification, however, did not end the problems of regionalism

and revolts continued in Bahia, Rio Grande do Sul, Maranh~o,

Minas Gerais, Sao Paulo and Pernambuco. The uprising in

Pernambuco, which was successfully suppressed in 1849, is

generally considered to have been the last real threat to

the unity of the Empire.13

llHerman G. James, The Constitutional System of
Brazil (Washington, D. C.: Carnegie Institution, 1923), p. 5.
'2According to the Ato Adicional, the provincial as-
semblies could legislate on the contraction of debts and "the
raising and spending of public moneys for municipal and pro-
vincial expenditures, provided they did not interfere with
the general revenues of the central government." Ibid., p. 7.
13Herring, History of Latin America, pp. 734-35.






- 58


Partially as a result of these regional disturbances,

the national parliament passed subsequent laws which served

to abrogate much of the autonomy given to the provinces

through the Ato Adicional. One effect of the passage of

these laws was the fiscal impoverishment of the provinces,

since the central government gained control over virtually

all lucrative revenue sources. Herman G. James notes that

"this financial impotence of the provinces resulted in their

becoming gradually as politically subordinate to the central

government as before, for the support and financial assist-

ance of the imperial government were conditioned upon the

political subservience of the provincial authorities."14

Throughout the remainder of the Empire, Brazil was

ruled by Pedro II as a strongly centralized monarchy. Some-

t.imes accused of being a dictator, this emperor did manage

to maintain the large land area of Brazil intact. Improvements

in the nation's transportation and communication networks in

the latter half of the 1800's greatly aided this accomplish-

ment.15 By 1889, however, conflicts between the central

government and the Church, dissatisfaction within the army,


1'James, Constitutional System of Brazil, pp. 7-8.
'5Under the impetus of the Paraguayan War (1864-70),
the telegraph and railroad networks were greatly expanded.
During the war years, Rio de Janeiro was connected to Buenos
Aires by telegraph and the amount of railroad track in the
country was increased by 80 per cent (to a total of 450 miles).
Poppino, Brazil: The Land and People, pp. 205-06.






- 59


increasing republican sentiment and the issue of slavery

brought an end to the imperial era and Brazil finally

emerged as a federal republic.16

The Historical Impact in Summary

From the outset of federation, the public

administration of Brazil had a definite bias towards

centralization. A large part of this tendency can be

attributed to the influence of the centralized monarchy

under which the country had been ruled for the previous

seven decades.'7 As a result, Brazil became a federation

by "disaggregation," that is, a previously unitary government

had split into component parts.18 When a federation is

formed in this manner, the burden of asserting political

and financial autonomy is placed upon the state and local

governments. If these units have had little or no experience

with self-government (as was the case in Brazil), the task

is made far more difficult. To further complicate matters,

the first federal constitution of Brazil (to be discussed


'6Herring, History of Latin America, pp. 743-46.
'7In this respect, Jos Honrio Rodrigues states
that "it is to the triumph of central power in Rio de Janeiro
[during the Empire] over local and provincial authority that
the unit of the nation must be attributed." Rodrigues,
Character and Aspirations, p. 81.
'8This is in contrast to the inception of federalism
in the United States, Canada, Australia and Switzerland in
which previously independent units had formed a union, that
is, a "federation by aggregation."






- 60 -


more fully in the following chapter) was patterned on

the American Constitution and represented an ideology which

was essentially alien to a culture predominately based upon

Iberian influences.19

Even though the imperial administration successfully

molded Brazil into a national unit, a significant degree of

regional diversity was still able to maintain itself. Per-

haps the most important factor in this respect was the

absence of effective national authority during the colonial

period in areas isolated by lack of transportation and com-

munication facilities. By the time some semblance of

national administration could bc realized, this regionalism

had been irrevocably implanted. This fact is attested to

by the series of regional revolts which extended into the

twentieth century and the popular allegiance to state

governments that often superceded allegiance to the federal

government.

