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Brazil’s social challenges

Economic Report

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In the past decade, Brazil has managed to substantially bring down its traditionally high levels of inequality and poverty. However, inequality is still high and relatively weak public services result in institutional inequality.

Tim Rauws has contributed to this study as an intern at the Country Risk Research team at Rabobank Nederland .

Short history

Throughout its history, Brazil has been a country with a high level of inequality. Since household income survey data became available in the 1970s, Brazil has ranked as one of the most unequal countries in the world. According to World Bank data, Brazil’s GINI coefficient peaked at an extremely high 63.3 points in 1989. What is more, 17.9% of the population lived on less than USD 1.25 per day and 30.3% on less than USD 2 per day in 1992, even as Brazil was already classified as an upper middle income country by the World Bank.

However, especially in the past decade, poverty and inequality have fallen remarkably. From 1999 to 2009, the increase in the per capita income of the poorest 10% was nearly four times that of the richest 10%. Since 2002, roughly 40 million people have joined the middle class, while 35 million were lifted out of poverty. The percentage of Brazilians living on less than USD 1.25 and 2 per day fell to respectively 6.1% and 10.8% in 2009. Likewise, traditionally disadvantaged groups, such as non-whites and the population in the northeast, experienced a more rapid growth of income than the rest of the society. This reduction of inequality is even more remarkable when one compares Brazil to other countries. Brazil’s inequality went down almost twice as fast as the Latin American average, while in the other BRICS or the OECD countries as a group, inequality has gone up in between the early 1990s and the late 2000s (OECD 2013).

Figure 1: Poverty and inequality
Figure 1: Poverty and inequalitySource: OECD
Figure 2: Brazilian population by income class (in 2011 BRL)
Figure 2: Brazilian population by income class (in 2011 BRL)Source: OECD

How Brazil managed to bring down poverty and inequality

The strong decrease of poverty and inequality was caused by a combination of growth and redistribution. According to the OECD, 52% to 56% of the decline of poverty was caused by growth and the rest by redistribution. Redistribution was even more important for the growth of the middle class, as two-thirds of the increase of this class was caused by redistribution and the rest by growth.

Social policies played a prominent role. First, there has been a strong increase in the average years of schooling, which gave the population a better position on the labor market. Second, the government strongly increased the minimum wage. Although the first federal minimum wage was already established in the late-1930s, its impact on real income has long been trivial, as there were no laws regulating wage adjustments and high inflation often threatened to erode the purchasing power of the minimum wage. Since the mid-1990s, when the government had managed to end hyperinflation, the real value of the minimum wage began to rise.

Finally, in the 2000s, the government chose to rapidly increase the nominal minimum wage against a backdrop of higher economic growth. According to the OECD, over the last decade, the minimum wage almost doubled, while average real wage increased by just 25%. As a result of these labor market dynamics58% of the decline in disposable income inequality between 2001 and 2011 was caused by shifts in labor income.

Social transfers also played a big role. First, 23% of the decline in income inequality was accounted for by the pension system. As the Brazilian law stipulates that the minimum pension is equal to the minimum wage, which is rather a generous practice by international standards, the rapid increase of the minimum wage also resulted in higher pensions. Conditional cash transfers, notably trough the Bolsa Familia scheme, were also an important mechanism, as these accounted for 13% of the reduction in inequality. The Bolsa Familia provided direct cash support to poor households, provided that the households met some conditions, such as keeping children in school and sending them to health check-ups.

This program has been a rather effective instrument to combat poverty and inequality, considering the fact that the total expenditure on the Bolsa Familia was a modest 0.5% of GDP in 2012. The conditions tied to the Bolsa Familia also helped to improve other social indicators. These other social indicators have also improved in the past decades. For example, the life expectancy went up from 62.7 years in 1980 to 73.3 years in 2011 and the literacy rate of the adult population increased from 75% in 1980 to 90% in 2009 (World Bank Development Indicators). As the Brazilian population has the increase of the years of schooling has continued to increase, income inequality could be expected to continue to fall.

But income inequality remains high…

However, Brazil’s social agenda is far from finished. Inequality is still high in Brazil (see also figure 3). If inequality would fall at the same pace as it did over the last decade, it would still take Brazil 20 years to bring its income inequality down to the current level of the United States, one of the most unequal OECD countries (OECD, 2013). Furthermore, in the case of Brazil, people with an income of USD 6.1 per day are already classified as being part of the middle class, even though many of them remain close to and may easily fall back into poverty. Besides, many of the Brazilians that are part of the middle class have relatively high debt servicing costs, which may also make them financially vulnerable (Ferreira, 2013).

