2013.11.15_oecd-eclac regional consultation_marcos mendes

OECD/ECLAC REGIONAL CONSULTATIONInclusive Growth in Latin America and the Caribbean

Inclusive growth in Brazil? Where?

Marcos MendesEconomic Advisor in the Brazilian Senate

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Since democratization in 1985, long term growth in Brazil has been meagerGDP per capita: average annual growth rate for selected

countries (1985-2010) (Source: Penn World Table 7.1)

0,3 0,7 0,9 1,0 1,0 1,1 1,2 1,3 1,3 1,6 1,8 1,9 1,9 2,1 2,2 2,3 2,42,9

3,4 3,4 3,5 3,64,2 4,4

5,0 5,0 5,4

8,5

0,01,02,03,04,05,06,07,08,09,0

VENE

ZUEL

APA

RAGU

AYM

EXIC

ORU

SSIA

*SO

UTH

AFRI

CAEC

UADO

RBO

LIVIA

BRAZ

ILPH

ILIPP

INES

COLO

MBI

APE

RUAR

GENT

INA

COST

A RI

CASP

AIN

AUST

RALIA

TURK

EYPO

RTUG

ALPO

LAND

BOTS

WAN

AIR

ELAN

DM

ALAS

YAEG

YPT

CHILE

INDI

ATA

IWAN

VIET

NAM

SOUT

H KO

REA

CHIN

A

Even if we consider only the best sub-period of the Brazilian economy (2004-2010), and exclude China and India from the comparison group, the country does not appear in a prominent position

GDP per capita: average annual growth rate for selected countries (2004-2010)

-2,0

0,0

2,0

4,0

6,0

8,0

10,0

12,0

IRE

LAN

D

SP

AIN

PO

RTU

GA

L

BO

TSW

AN

A

ME

XIC

O

AU

STR

ALI

A

BO

LIV

IA

SO

UTH

AF

RIC

A

PA

RA

GU

AY

BR

AZ

IL

PH

ILIP

PIN

ES

CO

STA

RIC

A

MA

LAS

YA

EC

UA

DO

R

CO

LOM

BIA

CH

ILE

TUR

KE

Y

VE

NE

ZU

ELA

SO

UTH

KO

RE

A

EG

YP

T

TAIW

AN

PO

LAN

D

RU

SS

IA

AR

GE

NTI

NA

PE

RU

VIE

TNA

M

IND

IA

CH

INA

Per Capita GDP annual growth rate Mean Mean excluding China and India

Saturday 15 April 2023

Gini Index for Household Income (source: IPEA)

4

But inequality is falling

60,1

59,5

59,5

58,1

58,9 59,4

58,8

59,6

58,7

59,9

61,5

63,4

61,2

58,0

60,2 59,9

60,0 60,0 59,8

59,2

59,3 59,4

58,7

58,1

56,9 56,6

56,0

55,2

54,3 53,9

53,3 52,7

52,6

52,0

54,0

56,0

58,0

60,0

62,0

64,0

19

77

19

78

19

79

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

92

19

93

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

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Gini Média


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Despite the fall in inequality, Gini Index is still very high (source: OECD)

0,00

0,10

0,20

0,30

0,40

0,50

0,60

0,70

0

0,1

0,2

0,3

0,4

0,5

0,6

0,7


Low growth with dissipative

redistribution*

* Alston et al (2012) proposes the definition of “dissipative inclusion”

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The Brazilian economic model after democratization (1985) is not of inclusive growth but one of:


Democracy = government susceptible to political pressure

Inequality = heterogeneous groups, with different endowments of human and physical capital,

demand different public policies

In order to avoid political crises and reinforce democracy, numerous redistributive policies

are put in place in favor of:a) the richb) the poorc) some middle income groups

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High inequality + Democracy = Low growth with dissipative redistribution


The rich always had privileged access to governmental decisions and could create exclusionary policies that reinforced inequality.

After democratization, they were able to preserve many privileges, due to high economic power and political connections.

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Throughout history, inequality shaped Brazilian institutions in favor of the rich.


• protection of local producers from external competition (import substitution);

• subsidized public credit to large firms;• restricted access to an expensive and

sluggish judicial system;• regulatory agencies captured by regulated

firms• preferential access of well connected groups

to the capital of public pension funds • numerous public bailouts to big farmers

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As a consequence, Brazilian society, before and after democratization, is characterized by features such as:


The Brazilian economy remains poorly regulated and with low participation in external trade.

Privileges to well connected firms and groups abound.

Most of them increase public expenditure

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Consequences...


