My dear friend and colleague Rafael is from Brazil. For a long time I didn’t quite understand why he was here at the University of Maryland. Not only is Brazil the largest country in South America, it also has the largest population, largest economy, and is home to a vast amount of the natural resources in South America. Even so, the socioeconomic climate in Brazil is far from perfect. For this blog post I am going to focus on two articles that appeared in the Rio Times in early 2017, one titled “Economic Crisis to Push 3.6 Million Brazilians Into Poverty” and the other “Forty Percent of Children Under 14 Live in Poverty in Brazil.”
The first article talks about how the current economic hardships could push up to 3.6 million more Brazilians into poverty by the end of 2017, with most of the new poor living in urban areas. There is a welfare program in Brazil called Bolsa Familia that provides cash transfers to low income families, and the current crisis could add up to 1.16 million families to the program. Currently, there are no plans to increase funding for Bolsa Familia.
The second article talks about how seventeen million children under 14 are currently living in low income households, which is approximately 40% of the population in this age group. The North and Northeastern regions of Brazil are in a more critical state and have much higher percentages than the average (approximately 60% and 54% respectively). Around 5.8 million of these children are living with a per capita income of less than 25% of the minimum wage.
Income inequality and poverty are really big problems facing Brazil today. According to World Bank Data, the top 10% of the population holds 40.7% of the total income while the lowest 20% only holds 3.6% of the total income as of 2014. Since 2014, the economy has continued to shrink, many political leaders have been accused of corruption, and the president of Brazil was impeached, leading to the poverty and suffering discussed in the two articles.
The Bolsa Familia program is very important for improving conditions for the poor people in Brazil, particularly for poor children. The cash transfers it provides are conditional on the children of the family going to school and receiving regular health checkups. The cash transfer it provides should assist in reducing poverty simply because the poor now have more money, but it is important to look at both the income and the welfare of the poor when determining the effectiveness of the program. The conditionality of the transfer will do more in the long run to further reduce poverty and inequality and increase welfare.
The cash transfers make it easier for kids to attend school longer. When the decision of whether or not a child should continue attending school is being made, the expected utility of the education has to be compared to the opportunity cost (the wage they could earn if they worked instead) of that time spent in school. Because of time inconsistent preferences, people tend to discount the future benefit of education, which can lead to under consumption of education. For poor families this can be especially true because they need the income now, rather than later. So without the transfer, many children may end up working instead of going to school. With the transfer, the utility of education is increased, making the benefit of sending children to school higher.
The 1992 paper by Mankiw, Romer, and Weil shows that the accumulation of human capital is an important factor for economic growth in a country in the Solow model. The current recession in Brazil is caused by a variety of factors unrelated to the Solow model; however, in order for Brazil to move past their recession and work towards positive economic growth, accumulation of human capital is vital. Because Bolsa Familia requires that children attend school in order for the family to receive the transfer, this program is promoting education which, according to theory, should contribute to rising economic growth. Studies have also shown that increased education leads to higher wage profiles later in life. Requiring that these poor children continue their education could lead to a reduction in inequality if, because of their education, they are able to obtain higher paying jobs as adults and break the trend of generational poverty.
The health checkup requirement of the transfer can also lead to higher human capital and increased productivity. Being healthy means that kids don’t have to miss as much school and will be able to learn more. Regular health checkups can also help to identify and correct health issues that might otherwise become major problems later on in their lives, limiting their future productivity. Studies of the Bolsa Familia program have shown that most of the transfer is used to purchase food, clothing, and school supplies for the children. The nutritional component of food consists of quality and quantity, and malnutrition is linked to higher rates of mortality and stunting. The transfer would effectively relax the budget constraint. This could help families satisfy their nutritional needs while also allowing them to re-optimize and select foods with greater variety and nutritional content, which should have positive effects on welfare.
The current sociopolitical climate in Brazil is certainly less than optimal, and it is absolutely terrible that so many more people, including many children, are going to be pushed into poverty as a result of this recession. The Bolsa Familia program will be vital not only in the current alleviation of poverty, but also for sustained reduction of poverty. The investments the program makes in children will help to improve the health and welfare of poor children, while also allowing them to increase their human capital. According to the Solow model augmented with human capital, this should lead to higher growth rates, which should help Brazil to escape their recession. The increase in human capital should also help poor children to escape generational poverty, which will lead to a reduction in inequality. The Bolsa Familia program is important not only for improving the lives of the poor, but also for moving Brazil as a whole towards a better socioeconomic climate.
The two articles I analyzed are as follows: