ABSTRACT
The research aims to find the relationship between income inequality and
economic growth in the Brazilian economy. Economic growth and income
inequality are defined in the light of academic literature and their varied effect on
wellbeing are explored. The research methodology selected is deductive. The data
have been collected through secondary sources and a multiple regression model is
used to study the relationship between the economic performance and income
inequality in Brazil. Contrary to many previous studies, the findings of the
research suggest a significant positive relationship between these two variables.
Newer and reliable data were used for these estimations. Other findings of the
study are that human and physical capital have significant positive effect on
growth. It was also concluded that, unlike many recent country and cross-country
studies, Brazil’s income inequality does not hinder its growth.”
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Table of Contents
CHAPTER ONE …………………………………………………………………………………………………………… 4
1.0 INTRODUCTION……………………………………………………………………………………………………….. 4
1.1 MEASURES OF INEQUALITY ………………………………………………………………………………………. 7
1.2 BRAZIL’S INEQUALITY FACTS AND FIGURES ……………………………………………………………….. 7
1.3 WHY IS BRAZIL’S INEQUALITY LEVEL SO HIGH? …………………………………………………………. 9
1.4 ECONOMIC GROWTH, INCOME INEQUALITY, AND POVERTY…………………………………………… 9
CHAPTER TWO ………………………………………………………………………………………………………… 14
3.0 LITERATURE REVIEW …………………………………………………………………………………………….. 14
3.1 EARLY STUDIES…………………………………………………………………………………………………….. 14
3.2 NEWER STUDIES ……………………………………………………………………………………………………. 17
CHAPTER THREE…………………………………………………………………………………………………….. 18
3.0 THEORETICAL FRAMEWORK……………………………………………………………………………………. 18
3.1 FERTILITY RATE……………………………………………………………………………………………………. 19
3.2 GENERAL HEALTH IN A SOCIETY……………………………………………………………………………… 20
3.4 CREDIT MARKET IMPERFECTIONS ……………………………………………………………………………. 20
3.5 REDISTRIBUTION PROGRAMS…………………………………………………………………………………… 21
3.6 SOCIOPOLITICAL UNREST ……………………………………………………………………………………….. 22
3.7 SAVINGS RATE ……………………………………………………………………………………………………… 22
3.8 OVERALL EFFECT………………………………………………………………………………………………….. 23
CHAPTER FOUR……………………………………………………………………………………………………….. 24
4.0 METHODS AND MATERIALS…………………………………………………………………………………….. 24
4.1 RESEARCH DESIGN AND POPULATION OF STUDY………………………………………………………… 24
4.2 DATASET ……………………………………………………………………………………………………………… 25
4.3 THE MODEL………………………………………………………………………………………………………….. 27
4.4 DATA PROCESSING ………………………………………………………………………………………………… 28
CHAPTER FIVE ………………………………………………………………………………………………………… 29
5.0 RESULTS AND DISCUSSION ……………………………………………………………………………………… 29
5.1 RESULTS………………………………………………………………………………………………………………. 29
5.2 DISCUSSION………………………………………………………………………………………………………….. 30
5.3 TESTING FOR HETEROSKEDASTICITY………………………………………………………………………… 32
5.4 TESTING FOR SERIAL CORRELATION ………………………………………………………………………… 34
CHAPTER SIX …………………………………………………………………………………………………………… 35
6.0 CONCLUSION ………………………………………………………………………………………………………… 35
REFERENCES…………………………………………………….ERROR! BOOKMARK NOT DEFINED.
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List of Figures
Figure 1: GDP per capita (PPP) in US Dollars for Brazil 1980 – 2016…………………………………… 4
Figure 2: Annual GDP growth for Brazil 1980 – 2015 ………………………………………………………… 5
Figure 3: Brazil’s Gini Index 1970 – 2014 …………………………………………………………………………. 8
Figure 4: Poverty and Economic Growth in Brazil ……………………………………………………………. 11
Figure 5: Poverty and Inequality Trend in Brazil ………………………………………………………………. 12
List of Tables
Table 1: Income share of the highest and lowest 20% in Brazil for selected years…………………… 8
Table 2: Data Sources……………………………………………………………………………………………………. 26
Table 3: Data information………………………………………………………………………………………………. 26
Table 4: Results…………………………………………………………………………………………………………….. 29
Table 5: White Test for Heteroskedasticity ………………………………………………………………………. 32
Table 6: Breusch-Pagan Test for Heteroskedasticity………………………………………………………….. 33
Table 7: Durbin-Watson Test for Serial Correlation ………………………………………………………….. 34
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CHAPTER ONE
1.0 Introduction
Brazil is a developing Latin American country. Its political and economic growth over the past
three decades, in which annual GDP growth rate averaged 3.2% has spurred research worldwide.