Contemporary Forces

With this brief discussion of the country's

historical background in mind, we now turn to those federal

'91n referring to the American Constitution's emphasis
on "states' rights" which was incorporated in Brazil's first
federal constitution, one emminent scholar has noted that
"the problem of combining diversity with unity . seems *
to have suffered as much from the political methods . .
adopted by the Federal Republic of 1889 as from the centrali-
zation methods followed by the Empire." Gilberto Freyre,
New World in the Tropics: The Culture of Modern Brazil
(New York: Alfred A. Knopf, 1959), p. 105.





- 61 -


qualities which exist in present-day Brazil. While some

of these contemporary forces will be recognized as being

simple extensions of the society formed in the colonial and

imperial eras, others reveal tendencies which are quite

modern.


The Forces for Union

Cultural

Perhaps the most important unifying force in Brazil

is what Charles Wagley refers to as its "remarkably homo-

geneous national culture."20 Although basically Portuguese-

oriented, this culture has also been influenced to some

degree by the heritage of the African slaves and indigenous

Amerinds. This amalgamation of influences has produced a

culture which exhibits similarities to that of Portugal,

but is at the same time distinct.

Language.--One obvious legacy of the Portuguese was

their language. Extremely valuable as a unifying force,

Gilberto Freyre calls it the most important means "of

inter-regiona] and interhuman communication" in Brazil.21

At present, Portuguese is spoken throughout the country,

except for in some isolated Indian tribes and among a few

unassimilated Europeans. The language as it exists today


20Charles Wagley, An Introduction to Brazil (New
York: Columbia University Press, 1963), p. 1

21Freyre, New World in the Tropics, p. 101.






- 62 -


is generally distinct from the Iberian version in terms of

pronunciation, syntax and word usage and is flavored with

both American Indian and African influences. Regional

accents and dialects within Brazil, however, are "less

noticeable than those between a New England Yankee and a

person from the Deep South."22

Religion.--Another unifying force which also emanates

from the Portuguese heritage is religion. During the colo-

nial and imperial periods, Roman Catholicism was the of-

ficial State religion although freedom of worship was gen-

erally allowed. With the inception of the federation the

Church and State were officially separated. The Catholics

continued to dominate the religious orders, though, and in

1950, about 94 per cent of all Brazilians were members of

this Church.23

The number of Brazilian Catholics, however, belies

the extent of the power and influence of the organized

Church. Although Catholicism pervades almost every segment

of Brazilian society, it is often regarded more as a tradition

than as a strong faith.24 Moreover, "most of the differen-

tiation along religious lines has occurred within or been


22Wagley, Introduction to Brazil, p. 4.

23Smith, Brazil: People and Institutions, p. 511.

24Wagley, Introduction to Brazil, pp. 232-51.






- 63 -


incorporated into the general framework of this universal

body."25 Such differentiation, often the result of com-

bining either African or Indian religions with the Roman

Catholic tenets, has seemingly detracted from this Church's

potentially monolithic structure. Nevertheless, Roman

Catholicism is still very much an integral part of

Brazilian society and as such must be considered as one

of its unifying forces.

Developmental

In addition to these cultural factors, largely

based on historical precedent, forces of more recent origin

have a]so fostered Brazilian unity. Among the most signif-

icant of these are those which have arisen from the post-

World War II drive for accelerated economic development.

The increased administrative centralization and sense of

national commitment accompanying this goal have no doubt

had some positive effect on national unity, but the most

important factor in this respect has probably been the

recent expansion of the country's transportation and com-

munication (especially the former) networks. By expediting

personal and commercial intercourse between the regions of

Brazil, these networks have done much to alleviate the

centuries-old problem of rural isolation. The major cities


25Smith, Brazil: People and Institutions, p. 510.






- 64 -


of Brazil are also more closely connected as a result of

this phenomenon.

