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ECONOMIC GROWTH AND INCOME INEQUALITY THE CASE OF BRAZIL

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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.”

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)

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).”

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 long-time period to study this relationship. The research hopes to find answers to the following questions:

ï‚· Is income inequality actually related to economic growth in Brazil?

ï‚· 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 4th (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.