Today, Brazil ranks as the 7th largest economy in the world (by PPP GDP) with a per capita GDP
of $15, 390 (World Bank, 2017). Despite the recent economic turndown, the growth rate is
expected to increase in the near future and its economic power is likely going to overtake even
more countries. Politically, the economy has experienced tremendous success and international
recognition. It has hosted some of the world’s biggest events. Among these are the FIFA World
Cup in 2014 and most recently, the 2016 Summer Olympic Games. Figure 1 shows Brazil’s GDP
per capita trend from 1980 to 2016.”
Figure 1: GDP per capita (PPP) in US Dollars for Brazil 1980-2016
Source: (World Data Atlas, 2017)
Brazil has one of the highest income inequalities in the world despite its impressive growth rates.
This is evident in its Gini coefficient. The United Nations Department of Economic and Social
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
14,000.00
16,000.00
18,000.00
GDP Per Capita
Year
GDP Per Capita (PPP)
5
Affairs (2015) defines Economic or income inequality as “how economic variables are
distributed among individuals in a group, among groups in a population, or among countries”.
The Gini coefficient measures the extent to which household or individual income in a country
deviates from perfectly equal distribution (World Bank, 2017). This coefficient lies between 0
and 1; with 1 meaning perfectly unequal income distribution and 0 meaning perfectly equal
distribution of income. The Gini index is the Gini coefficient expressed as a percentage. Brazil
has a Gini index of 51.48% as of 2014. This makes it one of the highest in the world and ranks it
the highest among the twenty biggest world economies in GDP terms. Patterns in the data show
that the economy has had a relatively stable income inequality for a long time and this only
started to drop slightly in the last decade. Other inequality metrics like the income share of the
highest and lowest 20% in the economy supports the fact that Brazil has very high income
inequality. As of 2014, the bottom 20% (the poor) held 3.62% of total income compared to a
56.25% held by the top 20% (World Bank, 2017).”
Figure 2: Annual GDP growth for Brazil 1980 – 2015
Source: (World Bank, 2017)
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GDP Growth (annual %)
Year
GDP Growth (annual %)
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Many researchers since the nineteenth century have attempted to study the relationship between
growth and income inequality. Majority of the studies conducted recently have found that
income equality propels, while income inequality hurts growth. However, it is quite surprising
that Brazil still experiences high growth despite its high income inequality. This fact makes this
empirical research an interesting topic. Most of these recent researches use cross-sectional
approach or cross-country analysis to study this relationship. The objective of this paper is
therefore, to improve understanding of the effect income inequality has on the economic
performance of Brazil. Unlike successive studies, it will make use of data on Brazil over a longtime period to study this relationship. The research hopes to find answers to the following
questions:
Is income inequality actually related to economic growth in Brazil?
If there is truly a relationship, is it a positive or an inverse relationship?
Hence, the hypotheses formulated for this study are:
H0: There is no significant relationship between income inequality and economic growth in
Brazil.”
HA: There is a significant relationship between income inequality and economic growth in
Brazil.”
This chapter looks at a brief overview of inequality in Brazil, its causes, and how it is measured.
Chapter two discusses some old and recent studies conducted by economic researchers on the
impact of income inequality on economic growth. The third chapter looks at a couple of theories
that try to explain this relationship. The following chapter analyses and explains the methods
used in the empirical part. Using recent Gini index data on income inequality, chapter five
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empirically studies the impact Brazil’s income inequality has on its economic performance. The
chapter uses regression analysis to estimate the relationship. The discussions of the findings are
also contained in the chapter.
