Is Brazil Starting to Grow Faster and More Equitably and, If So, Who Should Get the Credit?

Many analysts, myself included, have raised questions about the appropriateness of including Brazil among the fastest-growing emerging economies, the so-called BRICs. Recently released data from Brazil’s 2006 National Household Income Survey should give all of us some pause for reflection. Coming on top of similar results in recent years, these 2006 data show that household incomes in Brazil are going much faster than commonly thought and that incomes of those at the bottom of the income distribution are growing fastest of all. In other words, almost by stealth, Brazil seems to be experiencing a pro-poor spurt of growth if these data are accurate.

Even if life has not changed much for the more than 50 million Brazilians who qualify as poor, these real income survey results are pointing to strong gains in the most recent five-year period. If this is indeed true, who should get the credit? The Cardoso-era “neoliberal” reformers who ushered in the period of macro stability which Brazil enjoys today? Lula’s economic team which has expanded income transfer programs to new levels and raised the minimum wage sharply? Or are the encouraging results due more to longer-term structural and institutional factors in Brazilian society?

Consider first just some of the facts in the 2006 household survey released by the IBGE at the end of September and analyzed by the experts at IPEA and at the Center for Social Policies at the FGV-Rio. The most striking results concern the rise in real incomes of the poor in Brazil and the sharp reduction in extreme poverty. The 2006 data show that the incomes of the poorest 50% of the Brazilian population grew close to 12% or more in 2006, a China-like figure that comes on top of strong gains in the five previous years and far exceeds the 7% real rise in household incomes in 2006 across all income brackets. (Actually, the methodology does exclude capital income, so the upper income groups probably did better than the survey results suggest. No need to feel too sorry for them.)

Looking at the data for the period 2001-2006, or roughly the period of Lula’s first term in office, the poorest 10% of the Brazilian population experienced a 57% growth in real income compared to a cumulative 7% for the richest 10% of the population. The measured Gini coefficient of income inequality in Brazil has actually been falling steadily for more than a decade and the latest data put the Gini coefficient at .56, still dismal but a considerable improvement compared to the .61 figure recorded in 1993. This is a sharp reduction in measured inequality in such a relatively short period. Moreover, the decadal trend suggests an ongoing shift toward greater equality which bodes well for the future.

Sharp declines are also occurring in the numbers of Brazilians living in extreme poverty. According to the Center for Social Policies at the FGV-Rio, the number of Brazilians living in extreme poverty (using the UN definition of $1 per day at PPP exchange rates) has been reduced almost by one-half in the last five years to about 4.7% of the population, about 8 or 9 million people. This means that something like an additional 8-9 million people once counted among the extremely poor have had their burdens lifted at list slightly and are now doing better. Compared to the prevalence of extreme poverty in Brazil prior to the Real Plan, extreme poverty has fallen by something like two-thirds with particularly rapid declines occurring in recent years.

The results of this most recent household income survey have touched off some head-scratching in Brazil which is not used to the finding the terms rapid income growth and greater equality in the same sentence. Naturally, debate has broken out about which of Brazil’s two recent presidential administrations – Cardoso or Lula – deserves the lion’s share of the credit.

Lula can argue that he has preserved macro stability in Brazil, no mean feat, while at the same time pumping up income transfer programs (often under the aegis of Bolsa Familia) that effectively target the poor. Of course, Lula has also engineered sharp annual increases in the minimum wage which is extremely important for the very poor whose only source of income is a government pension indexed to the minimum wage. Cardoso-era officials can claim credit for paving the way for the macro stability and income transfers programs which seem to be working today, while at the same time arguing that the glass really is half-empty and that Lula has not been as effective as he should have been in reducing poverty. Per capita real income in Brazil is still below levels of twenty years ago, for example, so the latest spurt of growth amounts to restoring income to levels reached in the 1980s.

While the politicians can claim credit and assess blame, it could be that these income and distributional data are the results not so much of specific policies, but rather are due to changes in underlying social and economic conditions in Brazil, the deep-rooted determinants of growth. Brazil is starting now to reap the benefit of a more favorable demographic structure and decades-long declines in population growth and fertility. Female participation in the workforce, for example, is now above 50% in Brazil compared to just 30% twenty-five years ago.

Educational shifts in Brazil are also part of the deep background factors that these income survey results describe. Average years of schooling in Brazil are still quite low, but increased to 7.2 years in 2006. Moreover, trends in the job market in Brazil are tending to reinforce societal preferences for more schooling. The number of new workers hired with at least eleven years of schooling completed has tripled in recent years. University enrollments, meanwhile, are mushrooming in Brazil, boosted by specific government policies and by significant private investment in the sector. Interestingly, the numbers of Brazilians working in the informal sector (44% of the workforce in 2006) appears to be in a steady decline as more jobs and better jobs are created in the formal economy.

