Brazil's social and economic shortcomings in the past two decades

23 May 2018 Authored by Consultancy.lat

In the first installment of Oliver Wyman’s Brazil Panorama series, entitled ‘Brazil: Income and Productivity in the last two decades’, the consulting firm analyzes how the last twenty years have shaped Brazil today. The report, released earlier this year, is the foundation which outlines why Brazil has not performed as well in comparison to other developing nations, even in times of great economic and social progress.

The Oliver Wyman report looks at the economic and social benefits which the boom brought to the Brazilian economy as well as where the country continues to struggle, focusing on aspects which are indicators of wealth and equality such as investments in human capital, access to healthcare, and guides such as the Gini Index and Product Per Worker to determine the outcome.

In the late 1990’s, Brazil emerged as one of the countries that would dominate the 21st century. Alongside China, India and South Africa, Brazil seemed to have a flare for the spotlight, especially due to the Bolsa Familia social welfare reforms. The agenda saw the country recognised by its peers as a leader in social justice and poverty eradication. 

Brazil has, in the twenty years to 2015, taken a great leap forward, reducing the percentage of its population living in extreme poverty by -66%, from 16.5% to 4.3%. In the same time, the population grew by roughly 23 million people (or the size of Australia) to 207 million inhabitants. 

Extreme poverty relating to the % of the population

Social and economic indicators have also improved significantly over the same period. GDP per capita rose by 31% to just under $15,000. Infant mortality dropped sharply by -68%, and life expectancy gained 8 years. 

According to the report, the country has pulled an estimated 53 million people out of poverty - people living on less than $5.50 per day - and given birth to an emerging middle class. Yet, in 2015 the country experienced an economic downturn and has only recently managed to pull itself out of corruption scandals and recession.

The end of the Brazilian commodity boom saw an end to public spending and the social spending cuts focused on health and education. With job cuts hitting those who had most recently joined the formal economy first, millions began to edge back under the poverty line. 

The economic efforts of Brazil have seen it excel in the region as leaders, but whilst Brazil’s economy today is still outperforming many of its Latin peers, the country is still faces staunch income inequality.

With a more prosperous population, comes increased purchasing power to keep the Brazilian economy turning. Prosperity also brings with it an obligation to improve a set of national foundations on which future prosperity can be built; improving the quality of education, the national infrastructure, creating a strong business environment, and improving factors of openness in politics and the economy.

However, the report states that whilst Brazil has grown richer, it has failed to solidify many of the social benefits which lay the foundations for further economic growth. Successive Brazilian governments have failed to invest in the future in terms of both bricks and mortar infrastructure and social benefits which tackle inequality.

Income inequality from the Gini Index

Included in the report is a graph representing income inequality taken from information provided by the Gini coefficient which ranges from 0 to 100. A reduction in the value of the score on the index represents a lower level of inequality in a country.

It can be seen that Brazil started with a Gini score of 60 in 1997, the highest level in Latin America. Whilst this may be taken into the context of a reduction to a score of 53 in 2012, and 51.3 in the latest index (2016), inequality is still much higher than that of its Latin peers. 

By 2016, the average income of a Brazilian belonging to the richest 1% was R$ 27,085, the equivalent of 36 times the average income of the poorest half of the country at R$ 747. 

Quality of functional education in Brazil in comparison to rest of world

These numbers show that whilst Brazil’s economy was growing, the benefits were not shared by the majority of the country. The Gini Index gives a good example of this, however, a factor which is more quantifiable can be measured in human capital. Investment in human capital in the report has been divided into two subsections. Years of education and quality of education.

The report states that “the level of education of the population is often identified as one of the determinants for a country's productivity and income growth. As is the case with infrastructure, education – is not merely measured in its quantity, but also in its quality – generates broader impacts on society and the economy.” 

Whilst the average years of education has risen in line with emerging markets, it still sits behind that of the rest of Latin America. The quality in education had a brief period of rise between 2006 and 2009 but has stagnated since. Student scores have been falling in comparison to both emerging markets and Latin America, showing that education did not improve with economic gains.

The fragility which this inequality has caused in Brazilian society has been coupled with a lack investment in infrastructure and the business environment. High levels of bureaucracy and little agenda to reform trade agreements make Brazil less enticing for investors and businesses. All of these factors combined lead to the quality of life in Brazil not advancing in line with economic growth. 

Environment of business confidence in Brazil in comparison to the rest of the world

The author of the report, Ana Carla Abrão, asks the questions: “How did Brazil arrive here? What are the root causes of Brazil’s problems in these areas? What is the true situation on the ground in Brazil and what is the country’s trajectory for the future?” 

The following editions of Oliver Wyman Consulting’s Panorama Series will focus on these questions and attempt to analyze the decisions that have brought Brazil into its current state of being whilst advising how the country can “return to a sustainable path with better income distribution”.

Abrão is a partner at Oliver Wyman and has worked previously as a former Secretary of State in Finance of Goiás. She has also worked as director of Risk and Modelling at Itaú Unibanco, chief economist at Tendências Consultoria Integrada, and analyst at the Brazilian Central Bank. Abrão holds a Ph.D. in economics from the University of São Paulo, and a master's degree from the Getulio Vargas Foundation.

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