Brazil: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
22 Sep 1999
eISBN:
9781451805895
ISBN:
9781451805895
Language:
English
Keywords:
ISCR; CR; break; inspections department; government; company; central bank report; sector worker; poverty headcount; GDP decline; countercyclical poverty reduction; income support; Income; Unemployment benefits
Download PDF (3.8 MB)

This Selected Issues paper and Statistical Appendix on Brazil looks at price developments following the floating of the Real in mid-January 1999. The paper highlights that the experiences in East Asia—Indonesia, Korea, Malaysia, Philippines, and Thailand—all show that the pass-through from devaluation to inflation has been lower than expected, with the exception of Indonesia. The paper analyzes the competitiveness and export performance of Brazil. Effects of high interest rates and currency depreciation on Brazilian enterprises are also analyzed.

Abstract

This Selected Issues paper and Statistical Appendix on Brazil looks at price developments following the floating of the Real in mid-January 1999. The paper highlights that the experiences in East Asia—Indonesia, Korea, Malaysia, Philippines, and Thailand—all show that the pass-through from devaluation to inflation has been lower than expected, with the exception of Indonesia. The paper analyzes the competitiveness and export performance of Brazil. Effects of high interest rates and currency depreciation on Brazilian enterprises are also analyzed.

IX. Strengthening social policy Instruments1

A. Background

1. The impact of the recent financial crisis in Brazil on output, formal sector employment, and prices turned out to be less severe than anticipated.2 For instance, the GDP decline in 1999 is now expected to be around 1 percent—significantly smaller than the 3.8 percent projected in January. However, the effect of economic slowdown and real exchange rate depreciation on both poor and near-poor households—who mostly derive livelihood from the informal sector—is not yet known.3 To meet the contingency of higher poverty as well as to alleviate existing poverty, social policy instruments should be strengthened and made more cost-effective. Brazil already allocates considerable resources to various social programs. Improving their cost-effectiveness is critical when fiscal retrenchment is the key element of ongoing economic reforms in Brazil.

B. The Poor and Their Characteristics

2. The latest available data for 1997 suggests that 22.6 percent of the Brazilian population (36 million) lives below the poverty line.4 Poverty declined by roughly one-third from more than 30 percent of the population in 1993. Around 80 percent of the poor work but do not earn enough. They are found predominantly in rural areas, in the Northeast, and possess less than four years of formal education. About half of the population below the poverty line is in the informal sector.

3. The poverty situation in Brazil has to be evaluated in the context of the country’s relatively high-income inequality. The income share of the richest 20 percent was 64.2 percent—26 times the share of the poorest. However, the initial years of the Real Plan appear to have benefited disproportionately low-income groups. The Gini coefficient was estimated at 0.61 in 1995, down from 0.63 in 1994. The improvement in the income position of low-income households, particularly in the nontraded sector, has been attributed to the fall in inflation and the appreciation of the real exchange rate, which increased the relative price of nontradeables that are relatively more intensive in unskilled labor.5 During 1994–97, the income gains of workers in the nontradeable sector (including those displaced from the formal sector and who found refuge in this sector) have been estimated to be significantly larger than those employed in the tradeable sector.6

4. Both the poverty headcount and Gini have begun to increase since 1997. The resources needed to eliminate poverty are estimated to be small, at around VA percent of GDP, particularly in relation to spending on existing social programs of 19 percent of GDP.

C. Existing Social Policy Instruments

Overall spending on social programs

5. As noted earlier, a substantial share of consolidated government spending—over 19 percent of GDP in 1995—is devoted to social programs (Table 9.1).7 However, the vast majority of this spending is not well targeted to the poor and do not focus primarily on countercyclical poverty reduction.

Table 9.1.

Consolidated Government Outlays on Social Programs, 1995

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Sources: IPEA; MARE; and IMF staff estimates.

6. More than half of social spending is on the two public social security programs. The Regime Geral da Previdência Social (RGPS) covers workers in the formal, private sector; while the Regime Jurídico Único (RJU) covers public sector workers at all levels of government. Financial imbalances in the RGPS and RJU are at the core of Brazil’s fiscal problems. The combined primary deficit in these two programs totaled 4.7 percent of GDP in 1998; including interest on accumulated deficits, the two programs account for more than the general government deficit. The primary goals of the ongoing reforms are to improve equity, and the fiscal and actuarial soundness of these programs.

