Usefulness of the article : This article explains the remarkable decline in monetary poverty and economic inequality in Brazil in 2020, against the backdrop of an unprecedented crisis. It then explores public policy options that could help to structurally reduce social disparities without weighing on public finances or growth.
Summary:
- Brazil was particularly hard hit by the economic crisis linked to Covid-19 as it was recovering from a double recession in 2015 and 2016 and its economy was vulnerable to such a shock.
- Support measures (12.9% of GDP), particularly emergency aid (4.3% of GDP), nevertheless mitigated the severity of the recession in 2020 and helped reduce monetary poverty and economic disparities.
- However, this performance should be put into perspective given its one-off nature and the parallel increase in social disparities outside the monetary sphere.
- Reducing disparities will remain a major challenge for Brazil, and this challenge is compatible with continued growth and sustainable public finances.
Brazil has not escaped the Covid-19 pandemic, which has caused the South American giant to suffer one of the heaviest death tolls in the world. Over the whole of 2020, Brazil recorded more than 7 million confirmed cases and almost 200,000 deaths linked to Covid-19, making it the country with the highest death toll in the world after the United States. This was followed by an economic recession of around -4.7%, the most severe in almost 30 years.
At the onset of the crisis, many observers anticipated a sharp increase in poverty and economic inequality in Brazil, even though social disparities there are already among the highest in the world. However, Brazil defied the predictions: in 2020, poverty and inequality are said to have decreased, at least in monetary terms (World Bank, 2021).
This development is attributable to the support programs put in place by the authorities, in particular emergency aid for low-income households, which proved to be one of the largest income transfer measures in the world during the Covid-19 crisis, both in terms of resources allocated and number of beneficiaries.
1) Unprecedented support measures in response to a historic crisis
1.1 A historic economic crisis in the wake of the pandemic
The Covid-19 pandemic hit Brazil while it was still recovering from its previous crisis.Although Brazil ended two consecutive years of economic recession in 2017, the recovery proved fragile, as it was relatively weak (in 2019, real GDP remained below its 2012 level) and mainly driven by demographic factors rather than increased productivity.
The labor market has certainly been able to recover, but this has come at the cost of job insecurity: since 2017, almost two-thirds of job creation has been in the informal sector, where workers have no safety nets (labor legislation and social security) and, on average, a lower nominal monthly wage than in the formal sector (in the private sector, R$1,442 compared to R$2,197 in Q4 2019). The informal sector thus accounted for 40% of employment in the last quarter of 2019. Moreover, the underutilized labor force[3] remained very large at the end of 2019 (26.2 million people compared to 15.1 million at the beginning of 2014), indicating a still high number of potential job seekers.
Brazil has been particularly hard hit by the economic consequences of the Covid-19 pandemic because its growth model is structurally vulnerable to such a shock.It is based on services (61% of GDP), which have been particularly affected by measures to contain and restrict activities involving intensive human contact.
The health crisis therefore caused a historic 4.1% decline in GDP over the year (the sharpest recession in 30 years), leading to the permanent closure of at least one in five businesses and a sharp deterioration in the labor market. In the last quarter of 2020, the unemployment rate reached 14.6% (compared to 11% at the end of 2019), but it would have peaked at 22.3% if 11 million Brazilians had not left the labor force—given that the unemployment rate only takes into account the active population in the denominator.
Nevertheless, the decline in Brazilian GDP was much smaller than that of its South American neighbors (-11.1% in Peru, -8.5% in Mexico, -6.8% in Colombia, and -5.8% in Chile). On the one hand, the premature reopening of many activities in August 2020 helped to limit the recession to the first two quarters of the year. On the other hand, the support provided by the economic authorities to households and businesses played a key role.
