Seeds of Change in a Deep-Rooted Society: Poverty Reduction in Brazil under President Lula

Latin American countries in general and Brazil in particular are well known for the high levels of inequality that divide their societies. Although Brazil’s relative poverty levels are not high compared to those of its neighbors, in 2005 over 36 percent of Brazil’s population lived below the poverty line, the level of income required by a household to meet the basic needs of all its members, including food, clothing, and shelter. Over 10 percent of this proportion comprised the indigent, or those with a level of household income that is inadequate for covering the nutritional needs of its members. In 2004, the poorest 10 percent of the population captured only 0.9 percent of the country’s wealth, while the richest 10 percent controlled 44.6 percent.Empirical evidence shows that poverty in Brazil tends to be less responsive to growth compared to the rest of the world, an observation that is attributed to extremely high levels of inequality. Thus it is the difficulty of reducing inequality, and not the lack of resources, that is the key obstacle to overcoming poverty in this country. But, as the analysis will show, better income distribution does not have to be promoted at the expense of growth. Efforts have been made in Brazil to reduce the incidence of poverty, most notably by the administration of President Luiz Inácio Lula da Silva, and also by that of his predecessor, President Fernando Henrique Cardoso.This paper will analyze why the policies adopted by Lula’s administration in its pursuit to reduce poverty in Brazil met its objective by the end of the first term. The first section begins with a discussion on the concept of poverty in development thinking, and how it relates to growth and income inequality. The possibility of a tradeoff between growth and redistribution objectives, as proposed by Nobel Prize–winning economist Simon Kuznets, is explored and refuted. In the second section, the question of poverty and inequality is examined in the historical context of Brazil, suggesting that the country’s colonial heritage and its pat-tern of economic development left these problems deeply en-trenched in the society. The third section describes the expectations that were generated by Lula’s election, and analyzes the effectiveness of his chosen policies in the context of his approach to poverty reduction. Particular attention is drawn to the criticisms of Câmara Neto and Matías Vernengo, which offer insightful arguments but are weakly supported by evidence, in light of the data presented by the Economic Commission for Latin America and the Caribbean (ECLAC) and the Institute for Applied Economic Research (IPEA). Strong evidence supports the conclusion that Lula’s objectives for poverty reduction—achieving a combination of economic growth and a redistribution of resources—have been met thus far, suggesting that these objectives can be promoted simultaneously. Future challenges for Brazil remain, however, and are outlined, followed by recommendations for future poverty reduction efforts in Brazil.Poverty, Growth, and InequalityDevelopment has traditionally been interpreted as a question of growth by economists, measured by changes in output over time. In 1969, British economist Dudley Seers challenged this view of development, conceptualizing it instead as a social phenomenon that requires attention to be drawn to the elimination of poverty, unemployment, and income inequality as well. Today, development is understood in a much broader context that also acknowledges inequalities arising in the social and political spheres. While a wider definition of development is critical to study and consider in policy formulation, stronger emphasis is often placed on income and inequality because these figures are the easiest to measure. By extension, it is noted that the first of the Millennium Development Goals addresses income distribution by seeking to eradicate “extreme poverty and hunger.” Although the three aspects of inequality—social, political, and economic—are intertwined and should not be considered in isolation when contemplating a development strategy, the political dimension is beyond the scope of this paper.Income distribution has become an increasing concern over the past decade, as it is linked to a lower rate of growth of the average income of the state. In countries where higher concentrations of wealth and power exist, inefficiencies can arise through unequal access to credit or insurance markets, where poor resource allocation means missed investment opportunities that could have potentially benefited the economy as a whole. Additionally, governments in unequal societies may be reluctant to choose policies that redress such inefficiencies, thereby perpetuating the problem. However, the negative effects of inequality are not restricted to issues of income alone; inequality can hurt society due to higher levels of crime and violence that ensue, as well as a poorer ability to cope with adverse aggregate shocks to the economy.The nexus between inequality, poverty, and growth has raised the question of whether the development process entails higher inequality. This is an important question that confronts policymakers. For example, the implementation of a social security system can reduce poverty and promote greater equity, but it may also reduce individuals’ incentives to work or save, thus creating inefficiency. In particular, this tradeoff was examined by Simon Kuznets, who