Mendes Inequality, Democracy, and Growth in Brazil

A Country at the Crossroads of Economic Development
1. Auflage 2014
ISBN: 978-0-12-801965-8
Verlag: Elsevier Science & Techn.
Format: EPUB
Kopierschutz: 6 - ePub Watermark

E-Book, Englisch, 280 Seiten

In terms accessible to non-economists, Marcos José Mendes describes the ways democracy and inequality produce low growth in the short and medium terms. In the longer term, he argues that Brazil has two paths in front of it. One is to create the conditions necessary to boost economic performance and drive the country toward a high level of development. The other is to fail in untying the political knot that blocks growth, leaving it a middle-income country. The source of his contrasting futures for Brazil is inequality, which he demonstrates is a relevant variable in any discussion of economic growth. Inequality illuminates causes of seemingly-unconnected problems. This book, which includes freely-accessible documents and datasets, is the first in-depth analysis of an issue that promises to become increasingly prominent. - Contrasting visions of Brazil's future described in economic terms - Easy-to-understand graphs and tables illustrate analytical arguments - All Excel-based data available on a freely-accessible website

Marcos José Mendes is a member of a Brazilian think tank Fernand Braudel Institute of World Economics. He earned a Ph.D. from Universidade de São Paulo (Brazil) and is a Legislative Advisor in economics for the Brazilian Federal Senate. He started the research for this book in 2012-13 during an eight month visiting fellowship at the Department of Economics at the London School of Economics.

Autoren/Hrsg.

Mendes, Marcos

Inhaltsverzeichnis

1;Front Cover;1
2;Inequality, Democracy, and Growth in Brazil: A Country at the Crossroads of Economic
Development;4
3;Copyright;5
4;Contents;6
5;Foreword;10
6;Disclaimers;12
7;About the Author;14
8;Acknowledgments;16
9;Dedication;18
10;Introduction;20
10.1;Chapter 1;27
10.2;Chapter 2;27
10.3;Chapter 3;28
10.4;Chapter 4;29
10.5;Chapter 5;31
10.6;Chapter 6;32
10.7;Reference;34
11;Chapter 1: Low Economic Growth and its Proximate Causes;36
11.1;1.1 . Introduction;36
11.2;1.2 . Sources of economic growth 1 ;37
11.3;1.3 . The Brazilian economy during the military government (1964-1984) and the transition to democracy;40
11.4;1.4 . Low growth;44
11.5;1.5 . Proximate causes for low growth in 10 stylized facts;46
11.5.1;1.5.1 . STYLIZED FACT 1: Current Governmental non-Financial Expenditures have Steadily Grown;47
11.5.2;1.5.2 . STYLIZED FACT 2: The Tax Burden had to be Raised to Finance Increasing Expenditures;50
11.5.3;1.5.3 . STYLIZED FACT 3: Tax Increases were not Sufficient to Finance Growing Expenditures and, as a Consequence, Public ...;56
11.5.4;1.5.4 . STYLIZED FACT 4: High Interest Rates;58
11.5.5;1.5.5 . STYLIZED FACT 5: Infrastructure Bottlenecks;60
11.5.6;1.5.6 . STYLIZED FACT 6: Skyrocketing Minimum Wage;68
11.5.7;1.5.7 . STYLIZED FACT 7: The Brazilian Economy is Closed to International Trade;71
11.5.8;1.5.8 . STYLIZED FACT 8: Judicial Uncertainty and Poor Protection of Property Rights;75
11.5.9;1.5.9 . STYLIZED FACT 9: A Large Number of Small and Informal Companies Drive Average Productivity Down;86
11.5.10;1.5.10 . STYLIZED FACT 10: Educational Backwardness;93
11.6;1.6 . The story behind low growth;96
11.7;Annex 1A .1. The Main Electoral and Political Institutions in the New Brazilian Democracy;100
11.8;References;107
12;Chapter 2: Inequality;110
12.1;2.1 . Introduction;110
12.2;2.2 . The composition of inequality;115
12.3;2.3 . The fall of inequality since the mid-1990s;119
12.4;2.4 . Will inequality continue to fall?;123
12.5;2.5 . Are social policies effective in reducing inequality?;127
12.6;2.6 . Did inequality only begin to fall more intensely as of 2001?;130
12.7;2.7 . Social stratification after two decades of poverty and inequality reduction;131
12.8;2.8 . Conclusions;135
12.9;References;137
13;Chapter 3: Redistribution to the Rich;138
13.1;3.1 . Introduction;138
13.2;3.2 . What does economic theory have to say?;141
13.3;3.3 . Inequality, extractive institutions, and rent seeking in Brazil;145
13.4;3.4 . Evidence of redistribution to the rich in Brazil;149
13.4.1;3.4.1 . Slow and Inefficient Judicial System;149
13.4.2;3.4.2 . Regulatory Agency Weakness;153
13.4.3;3.4.3 . Privileged Access to Public Credit;161
13.4.3.1;Bndes;162
13.4.3.2;Constitutional Funds;167
13.4.3.3;State-Company-Sponsored Pension Funds;169
13.4.3.4;Political Connections and Access to Credit;173
13.4.4;3.4.4 . Protection of National Industry;174
13.4.4.1;Arguments in Favor of Industrial Protection;176
13.4.4.2;Critiques of Industrial Protection;178
13.4.4.3;Why Is Industrial Protection so Resistant?;181
13.4.4.4;References;184
14;Chapter 4: Redistribution to the Poor;188
14.1;4.1 . Introduction;188
14.2;4.2 . What does economic theory have to say?;189
14.3;4.3 . The fiscal impact of income transfer to the poor;192
14.4;4.4 . Expansion of public education for the poor and its Fiscal impact;194
14.5;4.5 . Expansion of public health to the poor and its fiscal impact;196
14.6;4.6 . Conclusions;199
14.7;References;200
15;Chapter 5: The Middle Class Joins the Game;202
15.1;5.1 . Introduction;202
15.2;5.2 . What does economic theory have to say?;205
15.3;5.3 . Rent seeking in legal disputes;211
15.4;5.4 . The elderly as a politically preferred public;215
15.5;5.5 . Public education that does not serve the poor;221
15.6;5.6 . The political power of civil servants;225
15.6.1;Seeking rent in the legal details;231
15.7;5.7 . Labor unions and resistance to labor legislation reform;235
15.8;5.8 . Income-tax exemptions;238
15.9;5.9 . 18 Great farm debt renegotiations in 19 years;241
15.10;5.10 . The widespread distributive conflict;244
15.11;5.11 . Conclusions;247
15.12;References;250
16;Chapter 6: Redistribution and Long-Term Growth;254
16.1;6.1 . Introduction;254
16.2;6.2 . What does economic theory have to say?;255
16.3;6.3 . Which path will brazil take?;258
16.4;6.4 . Conclusions;261
16.5;References;264
17;Glossary;266
18;Index;276