Transportation.--Improvements in overland

transportation in recent decades have been dominated by

highway construction and paving as the railroad system has

deteriorated.26 Although modern highway construction

generally began during the late 1920's, it did so at a

fairly slow pace and by 1947, only 276,000 kilometers had

been built.27 After World War II, however, increased

interest in this area prompted a reorganization of national

and state highway departments and the creation of a "national

roads fund" which was to be financed through the earmarking

of revenues from a newly imposed tax on petroleum.28

The initial postwar enthusiasm for highway

construction was maintained during the 1950's and into the

early 1960's; by 1965, the national highway network had

surpassed the 800,000 kilometer mark.29 Furthermore, the

26Total extension of track increased from 31,333
kilometers in 1926 to only 38,287 kilometers by 1960. Brazil,
IBGE (Instituto Brasileiro de Geografia e Estatistica),
Anuario Estatistico--1982 (Rio de Janeiro, 1962), p. 107.
27U. S. Department of Commerce, Brazil: Information
for United States Businessmen (Washington, D. C.: Government
Printing Office, 1961), p. 138.
28bid.

29Brazil, IBGE, Anuario Estatistico--1966, p. 239.
Of no small consequence in this phenomenal growth was the
moving of the national capital from Rio de Janeiro to Brasilia
in 1960. The transfer of the capital city to this previously
remote arca necessitated the building of a system of con-
necting roads which now extend to all regions of the country.





- 65 -


number of motor vehicles in Brazil generally paralleled this

growth of highways. While in 1946 there were only 219,000

such vehicles registered in the country, there were almost

2 million in 1965.3o A summation of the effects of this

phenomenon is offered by Rollie Poppino: "the expansion of

the network of motor roads brought large areas of rural

Brazil under the political, economic, and cultural influence

of the state and national capitals, and made it more dif-

ficult for the people of interior communities to resist the

forces of change that had been at work in the coastal cities

since the last quarter of the nineteenth century."31

The two other major means of transportation, air and

maritime, have also made gains in recent decades. Aviation,

which was initially encouraged by the relative lack of other

efficient means of transportation, madc its first appearance

in Brazil in the late 1920's. Since that time it has

rapidly increased in importance both as a carrier of pas-

sengers and of freight, especially in the postwar years.

In the period 1946-63, for example, the number of air

passengers grew from 511,818 to 3.5 million; with passenger-

kilometers increasing from 395 million to over 3.5 billion.32

30Brazil, IBGE, Anurio Estatistico--1947, p. 192
and Brazil, IBGE, Anurio Estatistico--1967, p. 303.
3 Poppino, Brazil: The Land and People, pp. 298-99.
32Brazil, IBGE, Anuario Estatistico-1947, p. 211
and Brazil, IBGE, Anurio Estatistico--1966, p. 252.






- 66 -


Air cargo experienced similar growth, increasing from about

7,000 tons in 1946 to over 70,000 tons in 1963.33

Maritime shipping has traditionally been of great

significance in connecting the population clusters along

the Brazilian coast. With the rapid growth of highway

travel, however, the relative importance of this means of

transportation has somewhat lessened in terms of the volume

of merchandise carried, but in 1958 still accounted for

34 per cent of the total. Although the number of ships

entering Brazilian ports actually declined between 1946 and

1965 (from 32,941 to 22,054), the registered tonnage of

these ships more than doubled (from 25 million tons to

60 million tons).35

Communications.-The principle means of communication

in Brazil are radio, telegraph, telephone, television and

the newspapers and periodicals. A potentially significant

unifying force, communications between the various regions

of Brazil and between the cities and the hinterland are as

of yet quite underdeveloped. Facilities tend to be con-

centrated in the eastern and southern areas of the country

and the expense involved in the purchase of a television or


S3Ibid.

34U. S. Department of Commerce, Information, p. 135.

3sBrazil, IBGE, Anurio Estatistico-1947, p. 199 and
Brazil, IBGE, Anuario Essatistico--1966, p. 251.






- 67 -


telephone tend to confine their ownership to a relatively

small segment of the population.36 The circulation of

newspapers and periodicals and the telegraph system are

more widespread, but also involve a purchase price which

puts them out of the reach of much of the general populace.

Furthermore, their use as a unifying device is hindered by

the fact that about 50 per cent of the Brazilian population

is illiterate.

The Forces for Diversity

As was mentioned previously, Brazil has been

characterized by an "ingrained sense of regionalism" since

colonial days. Differences in topography, race, nationality,

economic activity and income levels and historical back-

grounds have produced highly diverse areas within the

country. Since this regionalism probably represents the

most important factor in favor of a federal system in Brazil,

it is to be discussed in some detail.

