the unweighted average industrial growth rate over the period 1980-89 would have been 4.3% instead of 3.7%, if Brazil had achieved the average rank in contract enforceability of OECD countries, again a strong assumption. The effect is even stronger for industries that depend heavily on external finance. The plastic product industry, for example, with an external dependence of 114% would have grown by 0.1% instead of -2.9%, if Brazil had achieved the level of contract enforcement of OECD countries.

Table A4 reinforces the previous results using firm-level data. A recent study by Demirguc>-Kunt and Maksimovic (1998) shows that in countries with a more efficient legal system, a higher share of firms use long-term financing. They analyze the proportion of firms in countries that grow faster than predicted by internal cash flow and short-term credit availability using an indicator of the rule of law, and controlling for other firm-specific and country characteristics. The results indicate that the legal environment has a statistically significant and economically large impact on the proportion of firms whose growth rate exceeds the growth that could have been supported by internal cash flow and short-term debt only. If Brazil had achieved the average level of rule of law as the OECD countries, a very significant improvement, more long-term finance would have been available, and 50% instead of 37% of Brazilian firms would have been able to grow beyond the constraints imposed by internal cash flows and short-term debt.

While the evidence presented so far relies on cross-country studies, the results from a recent Brazil study by Pinheiro and Cabral (1999) confirm these findings. Their analysis relies on the variance in private credit and the efficiency of the judicial system across Brazilian states. They show that states with more efficient judicial systems have a higher share of private credit to their GDP. To assess the economic significance of these results, consider the state of Sergipe in North East Brazil, which had the lowest level of judicial efficiency and a share of credit to GDP of 11.15% in 1996. An increase to the average judicial efficiency in the North East would triple the credit activity in Sergipe to 31.11%. **'"** Additional anecdotal evidence suggests that banks try to avoid certain states with weak judicial systems in their credit activity.'<sup>2</sup> The quality and amount of information creditors can obtain about potential borrowers is also an important determinant of financial development. To assess this impact quantitatively, we regress private credit on two dummies that indicate whether a country has a negative (black) information system only or a positive (black and white) information system.13 The results in Table Al indicate that the existence of a black and white information system increases private credit by about 21 percentage points of GDP, whereas the existence of a black information system only does not have any significant impact on financial development. If Brazil moved from its current system of mostly negative information to a system with both positive and negative information, its level of private credit over the period 1980-95 would have been 45% of GDP instead of 25%.

> 11 The indicator ofjudicial efficiency is constructed form two surveys conducted in 1996 and 1997 among Brazilian businessmen. The surveyed were asked to evaluate the state judiciary along the dimensions cost, speed and fairness. **12** See Pinheiro (1998).

> **13** This regression uses data collected by Japelli and Pagano (1999). Although these data do not correspond to the same time period as the data on Private Credit, we continue using data over 1980-95 to make our results comparable to column 1 in Table Al.

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