and at the average for upper middle income §roups (54). Its accounting standards, however, are below the average for OECD countries (65).

# 3. The Importance of Creditor Rights, Contract Enforcement and Information Sharing for Financial Development

Financial intermediary development has a causal impact on economic growth. Creditor rights, their enforcement and the information that creditors can obtain about debtors in turn are important determinants of financial intermediary development.7 In the following, we analyze cross-country and Brazil-specific evidence to underline the importance of these policy areas for the development of the financial sector in Brazil.

Cross county evidence shows that creditor rights-in particular the absence of an automatic stay on assets and required replacement of management-are important determinants of a welldeveloped financial system. The lack of the right to replace management explains partly the low level of financial intermediation in Brazil. More importan **t** han the presence of these rights, however, is the general level of contract enforcement. Table Al presents the results of a simple regression of private credit on contract enforceability, controlling for other determinants of financial development, including the negative impact that high inflation has on financial intermediation.8 As can be seen from Table Al, contract enforceability exhibits a statistically significant and economically large impact on the level of private credit. If Brazil had achieved the average rank in contract enforceability for OECD countries, a strong assumption, private credit as share of GDP would have been more than twice as high-55% instead of 25°/0-over the period 1980-95, even when controlling for the adverse macro-economi **c** onditions in Brazil. Considering the regression results reported in Table A2, this higher level of financial intermediary development would have resulted in 1.19 percentage points higher annual GDP growth rate over the period 1980-95, i.e., 1.51% instead of 0.32%.

Table A3 presents additional evidence on the importance of efficient judicial systems for financial sector development at the industry level. Previous research has shown that industries that depend more heavilny on external finance grow faster in countries with a higher level of financial development.l The results in Table A3 indicate that industries with a higher need of external finance grow faster in a legal and institutional environment in which contracts and creditor rights are enforced more effectively. Given an average dependence on external finance of 21 percent (the ratio of external financing relative to investment) across Brazilian industries, **6** The index of accounting standard has been created by the Center for International Financial Analysis and Research and assesses the quality of income statements and balance sheets in 1990 for 41 countries. This index takes has possible maximum value of 90 and a possible minimum of 0.

See Levine, Loayza and Beck (2000) and Japelli and Pagano (1999).

**8** For a methodologically more rigorous analysis of the link between finance and growth and between the legal environment and finance, see Levine, Loayza, and Beck (2000). For an exploration of the link between inflation and financial development, see Boyd, Levine, and Smith (2000).

9 Both scenarios control for other determinants, including macroeconomic conditions, of financial development and GDP per capita growth, respectively. The data are averaged over 1980-95.

**10** See Rajan and Zingales (1998). The dependence on external finance is defined as the share of investmen **t** hat cannot be financed through internal cash flow and is calculated from a sample of U.S. firns.

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