Essay Sample on Income Inequality in Brazil Economic Research

Essay Sample on Income Inequality in Brazil Economic Research Free example essay on Income Inequality in Brazil: In the global economy Brazil has been marked for decades by its consistent problem with inequality in income distribution. In 2001 the World Bank ranked 152 countries and only five African countries had Gini coefficients higher than Brazil’s (de Medeiros). For the level of GDP and economic clout that Brazil has, no other country comes close to the having the same issues with income inequality and poverty. The causes of Brazil’s problems have been debated extensively as economists try and pinpoint the most significant causes of the in distribution, but we can conclude that several factors: education, regional inequalities, structural unemployment and price instability; all meet to play important roles in the Brazilian crisis. Education According to Carlos Aguiar de Medeiros of International Development Economics Associates, education almost always shows a direct connection to income distribution is. This idea is continually supported by World Bank’s studies on poverty, and as Aguiar states, â€Å"investment in education is the most efficient and adequate structural action to achieve a higher equity in income distribution and lower poverty levels† (de Medeiros). In order to bridge the gap between the lower classes and higher classes in any country, the education level must be made more equal between the two. We experienced this same idea in the United States when the public school systems were segregated, and black and white students were receiving vastly different educations. The intellect of the child in either case may be somewhat natural, but the child’s opportunity to develop their intelligence and ambition was often stifled in one setting and encouraged in the other. In Brazil the inequali ty of opportunity is even greater because the average Brazilian attends significantly fewer years in school compared with United States students, and a many Brazilian children do not have viable option for education available to them. Statistics from 1980 show that 27.4 percent of Brazilians over age 35 had no education, and 49.9 percent had only 1 to 4 years of education (Reynolds). Human Capital and Technology The greater issue here is of human capital. Brazil stands out in Latin America not only for its size, but also for being the most advanced country in the technological sector. Brazil’s involvement in the sector began when technology took off in the seventies, and this provides an interesting situation in terms of human capital because technologically based jobs require a much higher level of skill than most manufacturing jobs. An increase in technology also means that many of the low skilled labor jobs will be replaced by more efficient and cost effective methods that employ fewer workers. Therefore, although technology is highly beneficial to society from efficiency and productivity standpoints in the long run, the transition can be problematic for workers. Low skilled workers face a double-edged sword because not only did the total number of jobs decrease, but the skill level required to find employment rose. Many of the most important and detrimental effects of technology in the Brazilian economy are addressed by the Kuznets Effect. This effect is based on the principle that â€Å"initial impact growth has a disequalizing effect on the distribution of income† (Reynolds). The reasons for the disequalibrium are based on the new demand for management, professional, and technical workers, in jobs that most low skilled workers cannot fill. They also cannot be educated or trained quickly enough to put them in the market for newer jobs. The gap here can be improved through better education, but that effect takes years to take hold even after new education policies are put into place, and therefore as demand for skilled jobs is high, and supply of workers low, the market wage for skilled labor increases to very high levels, further distancing the income gap. Kuznet’s ideas also point out that beyond the better wage for skilled workers; there is an issue of where value is added to t he growing economy. In less advanced economies, the increasing value and profits are often passed on in small relative quantities, and the majority of capital remains for reinvestment. This is apparent in Brazil when in 1980 only about 30 percent of value added went to manufacturing compared with 50 percent in the United States (Reynolds). The returns on reinvestment help businesses and investors to grow financially and cushion the bank accounts of the wealthiest and smallest percentage of the population. The growth for the wealthy is in amounts that far outweigh the higher wages granted to workers, and thus causes the Gini coefficient to remain high or even rise. Why hasn’t Brazil invested more in education? Education is of course one of the best answers to many of Brazil’s economic problems. Brazil does not have the resources to provide better education, but they need education to create the human capital to gain resources. The government and economy of Brazil need to be well established and running smoothly before huge amounts of money are dumped into education. The problem is a catch-22 because the government may avoid investment in education because investment in education is risky, but better education may be exactly what the country needs. The returns on education investment are often unknown and the policies to implement it are always extremely complex. Therefore, when Brazil needs every real that they can manage to help support their markets, they are unlikely to invest largely in education which carries high risk, and which also doesn’t show returns for many years. Instead, they will continue to try and administer market reforms and controls with the money that is available (Rillaers). Until the economy is able to support itself, there will not be money to support new endeavors such as progressive education. Again, this shows the need for