A Real War on Inequality

Bashing the BRICS is all the rage these days — I’ve done my share — and it may even be time to abandon altogether this grouping of five big but exceedingly different economies. Yet one BRIC has come in for an unfair degree of criticism. Though Brazil may still be somewhat corrupt, its growth fueled by a temporary boom in natural resources, the country’s future is getting brighter by the day. Just as important, the nature of its economic progress offers a valuable lesson for countries both rich and poor.

Up through the 1990s, Brazil was known as the country with the worst income inequality in the Western Hemisphere, and one of the most unequal countries in the world. The frightful conditions in its slums, cane fields, and mines were emblematic of a deep and apparently ingrained poverty that belied Brazil’s ambitions of modernity. Poverty is still a serious problem, but for the past decade Brazil has been laying the foundation for a stunning new phase of growth.

No doubt, natural resources have helped Brazil to become richer. Revenues from selling minerals and fuels rose from 2.5 percent of the economy in 1990 to 5.3 percent in 2010, after peaking at 7.2 percent in 2008, according to the World Bank’s figures. This resource boom won’t last forever, even with Brazil’s new offshore oil fields. But Brazil has invested some of these proceeds, along with other tax revenue from its sustained economic growth, very wisely indeed.

When Luiz Inácio Lula da Silva took office as president in 2003, public spending on education had fallen to 3.8 percent of GDP. His predecessor, Fernando Henrique Cardoso, had already set the stage for Brazil’s surge by installing the bedrock of sound economic policies: a fiscal surplus, tight monetary policy, and a floating exchange rate. Lula, despite his association with leftist populism, committed to continuing these policies. But crucially, he also legitimized them by promising to share the gains of the resulting growth among all Brazilians.

By the time Lula finished his second and final term as president, spending on education had increased to almost 6 percent of GDP. School enrollment in Brazil has always been high, but the quality of education is climbing steadily, resulting in higher test scores and college graduation rates. Health spending also rose in both the public and private sectors, and here the progress is plain to see: mortality for children in their first five years has been cut in half, from 31.5 per 1,000 in 2002 to 15.6 in 2011.

Healthier and better-educated people can earn higher incomes, and the policies of Lula’s government, along with Brazil’s rapid urbanization and growth, have made a huge dent in inequality. Its Gini coefficient for income stood at 61 in 1990, according to the World Bank, and was still above 59 in 2002; by comparison, the United States had a coefficient of about 47 in 2010. This year, estimates from the Central Intelligence Agency put Brazil’s number at 51.9, about the same as Chile and Mexico. Research by the International Monetary Fund suggests this enormous reduction in inequality could itself offer Brazil a further boost to economic growth.

Brazil’s strides against inequality are even more remarkable when considered in context. In the past decade, the forces of globalization were at their apex. Though globalization has narrowed inequality between countries, it has aggravated inequality within them more often than not. Emerging economies like Brazil have seen millions escape poverty, but existing elites have also used their wealth, education, and international connections to exploit lucrative export markets and foreign investments. As a result, income distributions have polarized in countries ranging from Costa Rica to Côte d’Ivoire.

Brazil has shown that globalization need not be synonymous with burgeoning inequality — in fact, quite the contrary: the benefits of globalization can be harnessed to reduce inequality. By bolstering the middle class and creating a workforce capable of competing globally, Brazil is equipping itself to take advantage of globalization to the fullest.

To be sure, times are tough right now. Brazil’s economy likely grew just 1 percent this year, adjusted for inflation, after bouncing back from recession in 2010 and 2011. Moreover, the combination of a slipping exchange rate and a reliance on foreign cash has made investment in new capital especially difficult. The attractiveness of the Brazilian market is starting to dim, and domestic finance isn’t picking up enough of the slack.

Yet to the degree this change in fortunes reflects short-term shifts in commodity prices and problems with liquidity, investors who are bearish on Brazil are missing the point. Brazil is on a much stronger path to long-term growth than its recent malaise would suggest, perhaps strong enough even to justify the flood of capital that entered the country beginning in the late 1990s. Its economy is sure to expand and diversify as its workforce becomes healthier and more educated. The changes won’t occur in a few months or years, but they will happen. If investors can’t look far enough into the future to see this, it’ll be their loss.