Inequality, Democracy, and Growth in Brazil

A Country at the Crossroads of Economic Development

Marcos Mendes

• Publisher: Academic Press
• Year: 2014
• ISBN:
  9780128019658
• Topic: Economía
• Subtopic: Economía internacional

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

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 finan...