It hardly bears saying that social conditions in many areas of Brazil remain abysmal, but one can still read these household survey results, consistent over a multi-year period, with some wonderment. We could be witnessing important changes in Brazilian society and Brazilian institutions that may have escaped our notice. These changes in institutions, and their implications, are worth a closer look.

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9 Responses to "Is Brazil Starting to Grow Faster and More Equitably and, If So, Who Should Get the Credit?"

  1. Guest   October 5, 2007 at 11:11 am

    Very good discussion and analysis.
    But can brazil keep on growing and grow faster without more structural policies now that it has achieved macro and financial stability while improving poverty? and which policies are needed now to grow faster?

  2. Guest   October 5, 2007 at 11:31 am

    Very good analysis. You still did not provide a full answer to the question of who should get the credit for this fall in poverty: Cardoso or Lula? or perhaps neither if structural long term changes are more important?

  3. Vitoria Saddi   October 5, 2007 at 2:20 pm

    Tom, I might be wrong, but the decrease in poverty (and extreme poverty) is not a feature of Brazil. It seems that all countries in South America did decrease poverty, mostly due to the MDG. Brazil is one of these countries. Question:
    1. The improvement in the Gini still places Brazil as the most unequal country in the world, according to the WB. So do you really think that the country may ever achieve a more equal system?
    Great piece! Abracos,Vitoria

  4. Satish   October 5, 2007 at 3:14 pm

    Improvent in brazil economic performance is due to oil independence in the past
    few years. Infact in 2008 brazil will export some oil adding to current account
    surplus. With high oil prices the performance amplifies. With interest rates steadily falling, brazil should sooner or later achieve 8 % growth very soon

  5. Tom Trebat   October 6, 2007 at 11:01 am

    I am appreciative of the comments on this article and I would welcome further reflections from others on whether or not Brazil truly is on a path toward greater equality and, if so, what that means.

    In response to one comment, I am not really sure what factors are the “binding constraints” on economic growth in Brazil. The tax and regulatory systems are among the usual suspects, as is the poor quality of the business environment and the relatively closed trade sector.

    My bias, implicit in this analysis, is to think that the poor income distribution in Brazil is the most glaring difference between Brazil and its faster-growing competitors. Assuming that the income distribution is a cultural “given” handed down over the centuries and, therefore, immutable, is a natural tendency among policymakers. So my thesis would be that a more equitable income distribution could lead to faster growth, at least in the circumstances of great inequality that characterize Brazil and the rest of Latin America.

    Another commentator asks me to come down more clearly on who gets the credit for these recent improvements. I tried to suggest that the deep-rooted institutional factors are at work. These include such factors as society’s growing experience with macroeconomic stability, e.g, the definitive repeal of the inflation tax. They also include the decline in population growth and in fertility, especially among the poorest of the poor.

    Finally, globalization has clearly played a role of some sort, though we are unaccustomed to thinking of globalization as pro-poor. My conjecture would be that the greater access that Brazilians enjoy to goods and services produced globally, and their own success in global markets which is a matter of great pride, have spread awareness in the population of the increasing returns from staying in school.

    The steady rise in average educational levels , the growth in university enrollments and in specialized technical schools, and the greater focus on educational quality in the primary and secondary educational levels are indicative of a change in mentality in Brazil.

  6. Guest   October 6, 2007 at 1:31 pm

    You did not directly address the issue of who should get credit for the reduction in the poverty rate in Brazil: Lula or Cardoso?

  7. Vitoria Saddi   October 6, 2007 at 2:12 pm

    Dear Guest,

    You seem not to understand that Tom Trebat is right on saying that it is not a matter on granting the credit to Lula or FHC. In Brazil, inequality is something deeeper and does have a cultural/colonial component.
    It is just that in the US when you say ‘colonial’ component, you go back to your English/Irish background and hence what you get is an more equal system than the Portuguese and Spaniards created in South America.

    Vitoria

  8. Tom Trebat   October 6, 2007 at 5:16 pm

    I was not trying to duck the political issue, it’s just that I feel the something more fundamental is going on in Brazil. Vitoria said it better than I could. Returning to the political issues, I think no one is covered in glory, so to speak. However, Cardoso deserves a great deal of credit for defeating inflation and laying the technical basis for targeted social programs aimed at the poor. Lula gets credit for expanding the social programs (albeit at a cost in terms of loosened conditionality) and for making the minimum wage a hallmark of his social policies. The sharpest drop in the Gini index occurs right after the 1994 Real Plan (Cardoso, kudos to you), yet the most sustained declines have occurred during the last five years under Lula. Can they share the credit somehow?

  9. RL   October 8, 2007 at 6:44 am

    Vitoria In the comparison between the Spanish colonization system versus the British in America I must say that the British in America got a more “equal” system by systematically eliminating the Indian population, something I have a hard time calling more “equal” than using them as slaves as the Spanish did.

    Rafael Loring