Lessons from Brazil
The World Cup kicks off today with 32 nations hoping that their team can win the tournament and be crowned the best team in the world. Brazil, the host country, is hoping that home field advantage can bring them their sixth world title, the most of any nation. The other 31 nations might also want to emulate Brazil’s skill on the pitch, but the developing countries among them may want to consider emulating Brazil’s record on inequality and growth.
Looking at the trends in inequality across countries, you see the vast majority of countries had increasing inequality over the last several decades, even when you include taxes and transfers. But several South American countries, including Brazil, have bucked this trend. Since 2000, Brazil experienced a period of rapid growth that resulted in declining income inequality.
After tepid growth in the 1990s and two financial crises, Brazil grew at a strong pace during the first decade of the 21st century. From 2000 to 2008, the economy grew at an average annual rate of 3.6 percent. The Brazilian growth rate doesn’t stack up against the blockbuster growth rates of China and India’s economies, but it was higher than the average rate for developed countries during the same time period, 2.2 percent.
The benefits of economic growth in Brazil accrued mostly among the poor. From 2001 to 2008, the average annual growth rate for household incomes in the bottom 20 percent was 6.6 percent, according calculations by the Organisation for Economic Co-operation and Development. For the middle 20 percent, the average annual rate was 4.8 percent and for the top 20 percent, 1.8 percent. In contrast, growth in China was highly skewed toward the rich. The average growth rate for incomes in the bottom 20 percent there was 3.6 percent while incomes of the top 10 percent grew by 15.1 percent.
Stories about the reduction in Brazilian income inequality often mention the government’s conditional cash transfer program, Bolsa-Familia, which gives cash to families for sending children to school. The program was a large part of the reduction in inequality, with all public transfers accounting for about one-third of the drop over the decade according to one estimate. But the most important factor appears to be declining inequality in wage income due to investments in education. (See page 35 of the OECD study here for a summary of research on the decline in Brazilian inequality.)
Brazilian policymakers seem to have made some wise policy decisions in the early part of the century. But recent years haven’t been as kind. Brazilians may be excited about the prospects for their soccer team, but they are strongly opposed to hosting the World Cup and the massive giveaways to FIFA, soccer’s international governing association. Meanwhile inequality is still high and growth has recently been tepid. But recent mistakes don’t negate the successes of the past.
The Brazilian government made a concerted effort to make sure the benefits of growth were widespread. This experience can serve as an example for other developing countries seeking to promote equitable growth.
As for richer countries, the policies of Brazil might not be directly applicable to their circumstances but they should follow its spirit. Whether policymakers should focus on channeling the rewards of growth through tax and transfer programs or instead look at how market structures can be changed is up to each country. Further research and discussions, like the one being hosted today by the Center for Strategic and International Studies, are needed to figure out the right policy mix for developed economies.