hypothesized that income distribution in a society would worsen in the early stages of economic growth until a critical income level was reached. Only in later stages of development would inequality levels begin to fall. This is shown graphically as an inverted U pattern, with income along the horizontal axis and inequality on the vertical axis (as displayed in figure 1). The top of the Kuznets curve represents the income at which the level of inequality reaches a turning point. There are various explanations for this phenomenon, and they are generally attributed to structural changes in the economy. For instance, as a country transforms from an agrarian to an industrial economy, productivity and wages increase in the industrial sector, but full employment cannot be achieved due to the limited number of industrial jobs available.The explanatory power of the Kuznets curve remains controversial for both longitudinal and cross-sectional data. It has often been observed that Latin American countries tend to be in the middle-income range and also exhibit high levels of inequality. Using cross-sectional data, Fields reveals in a sample of 35 countries that the predicted inverted-U pattern disappears when controlling for the Latin American identity. Interestingly, a smaller sample of countries using longitudinal data shows Brazil to be the only country that displays an inverted-U pattern. However, in an analysis of 45 developed and developing countries, Michael Bruno, Martin Ravallion, and Lyn Squire find no evidence that growth is correlated with changes in inequality, and that the inequality rankings of the countries tend to remain steady over time. If income distribution remains unchanged, growth will have a positive impact on all income groups, including those living under the poverty line. Bruno and others also note that the higher the initial inequality in a country, the lower the impact of growth on poverty reduction. This observation is supported by another study by the World Bank, which reports a similar finding in Brazil. It is found that poverty can be reduced to half its current levels in a span of 10 years with a 3 percent growth rate and a reduction in income inequality of 5 percent (as measured by the Gini coefficient). Under the same conditions but in the absence of change in wealth distribution, the same level of poverty reduction would take 30 years. Furthermore, the elasticity of poverty reduction increases with lower levels of inequality, so that for a given rate of economic growth, poverty reduction will be accelerated.Thus, much of the evidence seems to suggest that achieving growth and reducing inequality are not conflicting objectives, but rather these policies act to reinforce each other. Although some degree of inequality in society is arguably effective for providing work and investment incentives, experience has shown that the extent of inequality that exists in Latin America has been costly and detrimental to poverty reduction and development efforts. Higher inequality at any given time indicates a greater incidence of poverty, and in the absence of redistribution, it also means a lower dynamic impact on poverty from development efforts. Such findings support the view that effective poverty reduction requires policies that promote both economic growth and redistribution, and these objectives can be pursued simultaneously without compromising each other. This was the approach taken by the Lula administration. Despite the criticisms that followed, the evidence shows that improvements in income distribution were not sacrificed in order to achieve higher economic growth.Poverty and Inequality in BrazilAlthough Brazil has experienced several periods of impressive growth, poverty and inequality have plagued the country throughout the course of its history. Thomas E. Skidmore identifies a number of ways in which poverty and inequality became institutionalized in Brazil. The country’s colonial heritage rein-forced an elitist society as it adopted Portugal’s hierarchic, paternalistic, and personalistic structures. The Portuguese sup-pressed the printing press and the establishment of universities in Brazil, which resulted in a neglect of public education until well into the twentieth century. Brazilians could pursue higher education in Coimbra, Portugal, but this opportunity was re-served for a select few. These restrictions hindered local economic progress. Also, Brazil’s long history of slavery, which was ended in the late nineteenth century, produced racial tensions that continue to fuel social inequalities today. Disparities were further reinforced by the corporatist structure instituted by President Getulio Vargas in the 1934 constitution, in which the government established a network of state enterprises that deepened the government’s influence and reach over the industrialization process.Economic factors also underlie the poverty and inequality rooted in Brazil. The country’s rapid industrialization in the 1960s, for instance, led to an increase in the wage gap as the economy became more capital-intensive. As Brazil became more engaged in world trade, the country remained highly dependent on the trade of primary products rather than the export of more value-added products; the surplus of labor in the primary products sector further contributed to the widening of the disparity in income. The powerful local elite also retained significant influence over the government in securing advantages in both taxes and public benefits, such as pensions and