1.1 Measures of Inequality
There are different measures that describe a country’s income inequality but the Gini index is the
most commonly used. This index takes on a number between 0 and 1, with 0 being perfectly
equal society and 1 being perfectly unequal. Another method, mostly used by scientists to
calculate income inequality is the Hoover index (Hoover, 1936). It is also called Robin Hood
index. This measure describes how much of a society’s income has to be transferred from the
hands of the rich to those of the poor in order to get a perfectly equal society. It can be
represented graphically as the area with the largest difference between the Lorenz curve and the
total equality curve. The Hoover index, just like the Gini index takes values between 0 and 1,
with 1 being a total unequal society. Other indexes used to measure inequality are the Theil
index, the Atkinson index and the income shares. These indexes are mostly used when analyzing
income inequality among subgroups. Most economic research use the Gini index because it is
more readily available and simpler than other indexes. This paper would also make use of the
Gini index.
1.2 Brazil’s Inequality Facts and Figures
Among world’s most unequal countries, Brazil ranks 4
th (Withnall, 2016). The Gini index over
the past century has been quite steady before it peaked in the late 80s. In the early 90s, it began
to fall drastically and not long enough, went up sharply. It has been a bit stable ever since until in
2002 when the fall accelerated. Figure 4 shows Brazil’s income inequality trend from 1970 to
2014. Over this period, its Gini index has not gone below 50, which is why it has been
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considered as one of the world’s most unequal societies since the last century. Table 1 shows the
income share of the highest 20 percent of the population in Brazil compared to the share of
income held by the lowest 20 percent. Although there has been an improvement in income
distribution, a lot still needs to be done.”
Figure 3: Brazil’s Gini Index 1970 – 2014
Source: (World Bank, 2017) and ( World Income Inequality Database, 2017)
Table 1: Income share of the highest and lowest 20% in Brazil for selected years
Year Income share of top 20% Income share of bottom 20%
1990 64.61 2.33
1995 63.83 2.44
2000 63.38 2.45
2005 61.03 2.90
2010 57.95 3.21
2014 56.25 3.62
Source: (World Bank, 2017)
48.00
50.00
52.00
54.00
56.00
58.00
60.00
62.00
64.00
66.00
Gini Index
Year
Gini Index
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1.3 Why is Brazil’s Inequality Level So High?
Looking at this incredibly high unequal income distribution, the question that comes to mind is
why does Brazil have this high inequality? There is no single answer to this question; so many
factors are involved. All around the world, the major contributor to income inequality is the
differences in human capital. This has to do with individuals’ health and education. These
differences lead to variations in the labor market’s returns. As inequality in the acquisition of
human capital increases so does the returns to education. This results to a skewed income
distribution in the society (Weil, 2012). Another source of income inequality is geographical
differences. For instance, this involves inequality between urban and rural settlers, race or gender
discrimination and a new technology that favors the few skilled workers in a society, among
others. The government also plays a role through its policies regarding income distribution. A
study conducted by Bourguignon et al. (2002) compared Brazil and other countries (Columbia,
United States, and Mexico) with regards to the impact of an unequal distribution of education.
Their findings showed that the differences in returns to schooling, coupled with work experience
explain about 40% of the variation in inequality in Brazil and the United states. In terms of
geographical differences, urban Brazil had a Gini index of 60% in 2005 compared to 54% in the
rural region, which were way above the average in other Latin American countries (Banerjee &
Duflo, 2003). Government policies in Brazil also contribute to the country’s inequality.
1.4 Economic Growth, Income Inequality, and Poverty
The whole essence of studying inequality and economic growth is to raise a case for the poor and
marginalized people. In highly unequal societies like Brazil, while the rich are very wealthy that
they are comparable to those in developed countries, the poor keep getting poorer and their
numbers keep increasing. The welfare of the people is the sovereign duty of the government.