1.2 Effective but costly economic measures
Although the Brazilian federal government’s health management proved controversial, the authorities’ economic response was surprising in its speed and scale.Under the war budget (orçamento de guerra) passed by Congress at the beginning of the crisis, Brazil was able to free up room for maneuver to support local authorities, businesses, and households. In particular, household income was supported by two main measures: partial unemploymentbenefits (beneficio emergencial de manutenção do emprego e da renda) benefited formal workers, while « emergency aid » (auxílio emergencial) supported the income of informal workers, self-employed workers, and households below the poverty line (see appendix). The latter measure was the most talked about in 2020: in addition to being passed unanimously by Congress—which is all the more remarkable given its highly fragmented nature—it proved essential in preventing several million Brazilians without safety nets from falling into poverty and in supporting growth. Sanches et al. (2021) estimate that GDP could have fallen by between 8.4% and 14.8% in 2020 without emergency aid, whereas it actually declined by only 4.1%. This cash transfer was among the largest in the world (Gentilini et al., 2020) in terms of the number of beneficiaries (68 million direct beneficiaries, 32% of the population) and budgetary cost, with the total amount of emergency aid exceeding eight times the annual cost of Bolsa Família ( 0.5% of GDP) (see appendix). By way of comparison, the US transfer program (Economic Impact Payments) covered 159 million beneficiaries (48% of the population), while the Japanese program (Universal Cash Handouts) benefited 117 million people (45% of the population).
While these measures were necessary due to the urgency and severity of the health crisis, they nevertheless worsened public finances, which were already in difficulty. The recession weighed on tax revenues, while new primary spending to combat the crisis amounted to R$605 billion (8.2% of GDP), including R$322 billion (4.3% of GDP) for emergency aid. Furthermore, when budget reallocations are added to these new expenditures, the total effort amounts to 12.9% of GDP. As a result, public debt rose from 74.3% of GDP in 2019 to 89.3% in 2020.
Beyond this significant jump, the structure of the debt continues to be a cause for concern. Although it is mainly domestic and denominated in reais, it is primarily indexed to price indices and the monetary interest rate (65%). However, if the prospects of accelerating inflation and monetary policy tightening in 2021 materialize, this composition is likely to increase debt servicing costs. In addition, the risk of refinancing Brazilian debt remains high, given that one-third of the debt matures in less than a year.
Aware of the fragility of public finances, the Brazilian authorities therefore ended most of their support programs in January 2021 and guaranteed that they would return to constitutional rules ensuring their sustainability this year[5].
2) A misleading decline in social disparities that in no way indicates future structural progress
2.1 A deceptive decline in monetary poverty and income inequality…
Given the nature of the Covid-19 crisis, the World Bank and the Brazilian authorities feared a sharp resurgence of monetary poverty and income inequality in Brazil, wiping out the social progress made at the beginning of the decade. Al Masri et al. (2021) estimate that 38 million workers (out of a total of 86 million) were at risk of losing their jobs in March 2020. These workers were employed in sectors that were vulnerable to containment measures because they were considered « non-essential, » involved significant human contact, or were poorly suited to teleworking. In particular, low-income households experienced the sharpest declines in labor income in 2020 as a result of job losses and wage cuts, as was the case during the 2015-2016 recession (see Figures 1 and 2).
However, government support measures more than offset the loss of income for the poorest during the crisis. Over the yearas a whole , partial unemployment partially offset the loss of wages for almost 11 million formal workers, while emergency aid directly benefited 68 million Brazilians (and even more if we consider the beneficiaries’ dependents). Emergency aid even increased the income of the least well-off compared to what they were earning before the crisis (see Figure 3), constituting the sole source of income for 3 million households in November 2020 (Carvalho, 2021).
As a result, the World Bank estimates that monetary poverty was halved in 2020 (World Bank, 2021) (see Figure 4), whereas it had anticipated an increase in April 2020. This decline in Brazil contrasts with the global upward trend during the crisis. Similarly, Al Masri et al. (2021) estimate that income inequality has been reduced thanks to government measures. However, these developments are misleading because they have been made possible by purely one-off measures and mask the growth of social disparities outside the monetary sphere.
2.2 …Masking a worsening of social disparities
The social statistics presented above should be interpreted with caution, as they are limited to gross household income and reveal a temporary trend. Monetary poverty has certainly been reduced in 2020, but the World Bank predicts that it will return to its pre-crisis levels as early as 2021 with the end of most support measures (World Bank, 2021). Even though emergency aid has finally been renewed for four months from April 2021, it is likely to have only a very limited impact on the rise in poverty, given its lower amount (an average of 250 reais per month per beneficiary, compared to 600 and then 300 reais in 2020) and its presumably smaller number of beneficiaries.
