In 2016 academia, and IRIBA, lost a great mind. Werner Baer contributed significantly to the IRIBA project, and was the catalyst for the special edition of The Quarterly Review of Economics and Finance that was ultimately published in his memory. Below is IRIBA co-lead Ed Amann’s presentation from the memorial and conference held in Werner’s honour at the University of Illinois in October 2016.

By Armando Barrientos and Edmund Amann. Originally published in Policy In Focus, a publication of the UNDP’s International Policy Centre for Inclusive Growth.

As the world begins to wake up to the dire social and economic consequences of rising inequality, we must recognise that it is not an inevitable side-effect of economic growth and development. Many Latin American countries, and Brazil in particular, have demonstrated it is possible to achieve inclusive growth, which has reduced inequality and poverty.

Despite its current difficulties, Brazil offers a striking example of inclusive growth. Inequality has fallen sharply over the past decade and a half, a period which has also seen the country lift an estimated 40 million people out of poverty. Although growth rates have been modest in comparison to China or India, Brazil has implemented a raft of measures to ensure the results of such growth have been shared throughout society. While Brazilians have seen their incomes rise, the poorest have benefitted most.

PiF

The growth experienced by Brazil hasn’t simply been attained through the unsustainable exploitation of natural resources. Despite serious lingering problems, deforestation rates in the Amazon have fallen remarkably since 2004. New jobs have been created, child mortality has plummeted, and schooling rates have increased.

So how have these gains been achieved; are they sustainable; what challenges remain; and what can other developing countries learn from Brazil’s experiences? These were the questions asked by a team of researchers from Brazil, Europe and the USA who formed the International Research Initiative on Brazil and Africa (IRIBA). This issue of Policy in Focus looks at the findings and insights they have produced.

The foundations of Brazilian progress can be traced back to the transition from a dictatorship to a democracy in the mid-1980s and the vision for the country which emerged. A firm consensus between citizens and politicians to address the ‘social debt’ created by soaring inequality set the country on a new path. After the economy was stabilised in the mid-1990s, the economic management pursued by successive governments enabled innovative social policies to flourish.

As a more inclusive and prosperous Brazil has developed, the public demand for further progress has also grown. The large protests surrounding the 2014 Football World Cup, worries about an economy mired in recession, and deep concern with serious corruption scandals demonstrate that the Brazilian consensus is under considerable strain. Public demand for better public services and transport infrastructure, less corruption and a more progressive tax system must be addressed by the country’s leaders. While much has improved, Brazil faces pressing challenges. It must ensure that the development gains made over the past decade and a half throughout times of economic growth are not eroded or scaled back throughout the troubling economic times it presently faces. The sustainability of those gains may well be the most important piece of any such Brazilian model of development, yet the jury is still out as to what extent this may be possible.

While the Brazilian experience is the product of a unique set of circumstances, it contains many lessons that should inspire debate and critical appraisal in other developing countries. The world is changing rapidly, and there are more opportunities than ever for genuine cooperation between countries of the Global South with recent and direct experiences of radically reducing poverty. This edition of Policy in Focus is essential reading for anyone grappling with how to reduce poverty and inequality while promoting sustainable and inclusive growth.

Download the full Policy in Focus report.

The highly regarded Brazilian business newspaper Valor Economico recently published an article focussed on the findings of our working paper ‘Taxation, Redistribution and the Social Contract in Brazil‘.

Here’s a pdf of the article in Portuguese. An English translation follows.

Increased tax burden was the basis for expansion of social assistance finds study
Brazil has had a significant and continuous increase in the tax burden in the last 20 years. High levels of collection underpin the funding that enabled the country to expand social policies and promote inclusion in the period, and it is this combination that helps explain an intriguing phenomenon for observers: the fact that tax increases have not provoked the dissatisfaction of society until recently.

This question was the starting point for a study led by the University of Manchester on relations between the Brazilian tax system and the model of economic growth that the country has developed. The study is part of ‘Brazil For Africa’, a programme funded by the British government that aims to study different facets of the Brazilian economy in search of approaches that could be replicated in Africa.

“Democratisation in 1989 comes with growing pressure from society for social policies and redistribution,” explains Marcus André Melo, professor at the Federal University of Pernambuco and one of those responsible for the research on tax.

It’s what the study called the Brazilian “social contract”: rising taxation was tacitly accepted by the population in return for rising social spending. “Brazil’s tax burden is clearly a point outside the curve of similar income countries, but it was essential for the economic development model of the country,” he says. “Brazil taxes too much and spends too much, with high redistribution. It is a Scandinavian balance.”

In Scandinavian countries, where the tax reaches 55% of the Gross Domestic Product (GDP), social indicators and the return on welfare are well ahead of those in Brazil. Complaints about levels of tax were one of the main reasons for the demonstrations of 2013. But the tax burden comes from long before.

From 1995 to 2010, the period covered by the study, there was a jump of seven points, from 27% to 34% of GDP. Today, it hovers around 37%, while the average for Latin America is 20%. According to researchers, social advancement was impressive and that’s what fuelled this “contract” for two decades.

