Brazil : Inequality and Economic Development, Volume 2. Background Papers

The present Report is motivated by the coming together o f three widespread perceptions about inequality, two somewhat newer and one long-standing. The two newer ones are; (i) that inequality may matter for the country's economic development, and (ii) that public policy can and should do something about it. The old perception, which is well borne out b y the facts, is that Brazil occupies a position o f very high inequality in the international community. Therefore, this report tries to explain what makes Brazil so unequal and to what extent the interaction o f labor market forces and public policies -or the lack of them- contribute to this undesirable outcome. For instance, in what measure is social mobility becoming more independent o f family background thanks to progressive public policies in basic education, health and nutrition. Accordingly, the report is organized around three basic questions. The first section asks why inequality might matter for the country's economic development. Why it matters for poverty reduction, for social justice equality o f opportunities and social mobility, and for economic and political efficiency. The second section asks why Brazil is so unequal. It seeks a deeper understanding of what lies behind Brazil's position as one of the most unequal countries in the world, as shown in typical international comparisons, the dynamics of income inequality, and the magnitude of inequality across regions, racial groups, and gender. Then, it attempts to shed light on why this may be so. It investigates the causes of Brazil's excess inequality in four dimensions: the distribution of assets - human and nonhuman-, the price of those assets, the behavioral difference in the labor market and fertility, and, finally, the distribution of state transfers and entitlements - public expenditure and taxation-. The third section asks whether there is a role for public action aimed at reducing inequalities, and considers some lessons from theory and evidence on the relative effectiveness of alternative approaches. First, it considers how the provision of education might affect not only the distribution of human assets in the long run but the relative prices of human capital for different levels of skill. Second it examines how public policy toward rural land use must take into account inefficiencies that are closely linked to inequities of land distribution. Finally, it investigates how taxation and public expenditure policies reduce income inequality and inequality of access to basic social services. The fourth section concludes.