Furthermore, although the World Bank’s poverty measures take into account changes in purchasing power, the cost of living in Brazil has increased more for the poorest than for others, thus widening social disparities. Behind the overall price increase of 4.5% in 2020, food inflation peaked at 14.1%, which particularly penalized low-income households, given that food accounts for a higher proportion of their expenditure than for wealthier households. This food inflation, coupled with the temporary closure of schools, is also likely to have caused a sharp increase in food insecurity: according to the PENSSAN network (2021), this affected 54% of the Brazilian population in 2020 (compared to 36.7% in 2018).
As poverty is multidimensional, its analysis must go beyond the monetary dimension and cover other deprivations faced by individuals in terms of access to basic services (education, health) and living conditions (basic infrastructure).It is clear that the pandemic has exacerbated social disparities in this area. The closure of schools has exacerbated educational disparities by sidelining 4.8 million young people who are unable to study from home due to insufficient internet access. The health situation is also likely to have increased the number of young people who are neither working nor studying: the proportion of these » nem nem « [8]among 18-29 year olds, which was around 26% in 2019, is estimated to have risen to over 34% in the second quarter of 2020 (da Silva and Vaz, 2021). Furthermore, UNICEF has raised the alarm about the resurgence of child labor during the crisis.
In the health sector, the health crisis has widened disparities in terms of contagion and access to care. On the one hand, due to the lack of basic infrastructure (access to drinking water, waste and wastewater collection, etc.), the poorest have been more exposed to the epidemic. On the other hand, the crisis has exacerbated the gap between a public system that is universal but underfunded in relation to the needs of the population, and a private system that is high-quality but only accessible to those who can afford it. In this regard, a study by AMEB in June 2020 showed that the Covid-19 mortality rate was twice as high in public hospitals (38.5%) as in private hospitals (19.5%).
3) Reducing inequalities without compromising public finances and while supporting growth: an impossible challenge?
3.1 Increasing Bolsa Família: a legitimate decision but one requiring difficult trade-offs
Anticipating the potentially profound and long-term impact of the crisis on social disparities, the Brazilian authorities considered in 2020 making emergency aid permanent, which seems consistent given the limitations of the famous Bolsa Família program ( see appendix). While it is widely accepted that this conditional transfer has helped to reduce poverty and inequality in Brazil since its creation in 2003, its eligibility thresholds (89 and 178 reais per month) remain well below the international poverty line defined by the World Bank (US$5.5 per day, or 434 reais per month). The number of beneficiaries covered by this program (13.9 million households) therefore underestimates the number of poor people in Brazil according to the World Bank’s criteria. This implies that, on its own and without emergency aid, Bolsa Família would not have prevented a sharp rise in poverty in 2020, according to international standards, given that the amount of its allowances (ranging from 89 reais to 294 reais) is lower than the poverty line (434 reais) and emergency aid (600 reais and then 300 reais).
Nevertheless, an increase in Bolsa Família would require difficult trade-offs.In order to ensure the sustainability of its public finances, Brazil has committed to freezing its primary spending in real terms. In other words, its annual spending is limited to the amount voted last year, adjusted for inflation, leaving very little room for an increase in Bolsa Família, even though it is known to be relatively inexpensive (around 0.5% of GDP each year).
Furthermore, an increase in this transfer financed by higher tax revenues is difficult to imagine, given the already high tax burden in Brazil (32% of GDP). Finally, seeking room for maneuver by reducing other public spending is also complicated because the majority of budget expenditures, known as « mandatory, » are virtually incompressible: in 2020, they accounted for more than 90% of total spending (civil servant salaries, education, health, pensions, etc.).