• 8th most closed economy to international trade among 191 nations (Source: Penn World Table 7.1)

• 116th among 185 countries in a rank of “contract enforcement”, (Source: Doing Business 2013)

• 143rd among 185 countries in a rank of “resolving insolvency” (Source: Doing Business 2013)

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Some empirical evidence


• Inequality produces political, judicial and regulatory institutions biased to the rich (Glaeser et al – 2003; Engerman and Sokoloff – 2002)

• Property rights are ill regulated in unequal countries, which creates opportunity for the rich to expropriate others (Gradstein – 2007, Sonin - 2003)

• “Extractive institutions” (Acemoglu e Robinson – 2011)

• Feedback between extractive institutions and inequality (Chong e Gradstein – 2007)

• The Brazilian case: Zanella et al (2003), Naritomi et al (2012)

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Literature on the Redistribution to the Rich


• Before democratization pro-poor policies were almost inexistent: in the 1980’s some social indicators, such as literacy and life expectancy were similar to those observed in Sub-Saharan Africa.

• In a democracy, politicians need votes, and the poor have lots of them (Alesina and Rodrik - 1994; Person and Tabellini – 1994).

• After democratization, poverty reduction policies boomed, playing an important role in reducing inequality and poverty: conditional cash transfers (Bolsa Família), pensions to rural workers, minimum-wage real value, which almost tripled in 20 years; benefits to the disabled and elderly among the poor; real budget increases for public education and health.

• Important source of poverty and inequality reduction.

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Redistribution to the poor


The poor are not the only group of voters that acquired voice after the transition to democracy. Some middle income groups are well positioned to influence policies in their favor. According to Robinson (2008) some groups offer a good benefit-cost relation for politicians in search for votes.

They mix features of the rich (access to political decision-making) and of the poor (some large groups with lots of votes)

• The elderly, religious and ethnic groups (large number)

• Unionized middle income workers (collective action)

• Civil servants (access to decision making + collective action)

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Redistribution to some middle income groups


• Regressive, expensive and unsustainable public social security system

• High wages for civil servants • Tuition-free public universities for high

and middle income students• The Elderly Statute• Cumbersome labor legislation in favor of

middle income workers• Some cash transfers that are expensive

and not targeted to the poorest

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Some examples


• Redistribution to the rich and to middle income groups partially undoes inequality reduction promoted by policies targeting the poor

• Inequality could be reduced faster with a lower cost if part of the benefits distributed by the government had not leaked to high and middle income households.

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Dissipative redistribution


• Polarization of interests caused by income and wealth inequality.

• Social groups are unable to agree on any consensual agenda.

• Political instability is avoided by means of distributing benefits to almost everybody

• Public expenditure skyrockets• Excessive regulation to protect rents• Everybody has incentive to rent seeking

behaviour

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The inverse of a “middle class consensus”


1. Increasing public current expenditure implies higher tax burden: reduction of net profits, high compliance costs, use of distortionary taxes that reduce productivity.

2. Negative public savings: restriction to investment;3. Public investment in infrastructure plummeted; 4. Judicial and regulatory uncertainty:

discouragement to investment;5. Closed economy: no creative destruction or

technological update;6. Burdensome labor law + high tax burden = firms

remain small (and unproductive) to hide from authorities;

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Low growth


• Despite dissipation, the net result has been a reduction in inequality.

• The country may be going in the direction of a “middle class consensus” (Banerjee and Duflo – 2003; Easterly – 2001)

• Part of the redistribution to the poor comes in the form of more public education, which increases human capital (Saint Paul and Verdier – 1993)

• Poverty reduction eases credit restriction to the poor (Banerjee and Newman - 1993, Galor and Zeira - 1993, Ghatak and Jiang -2002)

• In the future there may be less demand for social policies and more demand for good public services and a leveled playing field for businesses.

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A virtuous cycle?


• Inequality may stop falling and stall at a high level, perpetuating the present situation of heterogeneous and unequal groups fighting for rents provided by the government;

• There are signals that the present trend of inequality reduction will decelerate (Souza e Medeiros, 2013);

• Large part of households that escaped from poverty are still vulnerable to poverty in case of an economic downturn (Ferreira et al, 2013);

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A vicious cycle?


• Emphasize policies and reforms that, at the same time, reduce inequality and remove barriers to growth: social security, education, sewage infrastructure.

• Make governmental budget constraint harder to limit fiscal space for rent seekers

• However, inequality itself blocks such reforms, due to entrenched interests. Only political leaders/coalitions with a long term view can break the present inefficient equilibrium.