Leseproben

Chapter 1

Low Economic Growth and its Proximate Causes

Abstract

The main focus of this chapter is on ten stylized facts that characterize the Brazilian economy of the democratic regime installed in 1985. Such characteristics hinder the accumulation of physical and human capital as well as interfere with an increase in productivity, resulting in a low potential for economic growth. The ten stylized facts are: (1) steady growth of public current expense; (2) ever increasing tax burden; (3) low savings; (4) high interest rate; (5) infrastructure bottlenecks; (6) increase in minimum salary above the increase in labor productivity; (7) closure of economy to international trade; (8) judicial uncertainty and weak property rights protection; (9) proliferation of small and informal businesses; (10) low educational performance, especially in public schools.

Keywords

economic growth

public expenditure

tax burden

domestic savings

interest rates

infrastructure

international trade

judicial uncertainty

business size

misallocation

human capital

Chapter Outline

1.1 Introduction   1

1.2 Sources of Economic Growth   2

1.3 The Brazilian Economy During the Military Government (1964-1984) and the Transition to Democracy   5

1.4 Low Growth   9

1.5 Proximate Causes for Low Growth in 10 Stylized Facts   11

1.5.1 STYLIZED FACT 1: Current Governmental non-Financial Expenditures have Steadily Grown   12

1.5.2 STYLIZED FACT 2: The Tax Burden had to be Raised to Finance Increasing Expenditures   15

1.5.3 STYLIZED FACT 3: Tax Increases were not Sufficient to Finance Growing Expenditures and, as a Consequence, Public Sector Savings became Negative   21

1.5.4 STYLIZED FACT 4: High Interest Rates   23

1.5.5 STYLIZED FACT 5: Infrastructure Bottlenecks   25

1.5.6 STYLIZED FACT 6: Skyrocketing Minimum Wage   33

1.5.7 STYLIZED FACT 7: The Brazilian Economy is Closed to International Trade   36

1.5.8 STYLIZED FACT 8: Judicial Uncertainty and Poor Protection of Property Rights   40

1.5.9 STYLIZED FACT 9: A Large Number of Small and Informal Companies Drive Average Productivity Down   51

1.5.10 STYLIZED FACT 10: Educational Backwardness   58

1.6 The Story Behind Low Growth   61

ANNEX 1A.1 The Main Electoral and Political Institutions in the New Brazilian Democracy   65

References   72

1.1 Introduction

The main goal of this chapter is to show that the average economic growth rate in Brazil since the mid-1980s has been disappointing. It presents ten stylized facts on the Brazilian economy that constitute the immediate causes for this poor performance.