3.2 Reducing inequalities without damaging public finances: a matter of efficiency
Beyond the « communicating vessels » effect in public spending, a more equitable use of public funds would be possible if public services were more efficient. Education is a good example of this.Public funds in this area are mainly allocated to higher education, while primary and secondary education are left behind. In primary and secondary schools, there is a distinction between low-quality public schools, mainly attended by children from disadvantaged backgrounds, and higher-quality private schools, mainly attended by children from wealthy backgrounds. Disparities also exist in higher education, as public universities receive more funding but are mainly attended by affluent students who have been able to afford private education. In this way, reallocating public funds to primary, middle, and high schools would be both efficient and equitable, although the effects would only be felt in the very long term (Medeiros et al., 2020).
In general, Brazil is characterized by a regressive tax system and a limited income transfer system, which fuel income inequality. Although Brazil’s tax burden is close to the OECD average, it is also characterized by a regressive tax system (i.e., one that weighs more heavily on lower income groups) because it relies heavily on indirect taxation rather than income tax. At the same time, government transfers are not very progressive (and therefore do little to benefit low-income groups) because they consist mainly of retirement pensions, which benefit the wealthiest segments of the population.
As a result, transfers and taxes in Brazil reduce final income inequality by half as much as the OECD average (Ministério da Fazenda, 2017), making them mechanisms that need to be reformed if inequality is to be reduced in the future. For example, Arnold and Bueno (2021) propose a solution that leaves the weight of transfers unchanged: by adjusting the indexation mechanism for pension expenditures in order to maintain their purchasing power, resources could be found to finance an increase in transfers in Brazil and ultimately reduce income inequality.
The reformulation of the Brazilian transfer system is all the more feasible as it is suggested by the IMF (2020) and certain economic authorities, and would make it possible to reconcile a reduction in inequality with economic recovery. In this regard, Toneto et al. (2021) estimate that a transfer of 100 reais to the poorest 30% of households, financed by the wealthiest 1%, would not only be budget-neutral, but could also stimulate economic recovery. Indeed, such a transfer would increase aggregate private consumption and ultimately national income by 2.1%[10].
Conclusion
Despite controversial health management, the Brazilian authorities have developed an arsenal of economic measures that are astonishing in their speed, scope, and effectiveness. By supporting the incomes of the poorest, they have reduced poverty and inequality, at least if we limit our analysis to the monetary sphere.
On the other hand, the crisis has exacerbated social disparities in education and health, which will penalize Brazil in the long term. The emergency measures, beyond being purely temporary, have not put an end to the underlying problems of inequality, such as structural underinvestment in basic services, inefficient allocation of public resources, and the regressive nature of the tax and transfer system. Nevertheless, they leave the Brazilian authorities room for maneuver to correct social disparities without weighing on public finances or growth.
These social disparities are likely to worsen further in view of the health and economic situation in 2021. The end of emergency aid between January and April, coupled with the emergence of Brazilian variants, may have contributed to the resurgence of the pandemic in Brazil, with the country now mourning 400,000 deaths (compared to 200,000 at the end of 2020). The deterioration in the health situation—which, at this stage, shows no sign of improving in the short term—has therefore necessitated the renewal of containment measures, which will, in turn, weigh on the economic recovery. Without mentioning a new recession in 2021, GDP is expected to grow by only 3.1% according to market economists. However, such growth will be largely insufficient to offset the losses recorded in 2020 and help to revive the labor market.
Appendix: Bolsa Família and Auxílio Emergencial
Bolsa Família, introduced in 2003, effectively replaced and unified the programs that had existed until then. It is the main income transfer instrument in Brazil. It consists of an unconditional cash transfer of 89 reais for households with a monthly per capita income of less than 89 reais (14 euros) and a conditional transfer for households with a monthly per capita income of less than 178 reais (28 euros). For this second category of beneficiaries, assistance is provided on condition that the beneficiaries have dependent children who are enrolled in school and receive certain basic medical care. Today, 13.9 million families receive Bolsa Família. The monthly transfer per household consists of a basic benefit of 89 reais (€14) and a variable, conditional benefit of up to 205 reais (€32). For more information: http://mds.gov.br/assuntos/bolsa-familia.