• Otherwise, an economic crisis will be necessary to foster reforms.

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What to do to increase the odds of a virtuous cycle?


Acemoglu, Daron, Robinson, James A. (2011) Why Nations Fail: The Origins of Power, Prosperity and Poverty. Princeton University Press.

Alesina, Alberto, Rodrik, Dani (1994) Distributive Politics and Economic Growth. The Quarterly Journal of Economics, V. 109, Nº 2, 465-490

Alston, Lee J., Melo, Marcus, Muller, Bernardo, Pereira, Carlos (2012) Changing Social Contracts: Beliefs and Dissipative Inclusion in Brazil. NBER – Working Paper 18588.

Banerjee, Abhijit, Duflo, Esther (2003) Inequality and Growth: What Can the Data Say? Journal of Economic Growth, 8, 267-299.Banerjee, Abhijit, Newman, Andrew (1993) Occupational Choice and the Process of Development. Journal of Political Economy, vol.

101, nº 2, April, p. 274-298.Chong, Alberto, Gradstein, Mark (2007) Inequality and Institutions. The Review of Economics and Statistics, 89(3), Aug., 454-465.Easterly, William (2001) The Middle Class Consensus and Economic Development. Journal of Economic Growth, (6), 4, Dec., 317-335.Engerman, Stanley, Sokoloff, Kenneth (2002) Factor Endowments, Inequality, and Paths of Development Among New World

Economies, NBER Working Paper 9259.Fernandez, Raquel, Rodrik, Dani (1991) Resistance to Reform: Status Quo Bias in the Presence of Individual-Specific Uncertainty. The

American Economic Review, v. 81, n. 5, p. 1146-1155.Ferreira, Francisco H.G. et al (2013) Economic Mobility and the Rise of the Latin American Middle Class. World Bank. Galor, Oded, Zeira, Joseph (1993) Income Distribution and Macroeconomics. The Review of Economic Studies, 60, 35-52.Ghatak, Maitreesh, Jiang, Neville (2002) A Simple Model of Inequality, Occupational Choice, and Development. Journal of

Development Economics, 69, p. 205-226.Glaeser, Edward, Scheinkman, J., Shleifer, Andrei (2003) The Injustice of Inequality. Jounal of Monetary Economics, 50, 199-222.Gradstein, Mark (2007) Inequality, Democracy and the Protection of Property Rights. The Economic Journal, 117, Jan., 252-269.Lisboa, Marcos de B., Latif, Zeina (2013) Democracy and Growth in Brazil. Mimeo. Insper-SP.Naritomi, Joana, Soares, Rodrigo R., Assunção, Juliano J. (2012) Institutional Development and Colonial Heritage within Brazil. The

Journal of Economic History, v. 72, n. 2, p. 393-422.Persson, Torsten, Tabellini, Guido (1994) Is inequality Harmful for Growth? The American Economic Review, Vol. 84, Nº 3, 600-621.Pessôa, Samuel de A. (2011) O Contrato Social da Redemocratização. In: Bacha, E., Schwartzman, S. (Orgs.) (2011) Brasil: a nova

agenda social. Ed. Gen/LTC, p. 204-211.Rajan, Raghuran (2006) Competitive Rent Preservation, Reform Paralysis, and the Persistence of Underdevelopment. NBER –

Working Paper 12093.Robinson, James A. (2008) The Political Economy of Redistributive Policies. Background Paper for the UNDP project on “Markets, the

State, and the Dynamics of Inequality: how to advance inclusive growth”. Mimeo.Saint-Paul, Gilles, Verdier, Thierry (1993) Education, Democracy and Growth. Journal of Development Economics. 42, p. 399-407.Sonin, Konstantin (2003) Why the Rich may Favor Poor Protection of Property Rights. Journal of Comparative Economics, 31, 715-731.Souza, Pedro H.G.F, Medeiros, Marcelo (2013) The Decline of Inequality in Brazil, 2003-2009: The Role of the State. Universidade de

Brasília, Economics and Politics Research Group, Working Paper, 14/2013. Zanella, Fernando, C., Ekelund, Robert B., Laband, David N. (2003) Monarchy, Monopoly and Mercantilism: Brazil vs. The United

States in the 1800s. Public Choice, 116: 381-398.

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References

Marcos Mendes, Economic Advisor in the Brazilian Senate, [email protected]

2013.11.15_oecd-eclac regional consultation_marcos mendes

Economy & Finance

low growth

caribbeaninclusive growth

longterm growth

average annual growth

05december20144but inequality

reinforced inequality

high source

household income source