The Regions

One authority on Latin America has remarked that

"no real understanding of Brazilian problems can be gained

without an examination of the parts of the country."37 This

3 Radios, however, are found in virtually every part
of Brazil and serve as an important link between the urban
and rural areas. For some comments on the radio as an in-
strument of cultural diffusion see: Manuel Digues, Jr.,
Regioes Culturais do Brasil (Rio de Janeiro: INEP-Minis-
trio de Educacao e Cultura, 1960), p. 494.
37Preston E. James, Labin America (3rd ed.; New
York: Odyssey Press, 1959), p. 385.






- 68 -


statement seems especially applicable to a study of the

problems of Brazilian federalism. For the present discus-

sion, Brazil will be considered in terms of five major

regions: the North, Northeast, East, South and Central

West. Although this division is not entirely acceptable

for all purposes, it is the one adopted by the Brazilian

Council of Statistics and is widely used within the

country. 3

The North.-As Figure 1 illustrates, the Brazilian

North is comprised of the states of Par, Amazonas and Acre

as well as the territories of Amap, Roraima and Rond8nia.

Encompassing most of the Amazon River basin, this region

covers 42 per cent of the total national land area but

contains only 3.6 per cent of the Brazilian population

(see Table 1). Although the number of persons living in

this region increased by 41 per cent between 1950 and 1960,

it still ranks as the least populous of the five regions.39

The topography of the North is dominated by humid

lowlands containing the world's largest tropical rain forest,


33The main source of difficulty in this division
seems to be the inclusion of the states of Sergipe and Baha
in the eastern region since both exhibit some characteristics
which qualify them as northeastern. For the purpose of some
analyses later in the text, both states will be included in
the Northeast. The arrows in Figure 1 call attention to
this point.

39Brazil, IBGE, Anurio Estat~stico--1962, p. 27.







- 69 -


El~~~ -~ CIILIC ~~~ 'r;~--~Pl I~h~ L~ --R Ie~~


(err) ( Allayoos
ol s as r
Bahia /erivp

CENTRAL WEST

Matto / -.
S/ Brasa, Minas
rI r ;* ero \

EAST
/ s I rito
Sa uo P
Co dojS.nera
SOUT uanhoara
Paranac
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'. Catarina
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SOcean




o,
0O 500 1,000

Miles

~'1'"'i m-"~flTH17*T~7nL ~ j~:Iir r~i~- ir--Y~(~I~ IT" P % =l i "~_I- I---iiii


Figure 1. Brazil's Major Regions..

















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- 71


although small plain and highland areas can be noted.40

The Amazon River and its tributaries provide a convenient

means of transportation throughout the area and as a con-

sequence most of the population is concentrated along these

water routes.

The culture of the area is highly influenced by the

American Indian, although only about 10,000 to 20,000 of

them still remain.4' Agricultural techniques, folk beliefs

and folklore all reflect the Indian heritage. Few Negro

slaves wcre brought to the region and the present racial

composition is predominately a Portuguese-Indian mixture.42

In the nineteenth and early twentieth centuries,

this arca held a virtual monopoly of world rubber production.

The initial boom, however, was over by 1912 as plantings ini

British Malaya and Dutch Sumatra flooded the market. Economic

activity today is based on extractive agriculture (rubber,

Brazil nuts, pepper, maniacc, minerals (principally mangangese

and light manufacturing (textiles, food processing, lumber,

leather). The structure of the regional economy is such

that industry generates 26 per cent of the area's income

while agriculture accounts for about 25 per cent. Commerce,


4James, Latin America, pp. 540-41.

L'Wagley, Introduction to Brazil, p. 64.

42Charles Wagley, "Regionallsiii and Cultural Unity
in Brazil," Social Forces, XXVI, No. 4 (194S) 458.






