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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
JV ^..., Santo
'. Catarina
do Su Acttantic
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..
o i
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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.
- 85 -
- 86 -
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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