free university tuition. Under the mercantilist system, Brazil remained an agro-export outpost of the Portuguese empire.Despite this deeply-entrenched inequality, there are indications that small and gradual changes may be starting to take place in Brazil. Recent public opinion surveys by Latinobarómetro show that high levels of inequality are considered to be ‘unfair’ or ‘very unfair’ by over 80 percent of citizens in all of the seventeen countries surveyed across the region including Brazil, with Venezuela being the sole exception. Such views are reflective of the prevailing ideas in social justice theory and political philosophy, captured most famously by thinkers such as John Rawls and Jeremy Bentham, which tend to favor greater equity in society. It is encouraging that such ethical questions, previously raised solely in the academic domain, have begun to permeate the consciousness of the greater society. However, because inequality remains ingrained in most Latin American countries, fundamental changes in the institutions that perpetuate this economic problem are likely to be realized only in the long term.Anticipation and Actuality under LulaAs the leader of Brazil’s first left-wing government, Lula’s election in October 2002 raised many expectations, both domestically and internationally. There was a sense of nervous anticipation that Lula, who shared an antipathy to neoliberalism with President Hugo Chávez in Venezuela, might take drastic measures to institute radical change in the country. Foreigners feared that Brazil would default on its debt and become less welcoming to foreign investment. There were also concerns that the fiscal responsibility that had begun under Cardoso would not be maintained. Such speculation among investors was reflected in the jump in Brazil’s risk rating, measured by the interest rate spread between Brazilian and U.S. sovereign bonds. These fears were substantiated by Lula’s open criticisms of Cardoso’s economic model and social policies, and Lula’s own history as a union leader and founder of the Workers’ Party (PT).Domestically, Lula’s campaign created high expectations for improving social equity and poverty reduction. Upon his election, he announced that his top priority during his administration would be the elimination of hunger through the much-touted flagship program for food security, Fome Zero. This initiative aimed to carry out the government’s strategy to guarantee access to adequate food through various programs such as those providing financial assistance to poor families, building of infra-structure such as cisterns in semi-arid zones, and distributing nutritional supplements. The Special Ministry of Food Security and Combating Hunger (MESA) was established under the Office of the President in order to better administer and implement the Fome Zero program. Lula’s personal commitment to this goal was symbolic for the country’s first working class president. He famously pledged during his inauguration: “If, by the end of my term of office, every Brazilian has food to eat three times a day, I shall have fulfilled my mission in life”.However, once Lula came into office, he defied all expectations, particularly with regards to the government’s economic policy. The new president sent strong signals to the market about his cooperative relationship with the international financial institutions in Washington by making visits to the World Bank and the Inter-American Development Bank, though he maintained his distance from the International Monetary Fund (IMF). His commitment to market reform and fiscal prudence were so great that Brazil actually exceeded the fiscal-surplus tar-get set by the IMF, first by elevating the 2003 primary surplus from 3.75 percent to 4.25 percent of the gross domestic product (GDP) and then by subsequently reaching a surplus of 4.7 percent at the end of 2004. These positive balances were achieved by maintaining tight controls on growth in expenditures while increasing the tax burden to generate revenues. This, in turn, led to improvements in the country’s risk rating. Furthermore, the government also controlled inflation by keeping interest rates at very high levels, thus maintaining the inflation-targeting frame-work established in 1999 after the currency devaluation.Inheriting a country that was on the verge of another financial crisis, Lula’s government aimed to promote economic growth and stability through its commitment to maintaining four key elements of macroeconomic policy: the primary fiscal surplus, anti-inflationary strategy, the floating exchange rate, and existing contracts. Finance Minister Antônio Palocci emphasized the need to underpin economic growth with fiscal and monetary stability in order to begin tackling the broader goals of poverty reduction. The government promoted a new cycle of growth with measures that supported productive investments, including investor-friendly policies and partnerships between the public and private sectors.Like the Cardoso administration before him, the Lula government supported the use of cash transfer programs as a means of reducing poverty and inequality. These programs aimed to provide a consistent source of food aid and income to the poor, and most benefits were provided on the condition that certain requirements, such as regular school attendance under Bolsa Escola, were satisfied. Bolsa Escola, a program under which mothers received small payments to send their children to school, was the most notable and largest of the initiatives. It was