ABSTRACT
The research aims to find the relationship between income inequality and economic growth in the Brazilian economy. Economic growth and income inequality are defined in the light of academic literature and their varied effect on wellbeing are explored. The research methodology selected is deductive. The data have been collected through secondary sources and a multiple regression model is used to study the relationship between the economic performance and income inequality in Brazil. Contrary to many previous studies, the findings of the research suggest a significant positive relationship between these two variables. Newer and reliable data were used for these estimations. Other findings of the study are that human and physical capital have significant positive effect on growth. It was also concluded that, unlike many recent country and cross-country studies, Brazil’s income inequality does not hinder its growth.”
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Table of Contents
CHAPTER ONE …………………………………………………………………………………………………………… 4
1.0 INTRODUCTION ……………………………………………………………………………………………………….. 4
1.1 MEASURES OF INEQUALITY ………………………………………………………………………………………. 7
1.2 BRAZIL’S INEQUALITY FACTS AND FIGURES ……………………………………………………………….. 7
1.3 WHY IS BRAZIL’S INEQUALITY LEVEL SO HIGH? …………………………………………………………. 9
1.4 ECONOMIC GROWTH, INCOME INEQUALITY, AND POVERTY …………………………………………… 9
CHAPTER TWO ………………………………………………………………………………………………………… 14
3.0 LITERATURE REVIEW …………………………………………………………………………………………….. 14
3.1 EARLY STUDIES …………………………………………………………………………………………………….. 14
3.2 NEWER STUDIES ……………………………………………………………………………………………………. 17
CHAPTER THREE …………………………………………………………………………………………………….. 18
3.0 THEORETICAL FRAMEWORK ……………………………………………………………………………………. 18
3.1 FERTILITY RATE ……………………………………………………………………………………………………. 19
3.2 GENERAL HEALTH IN A SOCIETY ……………………………………………………………………………… 20
3.4 CREDIT MARKET IMPERFECTIONS ……………………………………………………………………………. 20
3.5 REDISTRIBUTION PROGRAMS …………………………………………………………………………………… 21
3.6 SOCIOPOLITICAL UNREST ……………………………………………………………………………………….. 22
3.7 SAVINGS RATE ……………………………………………………………………………………………………… 22
3.8 OVERALL EFFECT ………………………………………………………………………………………………….. 23
CHAPTER FOUR ……………………………………………………………………………………………………….. 24
4.0 METHODS AND MATERIALS …………………………………………………………………………………….. 24
4.1 RESEARCH DESIGN AND POPULATION OF STUDY………………………………………………………… 24
4.2 DATASET ……………………………………………………………………………………………………………… 25
4.3 THE MODEL ………………………………………………………………………………………………………….. 27
4.4 DATA PROCESSING ………………………………………………………………………………………………… 28
CHAPTER FIVE ………………………………………………………………………………………………………… 29
5.0 RESULTS AND DISCUSSION ……………………………………………………………………………………… 29
5.1 RESULTS ………………………………………………………………………………………………………………. 29
5.2 DISCUSSION ………………………………………………………………………………………………………….. 30
5.3 TESTING FOR HETEROSKEDASTICITY ………………………………………………………………………… 32
5.4 TESTING FOR SERIAL CORRELATION ………………………………………………………………………… 34
CHAPTER SIX …………………………………………………………………………………………………………… 35
6.0 CONCLUSION ………………………………………………………………………………………………………… 35
REFERENCES ……………………………………………………. ERROR! BOOKMARK NOT DEFINED.
