The Bolsa Familia Welfare Program in Brazil and its Impact on Poverty and Inequality

An analysis of the Bolsa Familia program compared to models and theory from 416 – by Erica Ryan

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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.[1] 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.[2] 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.[3] 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.[4]  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.[5] 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.[6] 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.

[1] https://blog.oup.com/2016/08/10-facts-economy-brazil/

[2] http://databank.worldbank.org/data/reports.aspx?source=poverty-and-equity-database

[3]http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21447054~pagePK:64257043~piPK:437376~theSitePK:4607,00.html

[4] http://eml.berkeley.edu/~dromer/papers/MRW_QJE1992.pdf

[5] https://www.brookings.edu/blog/up-front/2012/09/17/education-is-the-key-to-better-jobs/

[6]http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:21447054~pagePK:64257043~piPK:437376~theSitePK:4607,00.html

 

The two articles I analyzed are as follows:

Economic Crisis to Push 3.6 Million Brazilians Into Poverty

Forty Percent of Children Under 14 Live in Poverty in Brazil

 

Gigaba to take “tough, unpopular choices” to grow economy

By: Devin Griffiths

A summary of South Africa’s newest finance minister and the challenges he will face to lead a struggling economy.

gigaba

South Africa’s newest Finance Minister, Malusi Gigaba

The economy of South Africa has been on thin ice over the recent years, and if changes aren’t made soon this whole country may find itself in deep water. This article talks about Malusi Gigaba and the challenges ahead of him as South Africa’s newest finance minister. Gigaba replaced Pravin Gordhan who was not seeing eye to eye with South African President Jacob Zuma on the country’s financial plans. Gordhan was the finance minister from 2009-2014 and returned in late 2015 after the back-to-back firing of the finance ministers who had replaced him. Though Gordhan did not have the economy flourishing, he was able to keep it stable and he strengthened the rand (South Africa’s dollar) 20% upon his return in 2015. He planned to uplift the economy by cutting government spending and raising taxes on certain products to bring in more revenue. He also had the support of many investors and big businesses in the country that believed firing him could lead to market chaos. The rand has already dropped more than 5% since he was fired, and big investment firms like Old Mutual are seeing their shares decrease. The rand is currently .075 of the U.S. dollar. Zuma’s decision to fire Gordhan didn’t go well with many citizens either, including members of the ANC (African National Congress), which is his political party that has reigned throughout South Africa since the 90s. Citizens are suffering due to the failing economy and protests have broken out throughout the country over lack of services. Farmers have also been hit with the worse drought in over a century, which doesn’t help this country’s economic situation either. Many have said they will do what they can to make sure Zuma is no longer president in the near future.

South Africa’s economy is struggling so much that it is on the verge of reaching junk status from national agencies. Junk status is the low point for credit rating and would mean South Africa could be at high risk of losing its bonding privileges and therefore increasing its debt. The Citi World Government Bond Index has already said it would no longer support South Africa if it reached junk status. The fall in global commodity prices hasn’t helped either. The article also states that economic growth has also slowed to 0.3% in 2016 from a previous 1.3% in 2015. We can use the Rule of 72 to give us a perspective of just how slow this country’s growth rate is. This method estimates how many years it would take a country’s GDP per capita to double, given it’s current growth rate. It divides the number 72 by the growth rate. In South Africa’s case, it would take 240 years for income to double (72/0.3=240). Economic growth is determined by a multitude of factors from policies and market conditions to national resources. There are many different ways to go about increasing economic growth. The Harrod-Domar Model is an economic model that states economic growth depends upon saving and capital output:

Y = s/v-&

Y represents the growth rate, s represents savings, v represents capital output and & represents depreciation. Increasing savings while holding capital output steady can increase growth, or decreasing capital output while holding savings steady. Another way is to increase savings by more than you increase output. This is one example of many growth models. Below you can see a table provided by the World Data Bank that shows you the economic growth of South Africa over the past decade.

Year GDP growth (annual %)
2007 5.360474053
2008 3.191043888
2009 -1.538089135
2010 3.039734625
2011 3.284197135
2012 2.213258978
2013 2.330342259
2014 1.628871543
2015 1.264651378

Gigaba will be taking over financial minister of a country that is failing in almost every economic aspect. South Africa is also suffering from extreme economic inequality. Below is a table provided by the World Data Bank that shows you the income shares of each income group during the past decade.

Income Share % 2008 2011
Income share held by third 20% 8.05 7.97
Income share held by fourth 20% 15.79 15.9
Income share held by highest 20% 68.68 68.94
Income share held by second 20% 4.87 4.71
Income share held by lowest 20% 2.6 2.47

South Africa has one of the most unequal distributions of wealth in the world. The table of income shares shows that the top 20% own 68% of the wealth. These top 20% also own close to 100% in the country’s economic assets. To understand just how unequal the distribution of wealth in this country is, we can measure the Kuznets Ratio:

share of income owned by the poorest X% / share of income owned by the richest Y%

In this case we would divide South Africa’s poorest 20% by its wealthiest 20%. From the table, we would divide 68.94 by 2.47 = 27.91. This number is very high, and is triple the most recent Kuznet Ratio of the United States.The margin of wealth is so wide that a middle class technically does not exist. Even more inequality exists racially, as the white population owns the majority of the wealth, which is shocking considering that the white population make up only 8% of the country. A method that can decrease inequality is known as the Principle of Transfers. If wealth or resources are removed from the rich and given to the poor, inequality will go down. Unfortunately, increasing everyone’s wealth will not change inequality at all, which is known as Scale Independence. Capitalism is often criticized as a system where the rich continue to get richer while the poor consistently suffer. Wealth is often passed down from generation to generation. South Africa is a country that saw its first democratic government in 1994, evolving from that of an Apartheid system before hand. So it may not be that shocking to see the majority of the wealth in the hands of whites, considering that whites were historically always in power in South Africa up until the last two decades. Many citizens have continued to voice the issue of economic inequality to the government, and it is something Gigaba must try to change.

The road ahead of Gigaba will not be an easy one, which is something he definitely has realized. He knows he will have to make tough decisions and implement changes along the way, which will not always be supported by the citizens. As for now, he intends to stick to the financial plans laid out by Gordhan in February, which include seeking up to $2 billion in foreign aid for the next couple of years. He also maintains that he will work to redistribute wealth as well as shifting majority of it to blacks. There are many different models and formulas that can be used as guides to help decrease the problems in this struggling economy, so Gigaba will have a lot evaluate. He seems to be confident in his position, and hopefully his work will positively impact the economy of South Africa in the near future.

References

Cotterill, Joseph. “Fitch cuts South Africa’s credit rating to junk.” Subscribe to read. N.p.,      7 Apr. 2017. Web. 18 Apr. 2017.

Mullen, Jethro, and Alanna Petroff. “South African rand plummets after Finance Minister Pravin Gordhan is fired.” CNNMoney. Cable News Network, 1 Apr. 2017. Web. 18 Apr. 2017.

Orthofer Economics PhD Candidate, Stellenbosch University, Anna. “South Africa needs   to fix its dangerously wide wealth gap.” The Conversation. N.p., 6 Oct. 2016. Web. 18 Apr. 2017.

“South Africa’s economy ‘in crisis'” BBC News. BBC, 24 Feb. 2016. Web. 18 Apr. 2017.