introduced in 1995 in the Federal District of Brasília before it was eventually adopted nationwide in 2001. Other major social safety net programs established during Cardoso’s time were Bolsa Alimentação (to support maternal nutrition), Auxílio Gás (to compensate the elimination of federal gas subsidies), and Pro-grama de Erradicação do Trabalho Infantile (to eliminate child labor). A new program called Cartão Alimentação was also created under Lula, which allowed food items to be purchased with a special credit card. As part of the Fome Zero initiative, all of these programs were consolidated under the Bolsa Família. The Lula government tried to further boost Fome Zero’s effectiveness in targeting beneficiaries by streamlining important information about individual recipients into a single register. Local groups were given responsibilities for identifying the beneficiaries and monitoring the implementation of the programs. Funding for these programs increased in the social spending budget, growing from 2.4 billion reais in 2002 to 8.3 billion reais in 2006.Thus, Lula’s arrival in office surprised most observers be-cause his policies supported and deepened the approach taken by the previous administration. Despite its leftist roots, the PT government continued in the same course set by the right-wing administration before it. Economic orthodoxy was clearly a priority for the Lula government, and the regime that it adopted was, in fact, more austere than that of Cardoso’s. Although social policies were submitted to economic priorities, a greater overall importance was attached to the targeted cash transfer programs. These moves formed the basis for the government’s approach to poverty reduction, in which growth and equity would be promoted simultaneously. As the next section will show, there was no tradeoff between these two objectives.Poverty Reduction Outcomes under LulaLula’s achievements in his first year were dismissed by critics as disappointing. By adhering to its macroeconomic objectives, the government had successfully staved off a potential financial crisis. However, those choices were not without consequences; public spending was cut, interest rates were raised, and economic growth was stifled. Maria de Lourdes Rollemberg Mollo and Alfredo Saad-Filho contend that the costs were borne by most Brazilians, and specifically by the poorest members of society—those whom Lula’s promises of change were originally intended to help.Neto and Vernengo discuss at length the outcomes of Lula’s policies. They argue that income inequality worsened as a result of the financialization of expenditures, which limited the state’s ability to increase social spending and thereby reduce inequalities. The authors acknowledge that social spending alone cannot improve income distribution, and must be complemented by a means of absorbing surplus labor; this is similar to the Keynesian view that the economic and social development of a country depends on full employment, which can be stimulated through fiscal spending. Full employment, they note, was not a priority for the PT, and hence not a key part of the strategy for increasing social inclusion.Additionally, Neto and Vernengo pinpoint high interest rates as the root of Brazil’s low economic growth. Brazil has traditionally had high interest rates compared to the rest of the world, and these rates have been the government’s tool for con-trolling capital flows since capital account liberalization occurred in the 1990s. The authors argue that lower interest rates would generate more consumption and employment, as well as reduce the debt service burden for the government and free up resources for social spending. Stimulating demand, they maintain, is necessary for creating a more egalitarian society.The authors discuss the worsening of income inequality that occurred under the Cardoso administration. Although they ac-knowledge that inequality had in fact lessened according to the Gini coefficients, they dismiss this commonly used measure without justification and instead draw attention to the data on the functional distribution of income, which measures the share of wages in total income, in order to show that inequality had actually increased. This leads them to conclude that there was a compression of wages and a worsening of inequality during Cardoso’s government. While the authors highlight the similarities between Cardoso’s and Lula’s policies, and allude to the latter’s inability to increase social spending, there is no data to support that income inequalities have, in fact, increased under Lula’s administration. Macroeconomic indicators that are presented show that, since 2003, the unemployment rate has decreased, while the real minimum wage has increased. These indicators would tend to favor, not undermine, the case that in-come distribution has improved.ECLAC figures show that household income has become more evenly distributed since 1990, and most notably in 2004 and 2005 during Lula’s presidency (as shown in table 1). In addition, the proportion of people living below the poverty line decreased between 2003 and 2005. These numbers demonstrate that poverty rates fell both for people living under the poverty line as well as for those living below the indigence line (as shown in table 2). Furthermore, there is evidence of some improvement during the Cardoso government, which began in 1995 and continued through 2003, particularly when compared against the 1990 backdrop.Correspondingly, the Gini coefficient for Brazil exhibited a