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List of Figures
Figure 1: GDP per capita (PPP) in US Dollars for Brazil 1980 – 2016 …………………………………… 4
Figure 2: Annual GDP growth for Brazil 1980 – 2015 ………………………………………………………… 5
Figure 3: Brazil’s Gini Index 1970 – 2014 …………………………………………………………………………. 8
Figure 4: Poverty and Economic Growth in Brazil ……………………………………………………………. 11
Figure 5: Poverty and Inequality Trend in Brazil ………………………………………………………………. 12
List of Tables
Table 1: Income share of the highest and lowest 20% in Brazil for selected years …………………… 8
Table 2: Data Sources ……………………………………………………………………………………………………. 26
Table 3: Data information ………………………………………………………………………………………………. 26 Table 4: Results…………………………………………………………………………………………………………….. 29
Table 5: White Test for Heteroskedasticity ………………………………………………………………………. 32
Table 6: Breusch-Pagan Test for Heteroskedasticity ………………………………………………………….. 33
Table 7: Durbin-Watson Test for Serial Correlation ………………………………………………………….. 34
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CHAPTER ONE 1.0 Introduction
Brazil is a developing Latin American country. Its political and economic growth over the past three decades, in which annual GDP growth rate averaged 3.2% has spurred research worldwide. Today, Brazil ranks as the 7th largest economy in the world (by PPP GDP) with a per capita GDP of $15, 390 (World Bank, 2017). Despite the recent economic turndown, the growth rate is expected to increase in the near future and its economic power is likely going to overtake even more countries. Politically, the economy has experienced tremendous success and international recognition. It has hosted some of the world’s biggest events. Among these are the FIFA World Cup in 2014 and most recently, the 2016 Summer Olympic Games. Figure 1 shows Brazil’s GDP per capita trend from 1980 to 2016.”
Figure 1: GDP per capita (PPP) in US Dollars for Brazil 1980-2016
Source: (World Data Atlas, 2017)
Brazil has one of the highest income inequalities in the world despite its impressive growth rates. This is evident in its Gini coefficient. The United Nations Department of Economic and Social
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GDP Per Capita
Year
GDP Per Capita (PPP)
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Affairs (2015) defines Economic or income inequality as “how economic variables are distributed among individuals in a group, among groups in a population, or among countries”. The Gini coefficient measures the extent to which household or individual income in a country deviates from perfectly equal distribution (World Bank, 2017). This coefficient lies between 0 and 1; with 1 meaning perfectly unequal income distribution and 0 meaning perfectly equal distribution of income. The Gini index is the Gini coefficient expressed as a percentage. Brazil has a Gini index of 51.48% as of 2014. This makes it one of the highest in the world and ranks it the highest among the twenty biggest world economies in GDP terms. Patterns in the data show that the economy has had a relatively stable income inequality for a long time and this only started to drop slightly in the last decade. Other inequality metrics like the income share of the highest and lowest 20% in the economy supports the fact that Brazil has very high income inequality. As of 2014, the bottom 20% (the poor) held 3.62% of total income compared to a 56.25% held by the top 20% (World Bank, 2017).”
Figure 2: Annual GDP growth for Brazil 1980 – 2015
Source: (World Bank, 2017)
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Many researchers since the nineteenth century have attempted to study the relationship between growth and income inequality. Majority of the studies conducted recently have found that income equality propels, while income inequality hurts growth. However, it is quite surprising that Brazil still experiences high growth despite its high income inequality. This fact makes this empirical research an interesting topic. Most of these recent researches use cross-sectional approach or cross-country analysis to study this relationship. The objective of this paper is therefore, to improve understanding of the effect income inequality has on the economic performance of Brazil. Unlike successive studies, it will make use of data on Brazil over a long-time period to study this relationship. The research hopes to find answers to the following questions:
Is income inequality actually related to economic growth in Brazil?
If there is truly a relationship, is it a positive or an inverse relationship?
Hence, the hypotheses formulated for this study are:
H0: There is no significant relationship between income inequality and economic growth in Brazil.”
HA: There is a significant relationship between income inequality and economic growth in Brazil.”
This chapter looks at a brief overview of inequality in Brazil, its causes, and how it is measured. Chapter two discusses some old and recent studies conducted by economic researchers on the impact of income inequality on economic growth. The third chapter looks at a couple of theories that try to explain this relationship. The following chapter analyses and explains the methods used in the empirical part. Using recent Gini index data on income inequality, chapter five
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empirically studies the impact Brazil’s income inequality has on its economic performance. The chapter uses regression analysis to estimate the relationship. The discussions of the findings are also contained in the chapter. 1.1 Measures of Inequality
There are different measures that describe a country’s income inequality but the Gini index is the most commonly used. This index takes on a number between 0 and 1, with 0 being perfectly equal society and 1 being perfectly unequal. Another method, mostly used by scientists to calculate income inequality is the Hoover index (Hoover, 1936). It is also called Robin Hood index. This measure describes how much of a society’s income has to be transferred from the hands of the rich to those of the poor in order to get a perfectly equal society. It can be represented graphically as the area with the largest difference between the Lorenz curve and the total equality curve. The Hoover index, just like the Gini index takes values between 0 and 1, with 1 being a total unequal society. Other indexes used to measure inequality are the Theil index, the Atkinson index and the income shares. These indexes are mostly used when analyzing income inequality among subgroups. Most economic research use the Gini index because it is more readily available and simpler than other indexes. This paper would also make use of the Gini index. 1.2 Brazil’s Inequality Facts and Figures
Among world’s most unequal countries, Brazil ranks 4th (Withnall, 2016). The Gini index over the past century has been quite steady before it peaked in the late 80s. In the early 90s, it began to fall drastically and not long enough, went up sharply. It has been a bit stable ever since until in 2002 when the fall accelerated. Figure 4 shows Brazil’s income inequality trend from 1970 to 2014. Over this period, its Gini index has not gone below 50, which is why it has been
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considered as one of the world’s most unequal societies since the last century. Table 1 shows the income share of the highest 20 percent of the population in Brazil compared to the share of income held by the lowest 20 percent. Although there has been an improvement in income distribution, a lot still needs to be done.”
Figure 3: Brazil’s Gini Index 1970 – 2014
Source: (World Bank, 2017) and ( World Income Inequality Database, 2017)
Table 1: Income share of the highest and lowest 20% in Brazil for selected years
Year
Income share of top 20%
Income share of bottom 20%
1990
64.61
2.33
1995
63.83
2.44
2000
63.38
2.45
2005
61.03
2.90
2010
57.95
3.21
2014
56.25
3.62
Source: (World Bank, 2017)
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Gini Index
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1.3 Why is Brazil’s Inequality Level So High?
Looking at this incredibly high unequal income distribution, the question that comes to mind is why does Brazil have this high inequality? There is no single answer to this question; so many factors are involved. All around the world, the major contributor to income inequality is the differences in human capital. This has to do with individuals’ health and education. These differences lead to variations in the labor market’s returns. As inequality in the acquisition of human capital increases so does the returns to education. This results to a skewed income distribution in the society (Weil, 2012). Another source of income inequality is geographical differences. For instance, this involves inequality between urban and rural settlers, race or gender discrimination and a new technology that favors the few skilled workers in a society, among others. The government also plays a role through its policies regarding income distribution. A study conducted by Bourguignon et al. (2002) compared Brazil and other countries (Columbia, United States, and Mexico) with regards to the impact of an unequal distribution of education. Their findings showed that the differences in returns to schooling, coupled with work experience explain about 40% of the variation in inequality in Brazil and the United states. In terms of geographical differences, urban Brazil had a Gini index of 60% in 2005 compared to 54% in the rural region, which were way above the average in other Latin American countries (Banerjee & Duflo, 2003). Government policies in Brazil also contribute to the country’s inequality. 1.4 Economic Growth, Income Inequality, and Poverty
The whole essence of studying inequality and economic growth is to raise a case for the poor and marginalized people. In highly unequal societies like Brazil, while the rich are very wealthy that they are comparable to those in developed countries, the poor keep getting poorer and their numbers keep increasing. The welfare of the people is the sovereign duty of the government.