a true stabilization of some sort in Brazil that would allow more investment in education. Regional Inequality Brazil’s national problems with inequality are also linked to distinct problems of regional inequality. Studies show that the Northeastern region of Brazil holds 28 percent of the Brazilian population, but only produced 13 percent of GDP in 1998, and the Southeastern region holds 43 percent of the population, but produced 58 percent of GDP (Azzoni). Comparison of incomes between the regions show that the Northeastern incomes were only about half of the national average while the Southeast enjoyed incomes of one-third more than the national average (Azzoni). Market theory would suggest that resources should move to balance the market, but in Brazil there is an issue of mobility. The market will only relocate resources if they are cost-effectively mobile, and because of Brazil’s geography, the costs often outweigh the benefits. Transportation costs are too high and the distances to great. There is also the option of human capital moving to expand markets, but again, the c ost of movement usually offsets the benefit of a new market. We may see this change in Brazil as the national transportation system improves travel efficiency and costs. Azzoni and Servo find in their research that regional wage differences play a role in income inequality in Brazil, but are not the main cause of it. Price Stability Price stability or instability can play a considerable role in changing levels of income distribution. The familiar phrases, â€Å"poor getting poorer† and â€Å"rich getting richer† can be broken down into real terms by examining the numbers and causes for division. In Figure 1 we have data for Brazil from 1989 to 1995 that demonstrate the movement in income distribution for those years. Knowing the history of Brazil’s economy, we can draw certain conclusions and evidence from these numbers. We see that in the years from 1991 to 1994 when Brazil was facing its worst inflationary problems (just prior to the introduction of the Real), the poorest 50 percent of the population was rapidly losing ground to the richest 20 percent. Considering the types of income and wage contracts that poorer workers depend on, we can see that they are at a much higher risk when prices are not stable. They are often locked in to a particular wage or salary, and if the expectations at the time that the contract was drafted fall short of the actual inflation and price level, the workers are often left earning a lower real wage. The wealthy have outlets to protect their money. They can move large investments outside the country, have the opportunity to take advantage of high domestic interest rates, and are not effected by the rising prices of food and other consumer goods because those goods only constitute a small portion of their living costs. Looking again at Figure 1 we see that from 1993 to 1994, while the poorest half of the population lost 1.8 percent of the income share, the richest quintile gained 3.5 percent. The top 20 percent was increasing at almost double the rate that poorer sections were dropping. From 1994 to 1995, after the introduction of the Real Plan, we see an immediate turn around in the trend with the poorest half gaining 1.2 percent and the richest 20 percent losing 2.3 percent. The trend reversed from the prior year’s numbers, and that can be accredited to the Real Plan’s drastic decrease in inflation through de-indexation and a new currency. With price stability, the poor do not only avoid the inflationary tax that they undergo in times of unrest, the rich are also less able to capitalize on the very high interest rates of inflationary times, and therefore both ends of the distribution contract towards the center. In the two years following the stabilization Brazil only saw a 3 percent increase in the price level of basic goods, but the minimum wage grew in Brazil by 78 percent. This is pivotal to the real wage rate which increased by 24 percent in the year following the introduction of the Real Plan (â€Å"Stability†¦Ã¢â‚¬ ). Conclusion As evidenced above there are varied reasons behind the problems of income inequality in Brazil, but the overwhelming characteristic is that it runs deep and is engrained into the Brazilian society. There will not be any quick solution, as evidenced by the tiny improvement in the Gini coefficient after the Real Plan. From 1993 to 1995 Brazil’s Gini coefficient only improved from .60 to .59; a miniscule improvement in a number which is immense by world standards, and still the highest within Latin America (â€Å"The Real Plan†¦Ã¢â‚¬ ). There is an upside to the story. Data centered on education level compared with income growth show that there has been a greater percentage increase in income for less educated groups than more educated groups (â€Å"The Real Plan†¦Ã¢â‚¬ ). This shows that income distribution is narrowing, but again, there is still hardly any improvement in Brazil’s inequality measures. The lack of overall improvement of Brazil’s situat ion, despite favorable variables underscores the severity and depth of Brazil’s problem. If there is going be to a change in Brazil, it will have to be fundamentally at the root of the problem. No quick reconstruction or stabilization plan will equalize the income distribution. The most important issue will be education. Brazil must take dramatic steps to invest in and protect the education of their population. They are at the head of the technology game now, without a fully educated work force, and if they increase the number of workers who are skilled in new jobs, the economy will be strong enough to rebuild and support itself without hefty international aid. It will take time for returns on education to become influential, but once a strong educational base is in place, it will remain there. Once human capital is established it rarely diminishes. The base of an economy is the people who are a part of it, and if Brazil intends to improve across the board, they should start with the base and work their way up.