decline in recent years, falling from 0.593 in 2001 to 0.569 in 2004 and thus reaching its lowest level in 30 years. The fall in the Gini coefficient indicates a re-distribution in income, as the lower income earners capture a greater share of the country’s overall wealth. The IPEA assessed the factors that contributed to the decline in income inequality, and found that the demographic characteristics of families, returns on assets, and employment opportunities had the smallest impact on the outcome. The biggest drivers of the change were income transfers and the distribution of labor earnings. The transfers examined included pensions, continuous benefits, and benefits provided by programs such as Bolsa Família. The redistribution of labor income, meanwhile, was attributed to reductions in educational inequality as well as wage differentials by education level.As a result, income distribution in Brazil is gradually showing signs of improvement. Likewise, the economy began to strengthen as interest rates fell, although there had been wide-spread concerns about sluggish economic growth in Lula’s first year. Fiscal austerity and anti-inflation policies did hurt the economy initially by generating higher unemployment and restricting social spending. In the long run, however, the price stability that resulted benefited the public through the renewed confidence of investors. Economic stability is particularly critical in countries that have high social inequalities, as they have been shown to suffer more under adverse shocks—such as changes in the terms of trade or foreign interest rates—as compared to societies that have more egalitarian structures. This is because the institutions that enable the burden of adjustment to be shared function less effectively in societies where unequal distributions are pervasive.By 2004, the economy started to show signs of recovery. Flows of foreign capital resumed and were expected to have a positive effect on economic growth. Real GDP rose by 5.2 percent, primarily driven by growth in the industrial sector. Moreover, real monthly wages and unemployment were returning to previous levels, while new jobs were on the rise and an export boom in rural areas was closing the wage gap between large and small cities. Thus, despite a slow start and initial skepticism in his first term, Lula’s policies for growth, stability and distribution have resulted in positive outcomes for poverty reduction in Brazil.Ongoing Challenges for Redressing InequalityAlthough there have been positive improvements in Brazil’s economy, the course that the Lula government has chartered will continue to face a number of challenges. Despite much initial excitement surrounding Fome Zero, implementation was slow and the program fell short of expectations in some of the poorest areas of the country, such as Acauã and Teresina in the Northeast, where it was most needed. The program was structured to be executed by a local administrative committee in order to dis-courage political manipulation, yet disputes and allegations of favoritism soon emerged. Within the government the Minister of MESA was dismissed, while the poor management and organization of MESA itself led to the incorporation of the department into the Ministry of Social Development. Similarly, Bolsa Família is plagued with clientelism and other administrative problems, such as poor targeting of beneficiaries, lack of coordination between government ministries, insufficient monitoring, and weak accountability structures. On the contrary, the conditional cash transfer (CCT) programs have been effective in meeting some of the short-term needs of the poor.Improving targeting efforts will not be an easy task since it will require redirecting benefits, such as free university education and universal healthcare, that are currently enjoyed by the middle class. This is a sensitive issue for the government because the middle class encompasses a wide range of incomes and a substantial portion of the voting population. Shifts in public spending could have a large effect on this segment of the population—a segment that has considerable influence over public opinion. Already, there has been evidence that the middle class is paying the price. Table 1 demonstrates that this group’s share of total income declined from 28 percent in 1990 to 25 percent in 2005. A decline in the Gini coefficient, coupled with a recent sluggish economy, prompted industry and academic observers to comment that “the very poor are living Chinese growth rates” while “the middle is purgatory.” Although the implications for poverty reduction are encouraging, the government must negotiate a delicate balance within the economy.Reforming the institutions that affect the middle class was a challenge for Cardoso. His attempt to change two pension laws—which would have saved the government 2.4 billion reais in 2000—was overturned by the Supreme Court. Because pensions are a sensitive issue, the government backed down. Lula, however, had more success in achieving change. One of his greatest achievements in structural reform was the passage of a social security bill in 2003, which raised the minimum age of retirement, tightened the limits on benefits, lowered survivor benefits, and implemented a tax on the pensions and benefits of wealthier beneficiaries. Given that Bolsa Família only accounts for 2.3 percent of Brazil’s direct monetary transfers while pensions comprise 82 percent and are much more regressive, the status quo must continue to be challenged, even if