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Therefore, studies like these inform policymakers the extent to which the society is unequal and
the plight of the poor in meeting their basic needs of life. In recent times, the debate surrounding
the development experience, available policy options, and future prospects of Brazil has been
dominated by the country’s inequality and poverty. Extensive literature on the distribution of
wellbeing in Brazil exists. Most of these studies try to describe levels and dynamics of poverty
and inequality outcomes, analyzing sectorial and regional gaps, studying the links to human
capital outcomes and labor markets, spending patterns of the public, and so forth. From the body
of research, this fact about Brazil seems to be worth reiterating: compared to other countries,
Brazil is a clear outlier inequality wise, and accounts for the majority of Latin America’s poverty
rate (Elbers, Lanjouw, Lanjouw, & Leite, 2004). Earlier sections of this paper looked at a
background on the economic growth and income inequality facts and figures in the Brazilian
economy. What effect then, do these two variables have on poverty in the country? Brazil is one
of the emerging economies (BRIC countries) due to its rapid economic growth. However, this
growth has had little effect on the wellbeing of Brazilians at the bottom of the income pyramid
over the years. In 1990, 17.4% of the Brazilian population lived below the poverty line while the
growth rate during the same year was around – 3.1% (World Bank, 2017). By 2005, the economy
had recovered and growth increased to about 3.2% and as one would have expected, poverty rate
did not fall, rather it increased to 31%. Growth increased dramatically by 5.1% in 2008 but
poverty still remained at 26%, fell to 21.4% in 2009 and remained the same through 2014. One
would expect that since growth increases rapidly in the economy, poverty would be reduced by a
considerable extent, but that is not the case. Figure 4 shows the relationship shared by economic
growth and poverty in Brazil.
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Figure 4: Poverty and Economic Growth in Brazil
Source: (World Bank, 2017)
The figure illustrates that there has been some progress in reducing poverty from the mid 90s as
compared to the 80s, through the early 90s. Nonetheless, being that Brazil is an emerging
economy that is growing very fast, this progress is far below expectations. A message for
policymakers; more needs to be done to reduce poverty. What this trend represents is that
economic growth is relatively ineffective in reducing poverty. Perhaps the reason why the
economic growth is not impacting on the poor is due to the country’s high income inequality. It
makes sense to think of it this way; any growth achieved by the economy is pocketed by the rich
and thus, never gets to the poor. The little reduction in poverty has been largely attributed to
government policy (The Economist, 2011). With this, there has also been a fall in income
inequality, though it still remains high compared to levels prevalent in developed countries and
some developing countries. Figure 5 shows the trend in the Gini index and poverty in Brazil.
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Poverty and Economic Growth
Population below poverty
line, %
GDP per capita growth
(annual %)
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From the pattern exhibited by this figure, the questions that come to mind are: Can this high
inequality rate be the reason for Brazil’s continued growth? Will a reduction in the poverty rate
slow Brazil’s economic growth? and is it possible for Brazil to have more income equality and
thus low poverty rate yet, continue to grow? This paper hopes to answer some or all of these
questions.
Figure 5: Poverty and Inequality Trend in Brazil
Source: (World Bank, 2017)
It is important to note that in any given region or country, poverty reduction is closely linked to
mean income levels and income inequality (Tabosa, Castelar, & Irrfi, 2016). Determining the
type of policy that will be most effective in reversing poverty as quickly as possible is an
important issue in any country. The question is, therefore: Should policies aimed at reducing
poverty focus on reducing income inequality or increasing average income levels? Various
studies have shown that economic growth in itself has been ineffective in reducing poverty in
many countries and regions of the world (Tabosa, Castelar, & Irrfi, 2016). Although it is obvious
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Population below poverty
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that changes in poverty rates are a result of income redistribution or economic growth (or both),
it is not quite clear what effects the changes in each of these variables have on poverty rates
(Ravalion, 1997). Ravallion and Chen (2003), in their study of some developing countries based
on some number of people living on less than $1 per day discovered that there is a negative
relationship between average income levels and people with income below the poverty line.
Nonetheless, a consensus about the nature of the interrelationship between economic growth,
income inequality, and poverty is still nonexistent. Most of the empirical evidence suggest that
countries or regions with low income and low levels of inequality tend to respond better to
economic growth policies while countries with high incomes and high income inequality will be
less responsive to such policies (Tabosa, Castelar, & Irrfi, 2016). Therefore, inequality reduction
policies will be more effective in the latter countries.
Studies on the Brazilian economy indicate that poverty levels are more responsive to income
inequality-reduction policies than those aimed at boosting average income level (Tabosa,
Castelar, & Irrfi, 2016). There is substantial evidence proving that compared to other countries
with similar income levels, the poverty-reduction effect of economic growth is weaker in Brazil.
This explains and confirms the trend exhibited in figure 4 above. Because policies aimed at
reducing income inequality, and/or stimulating economic growth as an increase in the average
income level or a combination of both have different effects on poverty, it is important to gauge
the weight that should be apportioned to each strategy, both at the state and regional levels.
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