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Therefore, studies like these inform policymakers the extent to which the society is unequal and the plight of the poor in meeting their basic needs of life. In recent times, the debate surrounding the development experience, available policy options, and future prospects of Brazil has been dominated by the country’s inequality and poverty. Extensive literature on the distribution of wellbeing in Brazil exists. Most of these studies try to describe levels and dynamics of poverty and inequality outcomes, analyzing sectorial and regional gaps, studying the links to human capital outcomes and labor markets, spending patterns of the public, and so forth. From the body of research, this fact about Brazil seems to be worth reiterating: compared to other countries, Brazil is a clear outlier inequality wise, and accounts for the majority of Latin America’s poverty rate (Elbers, Lanjouw, Lanjouw, & Leite, 2004). Earlier sections of this paper looked at a background on the economic growth and income inequality facts and figures in the Brazilian economy. What effect then, do these two variables have on poverty in the country? Brazil is one of the emerging economies (BRIC countries) due to its rapid economic growth. However, this growth has had little effect on the wellbeing of Brazilians at the bottom of the income pyramid over the years. In 1990, 17.4% of the Brazilian population lived below the poverty line while the growth rate during the same year was around – 3.1% (World Bank, 2017). By 2005, the economy had recovered and growth increased to about 3.2% and as one would have expected, poverty rate did not fall, rather it increased to 31%. Growth increased dramatically by 5.1% in 2008 but poverty still remained at 26%, fell to 21.4% in 2009 and remained the same through 2014. One would expect that since growth increases rapidly in the economy, poverty would be reduced by a considerable extent, but that is not the case. Figure 4 shows the relationship shared by economic growth and poverty in Brazil.
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Figure 4: Poverty and Economic Growth in Brazil
Source: (World Bank, 2017)
The figure illustrates that there has been some progress in reducing poverty from the mid 90s as compared to the 80s, through the early 90s. Nonetheless, being that Brazil is an emerging economy that is growing very fast, this progress is far below expectations. A message for policymakers; more needs to be done to reduce poverty. What this trend represents is that economic growth is relatively ineffective in reducing poverty. Perhaps the reason why the economic growth is not impacting on the poor is due to the country’s high income inequality. It makes sense to think of it this way; any growth achieved by the economy is pocketed by the rich and thus, never gets to the poor. The little reduction in poverty has been largely attributed to government policy (The Economist, 2011). With this, there has also been a fall in income inequality, though it still remains high compared to levels prevalent in developed countries and some developing countries. Figure 5 shows the trend in the Gini index and poverty in Brazil.
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From the pattern exhibited by this figure, the questions that come to mind are: Can this high inequality rate be the reason for Brazil’s continued growth? Will a reduction in the poverty rate slow Brazil’s economic growth? and is it possible for Brazil to have more income equality and thus low poverty rate yet, continue to grow? This paper hopes to answer some or all of these questions.
Figure 5: Poverty and Inequality Trend in Brazil
Source: (World Bank, 2017)
It is important to note that in any given region or country, poverty reduction is closely linked to mean income levels and income inequality (Tabosa, Castelar, & Irrfi, 2016). Determining the type of policy that will be most effective in reversing poverty as quickly as possible is an important issue in any country. The question is, therefore: Should policies aimed at reducing poverty focus on reducing income inequality or increasing average income levels? Various studies have shown that economic growth in itself has been ineffective in reducing poverty in many countries and regions of the world (Tabosa, Castelar, & Irrfi, 2016). Although it is obvious
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that changes in poverty rates are a result of income redistribution or economic growth (or both), it is not quite clear what effects the changes in each of these variables have on poverty rates (Ravalion, 1997). Ravallion and Chen (2003), in their study of some developing countries based on some number of people living on less than $1 per day discovered that there is a negative relationship between average income levels and people with income below the poverty line. Nonetheless, a consensus about the nature of the interrelationship between economic growth, income inequality, and poverty is still nonexistent. Most of the empirical evidence suggest that countries or regions with low income and low levels of inequality tend to respond better to economic growth policies while countries with high incomes and high income inequality will be less responsive to such policies (Tabosa, Castelar, & Irrfi, 2016). Therefore, inequality reduction policies will be more effective in the latter countries.
Studies on the Brazilian economy indicate that poverty levels are more responsive to income inequality-reduction policies than those aimed at boosting average income level (Tabosa, Castelar, & Irrfi, 2016). There is substantial evidence proving that compared to other countries with similar income levels, the poverty-reduction effect of economic growth is weaker in Brazil. This explains and confirms the trend exhibited in figure 4 above. Because policies aimed at reducing income inequality, and/or stimulating economic growth as an increase in the average income level or a combination of both have different effects on poverty, it is important to gauge the weight that should be apportioned to each strategy, both at the state and regional levels.
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