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Brazil: A Poverty Assessment

 

Brazil FY95 PA

Main Report  (10.1Mb PDF)

Annexes (10.4Mb PDF)

Poverty Profile

The level of poverty in Brazil is well above the norm for a middle-income country. Within Brazil, there are wide disparities in the extent of poverty. More than half of all poor Brazilians live in the Northeast. In spite of urbanization, rural and urban areas contribute equally to national poverty. Poverty disproportionately affects the young. The participation of children in the labor force in Brazil is at least twice as high as in any other country in Latin America. In the North and Northeast regions, about a quarter of children under the age of five suffer from chronic malnutrition. Poverty alleviation programs should focus more on children than they do now.

Poor rural households are concentrated in the Northeast. The household head is illiterate (frequently even if he attended school) and works in agriculture. About half are smallholders or sharecroppers. The rest are employees or temporary workers. Poor households are large--they have nearly twice as many children as the better-off. Access to utilities is rare.

Poor urban households are evenly dispersed between large cities and small towns; 40 percent live in the Northeast. They have more young children than wealthier households and spouses are not likely to participate in the labor market. The household head tends to be young, does not have a labor card, and most commonly works in services. Many are self-employed. A quarter of these household heads are illiterate; about half attended school for four years or less. These households have significantly less access to water and sanitation services than do better-off urban households.

Incentive and Regulatory Framework

Economic growth reduced poverty in the 1970s because formal employment expanded and wages rose. However, in the 1980s, recession hit the private sector, and the government was the engine of growth in the "boom" years. The impact on the poor is reflected in the growing informality of the labor force and negligible income growth. Macroeconomic instability lowered average income for the poor and hurt the poorest the most. Although income declined over the 1980s for all income groups, it fell most for those at the bottom--in contrast to the 1970s when those at the bottom and the top shared equally in the gains from growth.

Price stability must be sustained in order to resume progress in poverty reduction. The poor stand to gain from lower inflation, through lower inflation taxes and transaction costs, and indirectly through high growth and wages associated with a stable economy. Second, one strength of the economy is that there is considerable labor market flexibility and job generation. Thus, there is no compelling rationale for introducing public employment generation programs in most areas of Brazil to reduce poverty. There would be much greater payoff from reducing informal in favor of formal sector employment, for example, by reducing the high level of payroll taxation. The removal of barriers to entry and of incentives to evade taxes and regulation would also begin to incorporate informal activities into the formal sector. The combined effect of these changes would be to raise the real wages of unskilled labor--the main asset of the poor. Third, few of the poor are formal workers. Policies geared explicitly to workers currently in the formal sector--an increase in the minimum wage, for example--are unlikely to benefit the poor.

Although agriculture has performed well in Brazil, there has not been a commensurate reduction in rural poverty. The major reason is that the benefits of agricultural programs in Brazil were captured in the form of high prices for land, which is very unequally distributed. Recently the government's strategy for rural development has changed. It has reduced taxation on agriculture, and states play a greater role in determining their development strategies. In addition, the government is encouraging small-scale activities selected by beneficiaries. These changes seem likely to improve the welfare of the rural poor and to lead to more pro-poor rural development.

Public Expenditures

Brazil spends large sums of money on social programs--$90 billion, about a fifth of GDP, in 1990. However, this has not translated into improved social indicators or poverty alleviation. In part, this is because the distribution of the benefits of public social spending in Brazil is pro-rich. The bottom quintile receives only 13 percent of total benefits, compared to 24 percent for the top quintile. The implication is that simply increasing social spending will do little to alleviate poverty. Rather, the priority is to restructure spending across programs and improve the administration and increase the efficiency of social spending. For example, the share of spending for primary education and nutrition programs for young children should be increased. The data show that many public social institutions--including schools--only partially reach the poor. Other delivery mechanisms will have to be sought--communities and community health workers, for example--and programs should be designed to promote more use of basic social services by the poor.

Safety Nets

Nutrition assistance does not adequately reach the most needy population--young children and the residents of the Northeast. The government could and should do more to address the problems of malnutrition, particularly among young children in the Northeast and Northern regions. The poor do not capture much of the benefits from social security, which is not really designed to reach them. However, it does have a negative effect on them. Recently the government has cut health spending in order to finance social insurance benefits, shifting resources from a progressive to the least progressive component of social expenditures. The distortionary employment effects from high payroll taxes--which account for virtually all contributions--are adverse and significant and hit the poor the hardest.

Poverty Strategy

Two instruments that would address the needs of both urban and rural poor households are: targeting interventions to the Northeast and expanding child care and preschool facilities in poor neighborhoods. Broad geographical targeting should be coupled with complementary targeting criteria (for example, nutritional status) to ensure that benefits reach the poor. The latter would facilitate labor force participation by women and could provide a mechanism for delivering services to young children.

Rural households who can only find seasonal work could benefit from employment generation programs in the off-season. Increasing access to land would also benefit rural households. In the absence of land, migration will probably remain the most important way in which they increase their income. Fortunately, the labor market has easily absorbed these migrants. If rural children stayed in school longer, they would be less likely to remain poor. Poor rural households would also benefit from well-targeted, low-cost expansion of access to basic utilities.

Fewer adults, particularly women, in poor urban households work than in better off households. Poor households would benefit most from measures to promote employment in the formal sector, especially the reduction of Brazil's high payroll taxes (in addition to the childcare facilities mentioned above). Programs to expand access to water and sanitation services in urban areas could be targeted to the poor.

On the other hand, some policies would not meet the needs of the urban poor. Few of them have a labor card, so increases in the minimum wage and unemployment insurance would probably not be effective tools. General subsidies, even on products or services such as urban transport that represent a large budget share for the poor, would have high leakages to wealthier consumers.

Although rural development policies have improved, they are not as pro-poor as they could be because the rural poor are still at a disadvantage in land markets. Reform of land markets in Brazil would tend to increase the amount of land used by smaller, more efficient farmers. This change would benefit smallholders (who could increase their holdings), as well as agriculture workers. The priorities include reforming the Land Statute and labor legislation and closing income tax loopholes with a view to removing both disincentives to allow temporary access to land and incentives to land concentration.

Statistical System

Currently Brazil does not officially monitor trends in poverty, but this should clearly be done systematically as part of a poverty alleviation strategy. It is possible to monitor poverty using the current statistical data in Brazil. Nevertheless, there are some additions that could increase the government's ability to design programs and policies to alleviate poverty and to evaluate their effectiveness. First, more data are needed on household expenditures, which for many reasons are a better yardstick than income for measuring welfare. Second, more data are needed on the utilization of public services, particularly health services. Third, more analysis is needed of the factors that contribute to Brazil's relatively poor social indicators, especially for the poor. Fourth, the quality of the statistical data for rural households should be improved. Focusing on expenditures is a first step, but more information is also needed on production patterns and asset ownership. An initiative has been started to pilot test a new integrated household survey following the Living Standards Measurement model, which would help to fill the gaps mentioned above.

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