Meanwhile, Brazil’s relatively generous pension system, which as we already mentioned played an important role in bringing down inequality and poverty, needs to be reformed. Currently, pensions are high, the replacement rate is 97%, compared to an OECD average of 65% (OECD, 2013), and Brazilians can retire at a relatively low age.

As a result, with a much younger population, Brazil already spends already about as much on pensions as the OECD countries. In particular, survivor benefits are very generous, with total spending on these benefits accounting for 2.8% of GDP, while most countries in Europe spend 1.6% of GDP on these benefits. As the number of old people will increase strongly in the coming decade, the pension system will need to be reformed. Some small steps have been taken in recent years, but more reforms will be needed to ensure the sustainability of the system.

Meanwhile, to combat inequality the government could increase the progressiveness of the tax system. Tax rates relatively high in Brazil, they are more or less equal to the average tax rate in OECD countries. However, while taxes and transfers in OECD countries strongly reduce inequality, resulting in an average reduction of the GINI coefficient by 14 points, the Brazilian system reduces inequality only by about 3 points (World Bank, 2013). The OECD therefore recommends Brazil to increase the progressiveness of its tax system.

…and relatively weak public services result in institutional inequality

Meanwhile, public service delivery has not kept up with income provision. In Brazil, public services are often provided by states and municipalities, and there are huge difference in the extent to which those local governments are able to deliver. This is very much visible in the field of health. While health was identified as a fundamental right in the 1988, and the life expectancy has increased strongly in recent decades, Brazil’s health system suffers from underfunding. At 4% of GDP (versus 6.5% of GDP in OECD countries), health spending in Brazil is relatively low.

A medical staff shortage results in insufficient access to basic health services. The supply of more specialized services within the public service is low. Especially the poorer part of the population thus lacks access to these services, as they do not have the means to access private suppliers. The inequality in health access also has a strong regional dimension: in terms of human resources, the South and Southeast are served twice as well as the rest of the country (OECD, 2013).

As already mentioned in this Economic Report, while access to education has greatly improved in the past decades and learning outcomes have also become better, the quality of education is also still relatively low by international standards. This limits social mobility. In a recent study covering 41countries (Brunori, 2013), it is estimated that 32% of Brazil’s inequality is attributed to differences in people’s pre-determined circumstances, such as race, gender and family background. This is a very high percentage, even by Latin American standards.

Transport services are also relatively underdeveloped. According to the OECD, Sao Paulo subway system had only 71km of railway track, while Mexico has more than 200 km. Furthermore, like many other Latin American countries, Brazil has a relatively high level of crime. For example, according to the United Nations Office on Drugs and Crime, Brazil had a homicide rate of 21.8 per 100,000 in 2011, which is relatively high by international standards (see figure 4).

Figure 3: Income inequality (GINI coefficient)
Figure 3: Income inequality (GINI coefficient)Source: OECD
Figure 4: Homicide rate (2011)
Figure 4: Homicide rate (2011)Source: UNODC

Meanwhile, the growth of the middle class seems to have made the population more assertive. This was best illustrated in June and July 2013, when large numbers of Brazilians demonstrated against the government. What began as a protest against a public transport fare hike then quickly turned into a much broader protest against the lack of good public services in general, bad governance and crime. The protest came as a surprise, as Brazil does not have a strong protest tradition. The protest underlines the importance of continuing social reforms.

Conclusion

Over the past decades, Brazil has been able to reduce its traditionally high levels of inequality and poverty. When the left-wing Workers Party came to power in 2003, there were widespread fears that the government would default on its debt. In the end, these fears did not materialize. Instead, the emancipation of the poorer parts of the population of the past decade is likely to have boosted political and economic stability. However, inequality remains relatively high in Brazil, and the growing middle class has become more vocal in its demands for better public services. Further social reforms are therefore necessary, as Brazil’s inequality still has a large institutional component. As the Brazilian population will soon start to age, it seems that better public services can only be realized if Brazil manages to reform its generous and expensive pension system.

Sources

  • Paolo Brunori, Francisco H. G. Ferreira, Vito Peragine, Inequality of Opportunity, Income Inequality and Economic Mobility, Some International Comparisons, Discussion Paper No. 7155, Institute for the Study of Labor, January 2013
  • Ferreira, Francisco H. G., Julian Messina, Jamele Rigolini, Luis-Felipe López-Calva, Maria Ana Lugo, and Renos Vakis, Economic Mobility and the Rise of the Latin American Middle Class, World Bank, 2013
  • OECD, OECD Economic Surveys, Brazil, October 2013
  • United Nations Office on Drugs and Crime, Homicide statistics 2013
  • World Bank, Shifting gears to accelerate shared prosperity in Latin America and the Caribbean, World Bank, June 2013
  • World Bank Development Indicators
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