existing institutions resist the efforts.Another critical area of structural reform in Brazil concerns changing the existing corporatist structure and promoting a greater inclusion of civil society in the political arena. This has already begun with organizations such as Conselho de Desen-volvimento Econômico e Social, a meeting forum for government officials, ministers, civil organizations, worker and employer representatives, and individual business leaders. They discuss the policy initiatives and administrative reforms proposed by the government and can also provide their own recommendations to the government. Another example of an even more inclusive model is the Porto Alegre experiment, which incorporates large numbers of civil society participants in an efficient, functional, and highly redistributive system of governance. Although this paper has focused on the economic dimension of inequality, the reforms that are required to reduce poverty in Brazil must also consider the incorporation of political changes into any modifications of economic and social structures.RecommendationsLula’s advent to the presidency signaled the beginning of an era that could offer greater opportunities and inclusion for the whole of Brazilian society into the economy. The moderate policies adopted by his government were unexpected and raised skepticism among many, but these policies made critical inroads for deeper change in the country. However, to be fair, although Lula’s compelling story made him an iconic figure in this quest, the macroeconomic and social policies he pursued built upon those already established by his predecessor, and some of the positive impacts of those policies had already become evident during Cardoso’s time in office.Nonetheless, Lula had a unique challenge as the leader of Brazil’s first left-wing government. Despite his pre-election rhetoric, once in office Lula was confronted with the realities of governance and an impending financial crisis. Additionally, he was being closely watched by the international community, and had to answer to a ten-party coalition domestically. Lula chose policies that were essential for economic stability and were a necessary condition for economic growth while simultaneously creating an opening for greater social change. Gaining international confidence, while proving the capabilities of a major leftist party, bodes well for the future of democratic governments in Brazil. It also provides the government with greater leverage to propose more comprehensive and significant changes in the future.Despite recent achievements, income inequalities must con-tinue to decline because Brazil remains one of the most unequal societies in the world. IPEA finds that the most effective policies involve income transfers and the distribution of labor income, and recommends a broad-based policy to reduce inequality. Such an approach could be comprised of creating equal opportunities for capacity building, reducing the unequal treatment of workers, and improving the efficiency of fiscal policies so that government expenditures primarily benefit the poor while taxes are levied mainly on the rich. The World Bank advocates reinforcing changes in inequality by promoting greater asset ownership, tackling the underlying sources of market inequality, improving market access for poorer households, and redistributing assets through the state.While these policies are key elements of a long-term poverty reduction strategy, real progress will be achieved only if they are complemented by measures that continue to stimulate the overall growth of the economy. Economic growth and redistribution are fundamental and mutually reinforcing objectives in a poverty reduction strategy. An effective strategy requires social protection programs to be complemented by income generation measures so as to discourage dependence on state handouts, as maintained by Neto and Vernengo and others. For example, some of the CCT programs established in Brazil at the state level have tied the distribution of food shopping vouchers with mandatory vocational training, an approach that has been adopted in Chile, Mexico, and Nicaragua, and which may become more widespread in Brazil in the future. Furthermore, low-skilled workers must not only have improved access to professional qualification and training programs but they must also have access to new job opportunities so that their newly-gained capac-ities can be used productively. Successful redistribution pro-grams alone, however, are not sufficient to overcome inequalities in Brazil where the problem has such deep roots. Sustained poverty reduction requires long-term changes that cannot be re-solved over the course of one or two administrations.Such changes involve not only the implementation of effective policies, or even broader structural reforms to the economy, but fundamental changes in institutions and the perceptions that govern them. Although changes may take place on paper, and even though citizens may concede inequality to be unfair, the real challenge lies in the extent to which the population is willing to make the necessary sacrifices in order to enable changes to actually take root. This may take generations; however, the struggle against poverty and inequality must continue. By mitigating the demands of the left and right, taking precautions to stabilize growth, continuing to support social reform, and gradually changing economic structures, Brazil has taken small steps that are leading the country in the right direction.