7. Although the pension systems are not designed to fight poverty directly, the minimum pension in the RGPS can be an important source of income support for the poor. Roughly 70 percent of all beneficiaries—primarily rural workers, for whom special criteria apply, and urban workers, especially women, who meet the minimum length of service requirements for an old-age pension—receive this minimum benefit, which accounts for approximately 35 percent of total benefits. Included in this group are roughly 1 million beneficiaries who receive minimum benefits on the basis of age or disability, despite short length of service (the Renda Mensal Vitalícia program).8

8. The unemployment insurance program provides countercyclical income smoothing for the same formal-sector workers who belong to the RGPS. Unlike the RGPS, however, the unemployment insurance program is adequately funded by Fundo de Amparo ao Trabalhador (FAT) through a turnover tax.9 Since formal sector workers are better paid and have other sources of income for periods of unemployment (severance pay and a mandatory saving plan), they are much less likely to fall into poverty during the current economic slowdown. 10

9. Brazil currently invests a larger than average share of its GDP on health and education, but with relatively poor results, especially in education. This is partly the outcome of institutional rigidities in financing mechanisms, and the mismatch between centralized financing and decentralized provision. Brazil is currently working with the World Bank to improve the efficiency and equity of spending in these sectors.11 Given that states and municipalities control most current outlays, the federal government has little discretion to reprogram resources in the short term.

10. In summary, a cursory look at broad aggregate spending on social programs reveals that relatively few resources are available to counteract a short-term increase in poverty, especially if attention is restricted to spending at the federal level. Moreover, existing programs are subject to substantially greater scrutiny in the current fiscal situation; the benefits that accrue from any use of resources to counteract poverty will have to be weighed against the benefit of fiscal adjustment. Poverty alleviation can yield important benefits in the short term, but fiscal adjustment will pay long-term dividends for the poor in Brazil.

The core social programs

11. To ensure delivery of critical social services in the near term, the authorities, in collaboration with the World Bank and the DDB, have identified a set of 22 core social programs that are relatively cost-effective and should be protected while more comprehensive restructuring of the social sector is undertaken. The 22 core programs are listed in (Table 9.2) 12 Several of these programs are recent innovations designed to improve the delivery of public services. Reflecting their value, the share of GDP devoted to them has increased from 1.1 percent in 1997 to roughly 1.2 percent in 1998–99, at the same time that spending on other programs was substantially cut.

Table 9.2.

Federal Spending on 22 Core Programs, 1997–99

(In millions of reais)

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Sources: Ministry of Planning and Budget; and Fund staff estimates.

12. Despite their long-term value, the 22 core programs provide limited protection against poverty during an economic downturn. Almost half of the money devoted to these programs goes to unemployment insurance. This program is obviously countercyclical, but focuses on relatively higher-income formal sector workers. Of the programs in education and health, the school lunch and health programs and the floor on financing of basic health services can provide needed nutrition and health care to those who are hardest hit by an economic downturn, provided they are adequately funded.13 The social assistance programs—especially the LOAS, Bolsa Escola, and child-labor eradication programs, since they provide income support to the most needy—14 have the greatest potential for mitigating poverty.

13. In conclusion, even taking account of a substantial share of resources spent on minimum pensions in the RGPS, total spending in programs that are likely to mitigate an increase in poverty over the short term is less than 1 percent of GDP. However, the most important gap in social policy instruments in Brazil is the absence of a program that directly addresses income losses of workers in the informal sector.

D. Options for Strengthening Social Policy Instruments

14. Although formal sector unemployment has begun to fall, and the output decline has plateaued, it is important to strengthen social policy instruments to help the existing poor and near-poor to withstand income losses during 1999 and to ensure their access to critical social services. Such an approach would complement the ongoing economic adjustment and reforms. The following options would improve social protection at a low budgetary cost.