It’s not just direct distribution policy, such as Bolsa Família at play. The 1988 Constitution established the Brazilian state assistance framework, which includes a universal free health system, free education and social assistance.

Only social assistance, which includes spending on pensions, allowances and unemployment benefits accounts for about 10 points of the 37% tax burden.

“Other countries, such as China and Chile, have a lower tax burden than that of Brazil, but they don’t provide a public pension,” says Everardo Maciel consultant, secretary of revenue during the Cardoso government. For the Chileans, the taxes account for 20% of GDP and, for the Chinese, 17%. “The tax burden is the size of the expenditure, and the size of the latter is the result of a choice made by society.”

The economist Amir Khair, executive secretary of municipal finance to Mayor Luiza Erundina in São Paulo, also points out that much of the increase in revenues came from the vigorous growth of last decade. “The taxes are directly related to the economic activity. When the country grows it reduces unemployment, people have greater disposable incomes, companies have more profits.”

On the other hand, the slowing economy is a factor identified by experts as responsible for exhaustion of the model. Without growth, revenue falls and with it the ability to continue supporting the social system. And why has the demand for social support appeared as stronger in Brazil than in other countries that also democratised and revised their constitutions at the same time?

According to Melo, coordinator of the study, the answer involves the degree of income distribution, considering that Brazil left the era of military rule as one of the most unequal countries in the world “second only to Sierra Leone.”

“The military brought development, but there was a wage squeeze and inequality rose sharply, then the democratisation process in Brazil was accompanied by strong demands in this direction,” says the professor. “Not only by the need to deconcentrate income to the level of other countries, but because inequality creates policy distortions.”

This is what political science, explains Melo, who holds a PhD from the University of Sussex (UK), studies through the “median voter theorem”: even with an income level similar to that of its peers, inequality meant that Brazil had a greater proportion of very poor, which made the population naturally more dependent on the state.

Since the return of democracy, elections created politicians who needed votes and approval of the majority. The social agenda ended up winning huge support, in response to the desire of the majority of voters.

On the other hand, a country with greater equality and fewer poor people explains the exhaustion of the model and changes in tone of public demands. The tax system, however, has shortcomings. The main one is the effect that public policies have on distribution. As the proportion of indirect taxes levied on products is greater than direct taxes on income, the burden ends up being proportionately greater for the poor, who have little income and use it fully for consumption. In 2008, while the poorest 10% paid 32% of their income on taxes, the richest 10% paid only 21% of theirs.

“There are two ways of doing redistributive policy: on the spending side and via the tax system. We have a system that is regressive and inefficient, but that reliably generates revenue,” says Melo. “We’ve ended up creating this schizophrenic situation in which the government makes great effort to invest in social assistance, but does not try to reduce inequality through taxation.”

Read the working paper, ‘Taxation, Redistribution and the Social Contract in Brazil’.

Escadaria Selaron Rio de Janeiro Brazil crop

Summaries of all IRIBA research is now available in French.

Don’t forget that you can also access all the briefings in Portuguese.

Brazil 2014 crop

We have just published summaries of all the IRIBA research briefings, translated into Portuguese. View them via our Portuguese overview page.

Photo credit: Adrien Sifre (CC BY-NC-SA 2.0)

At the end of last year, IRIBA author José Roberto Afonso hosted a seminar looking at the institutional basis for Brazil’s macroeconomic stability. José summarises the discussions for us here (English translation below).

O workshop Instituições para Estabilidade Macroeconômica no Brasil foi realizado na manhã do  último dia 19 de dezembro, no auditório do Instituto Brasileiro de Economia da Fundação Getúlio Vargas (IBRE/FGV), localizado em Botafogo, no Rio de Janeiro.

Foi uma parceria com a Universidade de Manchester no âmbito do projeto International Research Initiative on Brazil and Africa – IRIBA, com suporte do Department for International Development – DFID do Governo do Reino Unido.

José Roberto Afonso excplicou o projeto e apresentou o paper que elaborou com Eliana Araújo, abordando as instituições monetárias e fiscais brasileiras, sua evolução ao longo das últimas décadas e sua estruturação vigente. Depois, convidou Gabriel Leal, também do IBRE, para discorrer sobre os cenários para um ajuste fiscal. As apresentações e o paper estão disponíveis nos links abaixo no portal do IBRE.JA rio seminar

Foi seguido de um longo debate com os participantes, que compreendiam pesquisadores (em especial do IBRE), professores e alunos de universidades cariocas (como EPGE/FGV, UFRJ e UERJ), bem assim técnicos e autoridades de órgãos governamentais (como BNDES, IBGE e prefeitura do Rio de Janeiro.