Numerous studies attest to the effectiveness of Bolsa Família in many areas beyond the monetary sphere.In addition to improving the material living conditions of its beneficiaries, Bolsa Família has led to progress in health, with a decline in malnutrition and infant mortality and visible improvements in maternal health. In the field of education, Bolsa Família seems to have contributed to the universalization of basic education in Brazil, improved school results, reduced school failure rates, and reduced child labor. Finally, other studies show that this social program has empowered women and reduced domestic violence and crime in general.
The auxílio emergencial (emergency aid) was introduced in 2020 and renewed in 2021 as part of emergency measures to mitigate the economic consequences of the Covid-19 crisis. Emergency aid was set at 600 reais (US$100) per month per beneficiary from April to August, then 300 reais (US$47) per month from September to December. Initially intended for informal and self-employed workers meeting certain income criteria, it was subsequently extended to low-income households. Emergency aid was subject to two income ceilings: 0.5 times the minimum wage per month per person (522 reais, US$52) and 3 times the minimum wage per month per family (3,135 reais, US$313). EUR/BRL exchange rate = 6.3779 (December 31, 2020).
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Endnotes
[1]Poverty is defined as an « acute lack of well-being » according to the World Bank (2001). Monetary poverty consists of thinking of well-being as access to basic goods and is measured by comparing individuals’ income with a certain predefined threshold below which they are considered poor. In this article, we use the poverty threshold of $5.5 per day in 2011 purchasing power parity, as defined by the World Bank.
[2]In this article, we focus on income inequality among Brazilians, which occurs when « individuals do not have the same level of material wealth and general economic living conditions » (United Nations, 2015). The analysis focuses on either gross household income (before taxation and after income transfers such as pensions and social benefits) or final household income (after taxation and income transfers). We use the Gini index, which measures the deviation of a population’s income distribution from a perfectly equal distribution: 0 means perfect equality, while 1 means perfect inequality. Any increase (decrease) in this coefficient therefore represents an increase (decrease) in inequality.
[3]This measure aggregates in Brazil the unemployed, the underemployed (working less than they would like), discouraged workers, and others in the potential labor force (1/ those who are looking for work but are not immediately available to work, and 2/ those who are available to work but are not actively looking for work).
[4]This estimate is provided by the Brazilian authorities. Unlike the Brazilian authorities, the IMF does not deduct from public debt the outstanding debt securities held as assets by the Central Bank (net of those sold for temporary repurchase agreements, known as » repos » ) and adds the net debt of public enterprises. According to the IMF’s criteria, debt now stands at 100% of GDP.
[5]The declaration of a state of emergency during the crisis made it possible to circumvent three constitutional rules designed to ensure the sustainability of public finances. The most important rule in the eyes of observers and investors is the spending cap. This stipulates that primary public spending in T is limited to the ceiling approved in T-1 adjusted for inflation in T-1, which amounts to freezing it in real terms.
[6]School closures particularly affect disadvantaged families, as schools generally provide at least one balanced meal per day.
[7]Food insecurity characterizes the situation of a household whose food supply is not sufficient in quantity or quality, nor stable. In its most severe form, it can lead to hunger.
[8]In 2019, almost half were in thefirst income decile of the population. As the 2019 and 2020 data come from different surveys, the results presented should be interpreted with caution.
[9]Although the 1988 Constitution made Brazil’s public health system universal and free, it remains underfunded today. In 2017, the Brazilian public sector invested 4% of GDP in health, compared to an average of 6.5% in OECD countries, leading to significant shortages of health personnel and equipment across the country.
[10]This overall effect can be explained by households’ propensity to consume, which is inversely related to income. The underlying mechanism is as follows: if 1 real is transferred from the richest 1% (whose consumption will decrease by 0.24 reais) to the poorest 10% (whose consumption will increase by 0.87 reais), total private consumption will increase by 0.63 reais. Through a multiplier effect, this social transfer would ultimately increase total income by 0.67 reais: the increase in the income of the poorest stimulates their consumption, which stimulates the production of certain goods and therefore employment, and the Brazilian citizens and companies that benefit will in turn increase their consumption… which ultimately has a trickle-down effect on total aggregate income.