Implement a workfare program

15. A workfare program that seeks to transfer income principally to poor, informal sector workers would help to protect their consumption until the economy resumes strong growth. The program could focus on labor-intensive activities in poor communities (urban infrastructure, childcare and health, education). This type of program was implemented in 1998 in the Northeast in the aftermath of the drought, and benefited around 1 million people.15 16 It was financed by a loan from FAT.

16. The authorities have already responded to meet the short-term income needs of the poor. A workfare program along the lines of the program implemented by the municipality of São Paulo is under consideration by the federal government. The federal program would target 1 million workers and pay one minimum wage per month during six months. Beneficiaries would also attend retraining courses (two hours per day).17 The cost of the program to the federal government is estimated at R$1.4–R$1.5 billion. As with the Northeast drought program, financing could be provided through FAT.18

Strengthen funding for Lei Orgânica da Assistência Social (LOAS)

17. As noted earlier, the LOAS program is the primary mechanism for providing cash support to the elderly and the disabled living in poverty.19 Less than half of the applications for disability benefit are approved and their targeting is problematic. The funding for LOAS was increased in the revised fiscal program for 1999 from R$1,116 million to R$1,435 million to ensure timely payments to 33,000 beneficiaries estimated in November 1998 and any new beneficiaries due to the economic slowdown. However, the monitoring of eligibility and compliance should be improved to ensure that the program’s resources are well targeted.20

Strengthen the Bolsa Escola Program (Programa de Garantia de Renda Minima)

18. Bolsa Escola provides income support to poor families to maintain their children (7 to 14 years of age) at school. The national program was motivated by successful initiatives undertaken by a number of state governments. The 1999 budget provides R$100 million for this program, R$215 million less than in the initial budget proposal. Extending this program could prevent school drop out rates from increasing and also act as a countercyclical poverty alleviation measure.21 Because funding is provided jointly by the federal and municipal governments, one difficulty with raising federal allocations is that contribution from the municipalities may not always be forthcoming.22

STATISTICAL APPENDIX

Table 1.

Brazil: Macroeconomic Flows and Balances

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Sources: Brazilian Institute of Geography and Statistics (IBGE); and Fund staff estimates.

Includes changes in stocks.

Table 2.

Brazil: GDP and Real GDP per Capita

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Source: Brazilian Institute of Geography and Statistics (IBGE).
Table 3.

Brazil: National Accounts at Current Prices

(In millions of reais)

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Sources: Brazilian Institute of Geography and Statistics (IBGE); and Fund staff estimates.
Table 4.

Brazil: National Accounts at Constant Prices

(In 1985 millions of reais)

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Sources: Brazilian Institute of Geography and Statistics (IBGE); and Fund staff estimates.

Contribution to growth.

Table 5.

Brazil: Industrial Production

(Annual percentage change)

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Source: Brazilian Institute of Geography and Statistics (IBGE).
Table 6.

Brazil: Retail Sales in the São Paulo Metropolitan Area

(Seasonally Adjusted)

(1988 average = 100)

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Source: State of São Paulo Commerce Federation.

Includes durable, semidurable and nondurable goods.

Table 7.

Brazil: Price Statistics

(Monthly percentage change)

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Sources: Brazilian Institute of Geography and Statistics (IBGE); and Getulio Vargas Foundation.

A weighted average of the IPA-DI (weight of 0.6), INCC, (weight of 0.1), and the IPC-DI consumer price index (weight of 0.3).

Table 8.

Brazil: Consumer Price Index

(IPC-FIPE) 1/

(Monthly percentage change)

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Source: Brazilian authorities.

Consumer price index of São Paulo, not seasonally adjusted.

Table 9.

Brazil: Relative Public Sector Prices and Tariffs 2/

(Average 1991=100) 1/

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Source: Central Bank of Brazil.

Deflated by the IGP-DI price index.

The Central Bank stopped producing the above series since many of these prices have already been liberalized.

Table 10.

Brazil: Open Unemployment Rate 1/

(In Percent)

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Source: Brazilian Institute of Geography and Statistics (EBGE).

Survey data from 6 metropolitan areas (Belo Horizonte, Porto Alegre, Recife, Rio de Janeiro, Salvador, São Paulo), using a seven-day reference period.