- 72 -


services and government contribute 17, 11 and 10 per cent,

respectively, to the regional income.43 In 1960, the North

accounted for 2.2 per cent of Brazil's national income; its

per capital income being 61 per cent of the national average.4

The Northeast.-The northeastern region of Brazil

contains the states of Maranho, Piaul, Cear, Rio Grande do

Norte, Paraba, Pernambuco and Alagoas. Its land area of

about 580,000 square miles represents 11.4 per cent of the

national territory and its population, in excess of 15 mil-

lion, is about 22 per cent of the Brazilian total. (see

Table 1). Due principally to out-migration, the Northeast

experienced the slowest rate of population growth (about

25 per cent) among the five regions between 1950 and 1960.45

This region is in many ways the most heterogeneous

of Brazil. The basis for much of this diversity is the

widely differing landscapes and climates to be found within

the area. According to Preston E. James, the Northeast can

be topographically divided into two distinct parts; the

"Zone of the Mata" and the "Zone of the Caatingas."''

43Baer, Industrialization, p. 171.

44Stefan H. Robock, Brazil's Developing Northeast:
A Study of Regional PZanning and Foreign Aid (Washington,
D. C.: Brookings Institution, 1963), pp. 35-35 and Table 1
above.

4sBrazil, IBGE, Anurio Estatstico--1962, p. 27.

46James, Latin America, p. 410.





- 73 -


The former zone, characterized by generally fertile soils

and dependable rainfall, stretches along the coast in a

narrow band south of the state of Rio Grande do Norte

(see Figure 1). The latter zone, comprising much of the

interior of the Northeast, is the chronically depressed

area of Brazil. Plagued by alternating droughts and floods,

the "Zone of the Caatingas" is covered with a hard, sandy

soil in which grows a varied assortment of drought-resistant

bushes and trees.

The cultural and economic patterns of the region

are highly influenced by theii respective geographical

zones.47 Due to a sugar boom in the seventeenth and

eighteenth centuries which necessitated a large importation

of Negro slaves, the African influence is strong in the

cpastal area. Many typical foods and religious cults of

the "Zone of the Mata" have African origins."4 The arid

interior zone, in contrast, exhibits little of the Negroid

element, since the economic activity of the area was never

sufficiently profitable to encourage the introduction of

slavery. The racial composition today is largely Portuguese-

Indian, with the culture being "basically Iberian but

47The Northeast is also beginning to be affected by
the introduction of cultural patterns transplanted from the
southern regions of Brazil by returned migrants. Digues, -
Regioes Culturais do Brasil, pp. 496-97.
4The coastal zones of Sergipe and Bahia, in
Brazil's East, share these influences.






74 -


strongly marked by the necessity of adapting human life

to a hostile and inhospitable environment."49

Once the most prosperous region of Brazil (during

the sugar boom), the Northeast is now the poorest. The

region accounted for 11 per cent of the national income

in 1960, but per capital income was only one-half of the

Brazilian average.50 Agriculture dominates the structure

of the northeastern economy, accounting for 47 per cent of

the regional income. Commerce, services and industry rank

next in importance, generating 15, 12 and 4 per cent,

respectively, of the income.s5

Within the agricultural sector, the major sources

of income are cultivated field crops like cotton, sugar and

manioc. In the poorer parts of the region, though, the

grazing of cattle or goats is the most common economic

activity. The industrial sector of the Northeast is

relatively underdeveloped and, as mentioned above, accounts

for only a small portion of both the region's income and

the national output (see Table 1). As of 1958, food, tex-

tiles, chemicals and nonmetallic minerals comprised about

75 per cent of total factory employment and value added


49Wagley, "Regionalism," p. 459.

s5Baer, IndustriaZization, p. ]69 and Table 1 above.

s1Baer, Industrialization, p. 170.






- 75 -


in manufacturing (including Bahia and Sergipe).52 Since

the mid-1950's, industrialization efforts have accelerated

due to increased electricity generating capacity, the

availability of long-term credit and special incentives of

the federal government (to be discussed in a subsequent

chapter).

The East.-The eastern region of Brazil contains

the states of Sergipe, Bahia, Minas Gerais, Espirito Santo,

Rio de Janeiro and Guanabara. With a land area covering

15 per cent of the national territory, the East holds about

34 per cent of the Brazilian population (see Table 1). This

population, however, is quite unevenly distributed among the

component states. The 2,995 persons per square kilometer

in the state of Guanabara (the city of Rio de Janeiro) can

be contrasted with the 12 persons per square kilometer found

in the state of Bahia (1967).53

The topography of the East is quite complex, but

does not exhibit the extreme contrasts found in the Northeast.

