Development Lending and Debt Discipline: The Political Economy of External Finance in Brazil

ABSTRACT This article examines Brazil's External Financing Commission (COFIEX), a centralized body that approves all public‐sector external borrowing and exemplifies efforts in middle‐income democracies to reconcile fiscal restraint with the demands of strategic public investment. Drawing on original analysis of project‐level data from 1980 to 2022, the study shows that COFIEX has successfully enforced Brazil's conservative stance on external debt, maintaining public external debt below 10% of GDP through most of the past two decades. However, its capacity to act as a driver of development finance has been constrained by institutional risk aversion, rigid fiscal thresholds, and political incentives favoring highly visible infrastructure over less politically rewarding sectors such as sanitation. Despite these limitations, the article highlights COFIEX's important role in structuring Brazil's relationships with bilateral and multilateral lenders, whose technical expertise reduces project risk and can help crowd in private investment. The Brazilian experience underscores the trade‐offs inherent in centralized debt governance under fiscal orthodoxy, illustrating how institutions like COFIEX prioritize fiscal stability even when developmental needs remain unmet. The article contributes to broader debates on global development finance, showing how institutional design and bureaucratic practice mediate the relationship between fiscal discipline and external investment in federal middle‐income democracies.