Instituições e políticas fiscais acabaram por monopolizar as atenções face a conjuntura brasileira recente que foi dominada por medidas e debates em torno de uma deterioração das contas públicas, que parcialmente foram postergadas ou escondidas por medidas fiscais atípicas.  As lacunas da lei de responsabilidade fiscal (LRF), seja em termos de disposições ainda não regulamentadas (como o conselho de gestão fiscal e a limitação do endividamento público federal), seja como críticas a perda de transparência e integridade do orçamento e dos demonstrativos oficiais, foram um dos itens mais citados. Mais o sistema tributário também mereceu atenção importante face a sua perda de funcionalidade e mesmo desempenho recente, com queda da arrecadação em ritmo suerpior ao da desaceleração da economia.

O ajuste fiscal a partir de 2015 é uma imperiosidade unânime, porém, o debate deixou claro como será difícil sua formulação e implementação, seja por esbarrar em resistências políticas e sociais, seja pelas dificuldades decorrentes de uma recessão. Diferentes alternativas para aumento de tributos e para cortes de gastos foram especuladas mas o maior consenso é que seria necessário retomar uma agenda de reformas institucionais. Nesta direção, o Brasil deveria seguir o  exemplo de muitas economias avançadas no pós-crise global que adotaram programas de consolidação fiscal, que visam entregar no longo prazo os resultados que se  revelam impossíveis de serem atendidos no prazo mais curto.

José Roberto Afonso: 

Paper – Decentralization and Budget Management of local Government in Brazil

Apresentação em Workshop – Instituições para Estabilidade Macroeconômica no Brasil – Responsabilidade Fiscal

Gabriel Leal de Barros:

Apresentação em Workshop – Instituições para Estabilidade Macroeconômica no Brasil – Sobre a Conjuntura Fiscal e os Desafios

 

English Translation:

The workshop ‘Institutions for macroeconomic stability in Brazil’ was held on the morning of last December 19, in the auditorium of the Brazilian Institute of Economics, Getulio Vargas Foundation (IBRE/FGV), located in Botafogo, Rio de Janeiro.

It was a partnership with the University of Manchester and the International Research Initiative on Brazil and Africa (IRIBA), with the support of the UK’s Department for International Development.

José Roberto Afonso outlined the project and presented the paper, which he wrote with Eliana Araújo, addressing Brazilian monetary institutions and tax, its evolution over the past decades and its current structure. Then he invited Gabriel Leal, also IBRE, to discuss the scenarios for a fiscal adjustment. The presentations and the paper are available in the links below IBRE’s portal.

It was followed by a long discussion between participants, which included researchers (especially IBRE), teachers and students of universities Cariocas (as EPGE/FGV, UFRJ and UERJ), as well as technical and governmental authorities (such as BNDES, IBGE and the municipality of Rio de Janeiro).

Institutions and fiscal policies monopolised attention in the face of a recent Brazilian situation that is dominated by measures and debates around a deterioration of public accounts, which have been partially delayed or hidden by atypical tax measures. The shortcomings of the fiscal responsibility law (FRL), in terms of provisions yet unregulated (such as fiscal management board and limiting the federal public debt), whether as a critical loss of transparency and integrity of the budget and official statements, was one of the most cited issues. Additionally, the tax system received serious attention given its dysfunctionality and recent performance.

A fiscal adjustment in 2015 was unanimously seen as vital and necessary, however the debate made it clear that it will be difficult. Its formulation and implementation is likely to run into political and social resistance, compounded by difficulties arising from a recession. Different alternatives, like increasing taxes and spending cuts, were speculated upon but the consensus is that it would be necessary to resume an agenda of institutional reforms. In this sense, Brazil should follow the example of many advanced economies post-GFC in adopting fiscal consolidation programmes, which aim to deliver long-term results.

Economic stability has been central to Brazil’s development progress over the last 20 years. Without it, successive governments could not have invested in the innovative social policies that have transformed the country.

On December 19, we’ll be looking at this in much more detail at an IRIBA event in Rio, co-hosted by FGV/IBRE (in Portuguese). Places are limited, so please email seminarios_ibre@fgv.br to book your place.

Macroeconomic event

Last month, IRIBA research director Armando Barrientos presented our main findings on the Brazilian development model at the LSE. Alongside him was the Brazilian Minister for Social Development, Tereza Campello.

Favelas@LSE, who organised the event have put videos of all the presentations online. Here’s Tereza Campello, followed by Professor Barrientos:

Alysson Luiz Stege has a major in Economics at Ponta Grossa State University, master’s degree in Economics at Maringá State University and he is currently a Ph.D. student in Economics at the University of São Paulo/ESALQ. He has been working on Rural Development, Factor Analysis and Exploratory Spatial Data Analysis (ESDA).

IRIBA research:

 

Charles Mueller is Emeritus Professor of Economics at the University of Brasilía. He has an extensive publication record and policy experience in agricultural economics, environmental economics and development economics. Prof Mueller completed his undergraduate studies at the University de São Paulo, and his Master and PhD at Vanderbilt University. He joined the University of Brasília in 1972. From 1986 to 1989 he was Director and President of IBGE, Brazil’s statistical office.

IRIBA research: