The Battle of Ideas in the Quest for Wealth and Prosperity in Brazil: Policy Proposals of a Right-Wing Government

The Battle of Ideas in the Quest for Wealth and Prosperity in Brazil: Policy Proposals of a Right-Wing Government

Brazil’s income inequality is among the world’s worst. The country’s unemployment rate is currently 13 percent, compared to 4.6 percent in 2012, and the number of Brazilians in poverty or extreme poverty is now close to 30 percent, a far cry from 2014 when that number was less than 10 percent of the population. Brazil has one of the highest tax rates in Latin America—with tax revenue equal to 33 percent of GDP, against the regional average of 20 percent—but it is also notorious for its poor performance with respect to the ease of paying taxes and opening a business: the country ranks 184 and 140, respectively, out of 190 countries in the World Bank’s 2019 Doing Business Report. It is surprising, therefore, that Jair Bolsonaro, a conservative politician from the Social Liberal Party (PSL), was elected to the country’s highest office without meaningfully addressing his administration’s plans to solve the nation’s social injustices and other economic issues. Instead, Bolsonaro campaigned mostly on strengthening public security and fighting corruption, the two areas on which the former army captain built his reputation during his almost thirty years as a congressman. During the campaign, Bolsonaro recruited Paulo Guedes, a Chicago School-trained economist to be his Minister of the Economy. Guedes was tasked with building a “dream team” of experts that would design a plan to further liberalize the economy and turn Brazil into a much friendlier place to conduct business.

For many, Guedes’s policy proposals to lift Brazil from a decade of mediocre economic performance are nothing more than a laundry-list of neoliberal policies. In the 1980s and 1990s, developing countries in Latin America and elsewhere pursued such policies that stressed the need for a smaller and less interventionist state—one in which trade protectionism, price controls, and public spending, for example, were expected to be slashed. Although such policies were relatively successful in building a regional consensus on the importance of fiscal discipline and low inflation, they also had a disappointing track record in promoting social justice and, in particular, reducing income inequality. It was on the back of popular disillusionment with these neoliberal policies that the so-called “pink tide” surged in the late 1990s, when many left leaning presidents were elected for similar reasons. The early 2000s would later be characterized as a period of significant reduction in poverty and in income disparities in the region’s history.

Lessons from the Social Policies of the 2000s

In 2013, the World Bank published a thorough study of great relevance to policymakers on the topic of economic mobility in Latin America. Among its findings, the report confirms earlier studies that point to a decrease in the region’s poverty rate and an increase in the proportion of the population considered middle class. For example, between 2003 and 2009, the proportion of people living in poverty fell from 44 percent to 30 percent and the middle class expanded by 50 percent, representing 30 percent of the region’s total population. In another analysis, the study tracks social mobility from 1995 to 2010, and finds that much of the income mobility occurred within generations—that is, within a person’s lifetime. Unfortunately, though, intergenerational mobility is still very limited in most countries, meaning that a parent’s education and income level are most likely to determine the socioeconomic fate of their children.

During the years of Latin America’s commodity boom, which roughly coincided with the two terms of former Brazilian president Luiz Inácio Lula da Silva (2003-2010), much was said about the tens of millions of Brazilians who were either lifted from extreme poverty or moved to the middle class. Social gains in those years were credited in great part to the expansion of Bolsa Família, Brazil’s popular conditional cash transfer program, through which poor families commit to enrolling their children in school and taking them for regular health checkups in exchange for monthly stipends. Unfortunately, many of the social gains attained during Lula’s presidency were lost in the ensuing economic recession.

The critical question, then, is which social mobility policies should Bolsonaro replicate? According to the aforementioned World Bank report, “there was a clear association between faster GDP growth and higher income mobility.” Additionally, it claimed that although there was not a correlation between mobility and total social expenditure per se, mobility was ultimately positively associated with targeted, progressive social protection programs, such as cash transfers. Hence, the main lesson the Bank’s report offers is that policies that promote GDP growth—coupled with the strengthening of, and greater access to, cash transfer programs—tend to improve income distribution.

The Brazilian Experience

Despite recent progress, Brazil remains one of the most socially unjust countries in the world. Current estimates for income concentration levels point to a GINI coefficient of .53 (a coefficient of 1 represents complete income inequality). Thomas Pickety’s database on the income share of the top 1 percent of the population offers a better sense of income disparity. In Brazil, this group controls almost 30 percent of the country’s wealth, compared to the world average of about 20 percent.

The relatively rapid reversal of Brazil’s unemployment and poverty performances was actually predicted by the same 2013 World Bank report on poverty and inequality mentioned above. According to that report, the traditional categorization of income levels into three distinct groups (poor, middle class, and rich) is no longer capable of accurately describing social dynamics when it comes to distribution of wealth in Brazil. The authors propose instead that a fourth category be used: the vulnerable. According to the study’s definition, the economically vulnerable are those who “makes ends meet well enough so as not to be counted among the poor, but who does not enjoy the economic security that would require membership in the middle class” (Ibid). Due to their low resilience to economic shocks, the vulnerable experience a high probability of falling back into poverty. This is exactly what has happened in Brazil over the last five years, during which time the country's economy contracted by an average of -0.82 percent of GDP.

If the World Bank’s findings are true, then Paulo Guedes’s focus on the need to make Brazil more welcoming to investment through the implementation of a whole package of pro-market policies is a well-placed effort. The Bolsonaro administration has rightly committed to promoting and improving the Bolsa Família by protecting the program from past fraudulent use and increasing the payment disbursement per family, a promise already fulfilled by the addition of a thirteenth monthly payment. Although targeted social programs have proven necessary, they are not sufficient in and of themselves to reduce Brazil’s appalling social injustice, as they are too limited in their counter-cyclical capacity. Thus, as reflected by recent experience, a path to sustainable growth and wealth promotion is beneficial not only to the top 1 percent of the population but to society as a whole.

 

Monica Arruda de Almeida is an adjunct professor at the Center for Latin American Studies at Georgetown University. Her research focus is on illicit economies, with an emphasis on anti-money laundering efforts. From 2005 to 2008, she was a faculty fellow at the University of California, Los Angeles. She was affiliated with the Department of Political Science and with U.C.L.A.’s International Institute, where she taught courses on international political economy. Dr. Arruda was born and raised in Rio de Janeiro, Brazil, where she worked as a journalist for daily newspapers and editor for institutional publications. She has a B.A. in Communications Studies from the State University of Rio de Janeiro, and a M.A. and a Ph.D. in International Political Economy from UCLA. Dr. Arruda has published articles on anti-money laundering regulations, corruption, international trade, and the political economy of economic liberalization. Dr. Arruda is also a certified financial crime analyst.