Report No. 35749-BR Brazil forCities InputsforaStrategy II Volume Report No. 35749-BR Brazil Inputs for a Strategy for Cities A Contribution with a Focus on Cities and Municipalities (In Two Volumes) Volume II: Background Papers Public Disclosure Authorized Public Disclosure Authorized November 10, 2006 Brazil Country Management Unit Finance, Private Sector and Infrastructure Management Unit Latin America and the Caribbean Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized Public Disclosure Authorized Inputs to a Strategy for Brazilian Cities Page i This volume comprises ten background papers prepared as contribution to the main report. The authors of the papers are the following: Chapter Title Author Chapter 1 Urbanization, Growth, and Welfare in Brazil Somik Lall Chapter 2 City Performance and Policy Actions Somik Lall Chapter 3 Urban Policies and Slum Formation Somik Lall Chapter 4 The Evolution of Brazilian Municipal Finances, Fernando Blanco 2000-2004 Second Draft/January 2006 Chapter 5 Municipal Credit Markets, Issues and options Benjamin Darche Chapter 6 Efficiency of Brazilian Municipalities Suhas Paradekar Chapter 7 Main Aspects of the Regulatory Framework Edesio Fernandez Governing Urban Land Development Processes in Brazil Chapter 8 Land Markets in Brazil: Capturing Land Value Fernanda Furtado and Pedro to Finance Infrastructure Improvement Jorgensen Chapter 9 Urban Land Use Regulation in Brazilian cities – Paulo Avila Impact on Urban Land Markets and access of Low Income People to Land and Housing Chapter 10 Brazil’s Urban Land and Housing Markets David Dowall How well are they working? Inputs to a Strategy for Brazilian Cities Page ii ABBREVIATIONS ABS Asset Backed Securities ADR Age Grade Distortion Rate BACEN Banco Central (Central Bank) BNDES National Development Bank CDO Collateralized Debt Obligation CEF Federal Loan and Savings Bank (Caixa Econômica Federal) CMN National Monetary Council CVM Comisión de Valores Inmobiliarios (Stock Exchange) DEA Data Envelopment Analysis FAT Fundo de Amparo ao Trabalhador (Workers’ Support Fund) FDH Free Disposal Hull FDIC Fondos de Investimentos dos Direitos Creditos FGTS Workers Severance Fund (Fundo de Garantia do Tempo de Serviço) FJP Joao Pinheiro Foundation FPE Fundo de Participacao Estadual FPM Fundo de participacao municipal FRL Fiscal Responsibility Law GDP Gross Domestic Product HDI Human Development Index IBGE Brazilian Institute of Statistics and Geography (Instituto Brasileiro de Geografia e Estatística) ICM Imposto sobre valor de mercadorias (Value added tax) IMR Infant Mortality Rate IPEA Institute for Applied Economic Research (Instituto de Pesquiza Econômica Aplicada) IPTU Urban Property Tax (Imposto Predial Territorial Urbano) MDF Municipal Development Fund MIC Middle Income Countries MP Market Potential NCR Net Current Revenues NGO Non-Governmental Organization OECD Organization for Economic Cooperation and Development OODC Otorga Onorosa do Direito de Construir (Sale of Building Rights) PFI Private Finance Initiative PNAD Pesquisa Nacional aos Domicilios (National Household Survey) PNUD United Nations Development Program (Programa das Nações Unidas para o Desenvolvimento) RM Região Metropolitana (Metropolitan Region) SPE Special Purpose Entity STN Secretaria do Tesouro Nacional (Treasury Secretariat) TC Tribunal de Contas ZEIS Zone of Special Social Interest (Zona de Especial Interesse Social) Inputs to a Strategy for Brazilian Cities Page iii Table of Contents 1. Urbanization, Growth, and Welfare in Brazil ...............................................................................................1 Chapter 1. Urban Growth and Competitiveness................................................................................................2 Urban Growth Patterns.......................................................................................................................................2 Patterns of Income Growth.................................................................................................................................7 Specialization Across Cities .............................................................................................................................10 Industrial Decentralization ...............................................................................................................................14 Summary of Findings .......................................................................................................................................16 2. City Performance and Policy Actions...........................................................................................................19 Background ......................................................................................................................................................19 Measuring City Growth....................................................................................................................................19 Model and Estimatio Estrategy ........................................................................................................................21 Demand Side ....................................................................................................................................................21 Population Supply ............................................................................................................................................22 Determinants of Growth...................................................................................................................................22 Policies Favoring Secondary Cities..................................................................................................................29 Summary of Findings .......................................................................................................................................30 3. Urban Policies and Slum Formation.............................................................................................................33 Slum Formation Across Cities..........................................................................................................................34 Housing Supply and Slum Formation ..............................................................................................................37 Heterogeneous Housing Supply Elasticities.....................................................................................................38 Findings from Empirical Analysis....................................................................................................................40 Summary ..........................................................................................................................................................45 References ........................................................................................................................................................47 4. The Evolution of Brazilian Municipal Finances, 2000-2004.......................................................................50 Introduction ......................................................................................................................................................50 The Evolution of Municipal Revenues.............................................................................................................57 The Evolution of Municipal Expenditures .......................................................................................................64 Municipal Expenditures by Economic Category..............................................................................................64 Municipal Expenditures by Function ...............................................................................................................71 Conclusions and Policy Implications ...............................................................................................................79 5. Municipal Credit Markets .............................................................................................................................89 Introduction ......................................................................................................................................................89 Current Status of the Municipal Credit Market: Developments in the Demand and Supply of Municipal Credit................................................................................................................................................................90 Monitoring Sub-National Compliance with the Fiscal Responsibility Law.....................................................91 Municipal Capital Revenues and Expenditures................................................................................................93 New Borrowing Instruments and Lending Institutions to Assist Subnational Governments to Raise Capital.94 Public Private Partnerships and the Municipal Credit Market .........................................................................95 Development of Municipal Credit Markets in Brazil.......................................................................................96 Current Capital Market Conditions ..................................................................................................................96 Municipal