To introduce the question of economic growth, the chapter begins with Section 1.2, which summarizes the theoretical foundations of economic growth and development. After that, Section 1.3 presents a brief review of the Brazilian economic policy during the military regime, (1964-1984), showing how such a policy conditioned the choices made after the 1985 democratization. Section 1.4 shows data on economic growth, highlighting the poor Brazilian performance in terms of long-term growth since 1985. Section 1.5 focuses on the 10 Stylized Facts that explain the low growth. The final section of the chapter presents the main thesis of this book, which is: an important cause for low growth in Brazil is the coexistence of acute inequality in income and assets distribution with a democratic political regime. All 10 Stylized Facts that constitute proximate causes for low growth are, to a large extent, consequences or symptoms of this deeper cause.

1.2 Sources of economic growth1

Economic growth basically results from the accumulation of: (a) physical capital (machinery, roads, ports, land, etc.); (b) labor (number of workers available to be employed in the productive process); (c) human capital (the ability of workers, which usually increases with their level of education); and (d) productivity (more productive economies are able to create more units of product for each unit of capital and labor employed in the productive process).

It is easy to see that production grows when more machinery and workers are employed in the productive process. It is also clear that better trained workers are able to provide more and better goods and services. Furthermore, an economy that is able to produce more than others, using the same amount of workers and physical capital (higher productivity) will tend to achieve a higher level of per capita income.

Therefore, economic growth tends to be intense in countries where private sector companies show a high rate of investment in machinery and equipment and the public and private sectors invest in infrastructure in order to make the production and sales of goods and services (energy, transportation, communications) easier. Moreover, in this ideal country there is a large number of working-age citizens available to be employed in productive activities. Workers have been educated in high-quality schools, which enable them to perform complex tasks.

It is important to note that investing in physical and human capital, in order to foster growth, comes at the cost of reducing consumption or increasing debt. Money used to finance the purchase of equipment or monthly tuition payments is the same that finances the purchase of consumer goods. Therefore, the decision to invest should be accompanied by a decision regarding the origin of the funds used to finance the investment: reduction in consumption or increase in debt. Considering the economy as a whole, the savings accumulated by some people can be lent to others who desire to invest an amount greater than their financial resources. Therefore, the greater the level of consumption and the smaller the level of savings in a society, the less available capital there is to finance investments.

A society that, in aggregate terms, consumes a greater part of the income it generates has the option of financing investments through loans from abroad, or rather, borrowing from countries with populations that save more. One could say that using this mode of financing is equal to the use of “external savings.” Opting to use external savings means accepting the fact that the country’s foreign debt increases. As this debt is incurred in international currency (dollars, pounds, yens, etc.) and the national currency of developing countries, such as Brazil, is not accepted internationally, a high foreign debt brings the risk that at some time the country may not have enough international currencies on hand to pay its foreign debt.

Although necessary, high investment levels and the availability of high levels of capital (physical and human) and labor are not sufficient for a country to grow quickly and achieve a high level of development. The literature on growth and development shows that different availability of physical capital, human capital, and labor do not explain the large difference in the per capita level of income among countries. (See, for instance, Caselli, 2005.) For instance, the per capita GDP in France is 98 times higher than in Zimbabwe, and the United States is 32 times richer than The Gambia, while differences in capital and labor availability among these countries are not that high (Heston, Summers and Aten, Penn World Table Version 7.1, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, Nov. 2012.). What makes the United States, France and other developed countries much richer than underdeveloped nations is their productivity: developed countries are able to use their inputs much more efficiently in order to obtain higher production levels.

Productivity depends on the level of technology adopted and how the production factors are allocated. It is not easy to explain why some countries can use better technology or can make better use of their capital and labor. Generally speaking, one can say that such countries have good “institutions” or good “social infrastructure”(Jones, 2002).

These are social norms that are business friendly and offer incentives and safety to those that intend to invest and work hard: contracts are easily enforced; the judicial system is agile and able to preserve the rule of law; companies face low administrative costs and bureaucratic requirements; the labor market is...