Abstract

Brazil, as well as most Latin American countries, have an inflated public sector,
which follows from the expansive government policies pursued until late 70’s, largely
financed by external indebtedness. Currently, the lack of transparency and the complexity of
public sector accounts hinder the effectiveness of stabilization policies and the productivity
of state enterprises. Federal government budget is often balanced, but it does not cover
expenditures of the whole public sector. A large amount of subsidies to state enterprises and
local treasuries are provided indirectly with federal funds through state banks and monetary
authorities. A full-scale bailing out program to alleviate highly indebted enterprises will
allow the Central Bank and other financial intermediaries to stop acting as a lender of
last resort. In order to fully recover the effectiveness of government policies it is necessary
to decentralize national expenditures, grant autonomy to local governments and state
enterprises and to minimize their financial mutual dependence.

JEL Classification: H11