Generally characterized by hilly areas and small mountains,

transportation within the area is difficult. An escarpment

running parallel to the coast impedes overland travel to the

interior and rivers in the area are generally poor for


KRobock, Brazil's Developing Northeast, p. 51.
53Brazil, IBGE, Atualidade Estatistica do Brasil-
1968 (Rio de Janeiro, 1968), p. 28.






- 76 -


transportation purposes.54 Climate and vegetation are

largely dictated by altitude, with the low coastal areas

being characterized by tropical conditions and the upland

areas being more temperate. The interiors of Bahia and

Sergipe are within the "Zone of the Caatingas" and resemble

those of the northeastern states.

The Brazilian East is a culturally diverse region.

While the northern part (Bahia, Sergipe) shares strong

cultural affinities with the Northeast, the southern part

(especially Minas Gerais, Rio de Janeiro and Guanabara)

are "more in tune with twentieth-century trends in Western

society."5s Traditional values, however, can still be noted

in the rural areas of these latter states.56

Economic activity in the region is as diverse as

its culture, ranging from subsistence farming and grazing

in the arid backlands to modern industrial production in

Minas Gerais, Rio de Janeiro and Guanabara. The East ac-

counts for 34 per cent of the national income and its


"James, Latin America, pp. 412-13 and 434-37. An
exception is the Sao Francisco River which rises in the
state of Minas Gerais and flows northward for thousands of
miles through the backlands of Bahia and Pernambuco.

55Poppino, BraSil: The Land and People, p. 28.

56Charles Wagley contends, in fact, that the
"Eastern Highlands . is the region par excellence in
which to seek the traditional patterns of Brazilian
national culture." Wagley, Introduction to Brazil, p. 58.






- 77 -


per capital income approximates the average for Brazil.57

This latter figure is somewhat misleading, however, since

it conceals substantial intraregional variations. The range

spans from a per capital income of about half the national

average in the state of Scrgipe to one almost three times

the national average in the state of Guanabara.58

The agricultural sector, which generates 26 per cent

of the regional income, produces 20 per cent of Brazil's

sugar, 40 per cent of its tobacco, bananas and coconuts;

and 99 per cent of its cacao.59 Largo quantities of staple

foods, like corn, beans, manioc and rice, are also grown

in addition to a sizeable portion of the nation's livestock.

The industrial sector is generally well developed

in Brazil's East and produces almost a third of the national

output (see Table 1). Most of the county's iron and steel

production takes place in the states of Rio de Janeiro and

Minas Gerais, and food processing, consumer industries,

petroleum refining and cement production are also important.

Minas Gerais is noted for its mineral wealth (from whence

it acquired its name "general mines"), and in the eighteenth

century was the center of a gold rush. Although gold pro-

duction is of little relative importance in this state

57Baer, Industrialization, p. 169 and Table 1 above.
s5Baer, Industrialization, p. 170.
5SIbid., p. 171 and Poppinc, Brazil: The Land and
People, p. 30.






- 78 -


today, high-grade iron ore, nickel and manganese are

presently mined in substantial quantities.

The South.--Brazil's South, made up of the states

of Sao Paulo, Paran, Santa Catarina and Rio Grande do Sul,

is a region of superlatives. Although comprising only

10 per cent of the Brazilian territory, it is the most

populous region, having slightly more inhabitants than the

East. In addition, it is the wealthiest, most industrialized,

most modern and is often called the most "dynamic." Devel-

opment within the region is uneven, though, and Sao Paulo

leads the other three states in almost every field of

endeavor.

The region's landscape is possibly more complex

than that of the East. The Great Escarpment, rising to

elevations of more than 3,000 feet, continues along the

coast and stretches southward to the city of Porto Alegre

in the state of Rio Grande do Sul. In the interior one

finds lowlands and valleys, hilly uplands and plateaus.60

Although predominately in the temperate zone (the Tropic

of Capricorn passes just north of the city of So Paulo),

frost is only rarely experienced outside of the highlands.

