Last Friday the LSE hosted an IRIBA workshop on some of the work produced in the first round of the project. Research on inequality, social protection and infrastructure in Brazil was presented, before participants grappled with the implications of how key findings and lessons might be useful for particular African countries.
Lessons from Brazil
One of the successes of the last 20 years has been the reduction of inequality in Brazil. The first two presentations focussed on two of its causes, the reduction of inequality in wages in the last 20 years and the success of social protection policies.
Professor Sergio Firpo from the Getulio Vargas Foundation explained his findings regarding the improvement in equality in labour market outcomes.
He showed how the reduction in wage disparity has been achieved both through a compression of schooling wage ‘premia’ (a substantial increase in years of schooling for working-age adults has translated into a rising supply of skills, followed by a decline in the returns to those skills in the labour market), indicating a different remuneration mechanism, and a reduction of wage gaps among equivalent (in terms of human capital) workers. He also pointed to a ‘citizenship effect’, where once a worker obtains a formal contract, they’re reluctant to accept informal employment.
Another interesting finding was related to the minimum wage, which, overall, increased wage inequality between 1995-2003. It meant a high unemployment rate through a composition effect.
Professor Firpo concluded his presentation by outlining some of the remaining issues, such as the limited human and financial capacity of local governments, and the need to change the structure of the GDP and the economy as a whole to change the labour market situation.
On antipoverty transfers, Professor Barrientos looked at the role of transfers in promoting inclusive growth – and reducing inequality.
The main points of his presentation were the conceptual and normative frameworks, human capital and ‘productivism’ (complementing productive employment), and the heterogeneity of the effects of these programmes (mainly comparing outcomes between different municipalities).
He showed how the history of inclusion in Brazil came through three different routes: at first it was assistance to informal rural workers, allowing them to benefit from the private sector social insurance fund; in a second stage old and disabled people were included, following the traditional European social assistance route. Finally, the poor households were directed through the Bolsa Família programme (and the projects that preceded it). Moreover, the impact of these policies was also boosted by increases in the minimum wage.
Two interesting points were discussed. The first one is related to the true impact of Bolsa Família on inequality, as a recent body of literature attributes a large share to the programme (around one-third). But given that its budget represents just 0.7% of GDP, the true direct effect is probably overestimated.
The second issue raised was the possible effect on labour market participation, mainly at the margins of eligibility for the programme. Recent research is looking into the effect of Bolsa Família in generating incentives for informality.
The last paper presented was on infrastructure, which Dr Amann argued should be the focal point to re-catalyse growth in Brazil.
Brazil has in fact a legacy of underinvestment in infrastructure, which constrains productive capacity and the export sector. The most important example is the problem with roads; despite the fact Brazil has the fourth largest road network, only around 18% of it is paved. And just 1% of GDP is spent on highway maintenance, compared to a 6% threshold indicated by the World Bank as necessary to catch up with advanced industrial countries.
Problems can also be found in the railway network, which, unlike in Europe, or even the USA, witnessed no meaningful steps towards providing a publically subsidised long distance service. This underinvestment in infrastructure translates to high transportation and logistical costs in Brazil (representing 15.4% of Brazil’s GDP, compared to 8-10% in developed countries). Moreover, poor and expensive-to-access infrastructure is a source of social unrest (as seen in the past two years).
Infrastructure has therefore not been a positive aspect of Brazil’s development model, despite the fact Brazil possesses world class technical expertise and homegrown infrastructure project specialist multinationals. Hopefully things will improve with the growth acceleration programme (PAC). But for it to be effective, the three main issues that are holding back infrastructure in Brazil must be addressed: regulatory issues, financing issues and technical capacity.
What it means for Africa
The most challenging part of the workshop (and the aim of the IRIBA project) is to translate these findings into recommendations for development strategies in Africa. How can the above findings be used by policymakers in the African continent? Which lessons can they take?
Before looking at recommendations, we need to recognise that it is a difficult question, because the differences between Brazil and Africa are relevant in all aspects, and these differences can affect the outcomes of policies. But one point needs to be made. Brazil is a federal country, with several states and municipalities, very different one from another on many issues. This means that different policies are used in different areas, or that the same policy can have different effects in different municipalities, as Professor Barrientos showed with the Bolsa Família programme and its heterogeneous effects across different municipalities. Therefore, the aim of the IRIBA project to shed light on the similarities between African countries and areas in Brazil is a plausible one; and can make specific policy recommendations more relevant.
Going back to the outcomes of the discussion, one of the main points coming out of the discussion has been that different sectors cannot be treated as separate entities, as they intersect and depend on each other. In the context of this workshop for example, labour outcomes can be more equal if investments in education enhance the human capital of the population. In turn, conditional cash transfer programmes such as Bolsa Família can be more relevant if labour markets are able to absorb a more educated labour force.
Labour market policies can and need to live together with fiscal redistributive policies. Having said that, policymakers in Africa need to improve education outcomes (starting with primary and secondary education, which have the biggest impact on inequality reduction), but also the labour market structure, in order to address the problem of informality.
Another important discussion point relates to the type of social protection programmes that need to be used. In Africa, similarly to Europe, cash transfers are concentrated in households where there are no working people, and are primarily intended to reduce monetary poverty. In Brazil, and in Latin America as a whole, these transfers are intended to break the intergenerational transmission of poverty (through human capital accumulation and better health outcomes) and are directed also at families receiving labour incomes.
What the best social protection policies for the African continent are depends therefore on different aspects, such as the aim of the policies and the capacity. And the different impacts in different municipalities of the Bolsa Família programme can better show policymakers in Africa the factors that enhance the success of conditional cash transfer programmes.
Finally, infrastructure is vital for growth, competitiveness and trade. But investing in infrastructure, as the Brazil example shows, is not straightforward as it needs to take into account the availability of domestic technical capacity, financial availability and regulatory frameworks. Moreover, investments in infrastructure are very lumpy in nature and tend to be postponed until the occurrence of a crisis that gives political justification for high levels of investment. Infrastructure is a key challenge for development in the African continent and policymakers can learn from the failures that slowed social and economic development in Brazil.