Vegetation in the highlands changes from tropical semi-

deciduous forest to grass prairie as one moves southward


60James, Latin America, pp. 504-08.






- 79 -


and pine forests appear in the static of Paran; along the

coast, tropical rain forest gives way to a lighter semi-

deciduous forest in the northern portion of Rio Grande

do Sul..6

The culture of the South is highly influenced by

the large-scale European immigration into the area.

Between 1888 and the beginning of World War I, about

2.5 million of these people entered the country. Although

chiefly Italian and Portuguese, immigrants in sizeable

numbers also care from Spain, Japan, Germany and Russia.62

The state of Sao Paulo, which encouraged this immigration

through public subsidies, was the recipient of the bulk

of this flow.63 Today, the influence of European culture

in Brazil's South can be noted in many ways, including the

mixed-farmjng system, crops, architecture and language.

In the extreme southern part of Brazil, the impact of

Hispanic culture is also strong, sharing many of the

culture patterns of neighboring Uruguay and Argentina.

As has already been mentioned, the South is the

country's wealthiest and most industrialized region.64

61Ibid., pp. 508-09.
62Smith, Brazil: People and Institutions, p. 126.
631n the peak year for immigration (1895), So Paulo
received almost 140,000 persons or 83.5 per cent of the
national total. Ibid., p. 122.
64Industry is mainly located in the state of Sao
Paulo which, by itself, accounts for 50 per cent of Brazil's
industrial production. Robock, Brazil's Developing North-
east, p. 140.






- 80 -


With a per capital income almost 50 per cent greater than

the national average, it produces 60 per cent of Brazil's

industrial output (see Table 1). The region's industrial

base is highly diversified but food processing, textiles,

chemicals and pharmaceuticals are the most significant.

In spite of the South's preemminence in industry, agri-

culture is the largest recipient of the regional income

(33 per cent of the total versus 27 per cent for industry).65

Coffee growing, concentrated in the states of Paran and

Sao Paulo, has been the basis for much of the political

power which this region (the state of Sao Paulo in particular)

has held since the late 1800's. It still dominates the agri-

cultural sector (generating about 20 per cent of total

agricultural income), although the South is now an important

producer of beans, wheat, potatoes, manioc, cotton and other

commodities.

The Central West.--The fifth major region of Brazil

is the second largest in land area and the fastest growing

in population. Comprised of two states, Mato Grosso and

Gois, and the Federal District (Brasilia), the Central

West accounts for about 22 per cent of the national territory

but only 4 per cent of the population (see Table 1). The

approximately 3 million persons residing in the area in


65Baer, Industrialization, p. 171.






- 81 -


1960, moreover, represented a 70 per cent gain over

1950.66

The topographical setting of the Central West is

one of the least diverse of Brazil's regions. Almost the

entire region is a plateau varying in altitude from 1,000

to 3,500 feet. Vegetation ranges from tropical forest in

the north and in some of the river valleys to subtropical

forest, scrub brush and grasslands in other areas. An

exception to the general configuration is the low wetlands

of the Paraguay Valley in western Mato Grosso. This part

of the region, called the pantanal, is a tropical savanna

which is often flooded in periods of high water.67

Migrants from all areas of Brazil have entered the

states of Gois and Mato Grosso in search of agricultural

land and valuable minerals and, as a result, the cultural

patterns of the region are generally a reflection of

"frontier" values. Boom towns are continually being erected

and law and order is often entirely absent. Largely because

of this heavy in-migration, the racial composition of the

two states comprising the Central West approximates the

national average in all categories except for "mixed"

(pardo), in which it is significantly higher.68 One author,

68Brazil, IBGE, Anurio Estatistico-1962, p. 27.
67James, Latin America, pp. 530-32.
6sSmith, Brazil: People and Institutions, p. 70.






- 82 -


in fact, predicts that the Central West may become the "most

typically Brazilian region of the nation" if the flow of

migrants from the older areas of the country continues

unabated. 6

The Central West accounts for only 2 per cent of

the national income, while its per capital income is about

61 per cent of the national average.70 Due to the rapid

rate of population growth, however, per capital income has

undergone a relative decline since 1953 (when it was

77 per cent of the national average).71 Economic activity

in the region is overwhelmingly agricultural, with this

sector receiving 60 per cent of the regional income.72

Within the sector, livestock is important as is the culti-

vation of rice, beans, corn, manioc,coffee and sugar. The

region's industry is the most underdeveloped in Brazil and

is relatively unimportant as a source of regional income.

The moving of the capital of the country to the Central

West, however, may prove to be a stimulating factor as

improvements in basic infrastructure and a growing market

make industrialization increasingly profitable.


69Poppino, Brazil: The Land and PeopZe, p. 37.

70Baer, Industrialization, p. 169 and Table 1 above.

71Robock, BraziZ's Developing Northeast, p. 36.

72Baer, Industrialization, p. 171.






- 83 -


Summary


The forces which shapc modern Brazilian federalism

have been at work in the country since the first Portuguese

occupation in the sixteenth century. During the colonial

period, which lasted until 1822, the impossibility of ef-

fective administration was conducive to the formation of

regional diversities. This regionalism, still very much

alive today, was later nurtured by such factors as the

geographical concentration of foreign immigration and

uneven economic development.

Despite this strong regionalism, however, Brazil

has emerged as a unified nation, both politically and

culturally. Real political and administrative unity care

to the country only after three hundred years of colonial

rule, that is, long after the roots of regionalism had been

implanted. Nevertheless, the unifying influence of the

Empire was effective and prevented the Balkanization ex-

perienced by some of Brazil's Spanish-speaking neighbors.

Aiding the political unification of the country was the

emergence of a distinct and pervasive Brazilian culture.

Today this culture is embodied in both formal and

informal institutions. Of the former type one can note the

common language, religion and family concept. Although

basically Portuguese, they have been tempered by the






84 -



conditions of the New World to formn a uniquely Brazilian

pattern. Informal institutions, ranging from national

heroes and national holidays to the national passion for

soccer, have also arisen as important unifying forces.

Some authors even speak of a common character and common

aspirations. Brazil is thus a nation of unity but not of

uniformity.













CHAPTER III

CONSTITUTIONAL AND LEGAL ASPECTS OF
BRAZ1LIAN FISCAL FEDERALISM


Between 1889 and 1964, Brazil was governed under

four constitutions. The purpose of this chapter is to

present these documents in terms of their provisions per-

taining to the public finances. The method of presentation

is uniform for all four constitutions and concentrates on

the two fundamental aspects of federal finance, that is,

the administrative distribution of functional authority and

revenue sources. Other provisions of the constitutions as

well as supplemental laws will be discussed when relevant.

The concern of the present chapter is primarily of

description and analysis. Little attempt, however, will be

made to discuss the realities of Brazilian fiscal federalism.

This task is undertaken in subsequent chapters.


The Constitution of 1891


Brazil's first federal constitution was promulgated

in 1891, two years after the declaration of the republic.1


'The text of the Constitution of 1891 may be found
in Fernando H. Mendes de Almeida, ed., Constituiioes do
Brasil (So Paulo: Edico Saraiva, 1961), pp. 103-207. For
an English language translation see James, Constitutional
System of Brazil, pp. 221-59.


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Remaining in effect until 1930, this document served the

nation throughout the period of Brazilian history known as

the "First Republic" or the "Old Republic." The writers of

the 1891 Constitution were highly influenced by the Consti-

tution of the United States and adopted many of its features

virtually intact. The former imperial provinces were con-

verted to states and were delegated certain powers to

govern their own affairs.


The Distribution of Functional Authority


The basic administrative division of responsibilities

embodied in the 1891 Constitution included enumerated and

prohibited powers at both the federal and state levels as

well as powers which could be exercised concurrently. Like

the American Constitution, Brazil's Constitution of 1891

reserved residuary powers to the states. To this effect,

Article 65, Section 2 of the latter document provided that

"the states enjoy in general every and any power or right

not denied them by express provision of the constitution or

by implication from such express provisions."


The Federal Government

The responsibilities delegated to the Brazilian

federal government in the nation's first federal constitution

were quite sweeping. Although scattered throughout the

document, its exclusive powers are mainly found in




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