Throughout 2009/10, a new millionaire was created in Brazil every 10 minutes – not bad for a developing country! Despite the global recession, Brazil has managed growth of almost 5% and is set to overtake both the UK and France to become the world’s 5th largest economy. Brazil will hold the next World Cup and the Olympic games after London, bringing it further recognition as a global power. It has the third largest aircraft manufacturing industry in the world and is even doing its bit to tackle climate change, with 50% of its cars running on bio-fuels. It exports more meat than any other country and is looking to become an energy power. With falling unemployment, a buoyant economy, growing confidence, fantastic beaches and 6 millionaires created every hour, Brazil looks like the perfect place to live.
However, that is just one side of the story. Brazil is still a country with deep poverty – approximately 60 million people. The slums, or favelas, are home to 1 million people in Rio alone, where unemployment is high and drug wars common. There has been a concerted effort to reduce the drug trafficking business, but this has only created more unemployment. There is little sanitation, poor electricity and minimal chance of escape. Neighbourhoods need rebuilding, and despite high growth and arguably the most popular president in the world (Lula da Silva), there are calls for political, social, taxation and labour market reforms. This cycle of poverty and the equality gap needs addressing before the Brazilian economy can really be considered a global power.
Webcasts and podcasts
Will Brazil’s economy keep growing? BBC News, Matt Frei (27/5/10)
Brazil’s bid to be ‘world’s breadbasket’ BBC World News America, Paulo Cabral (26/5/10)
Tackling Brazil’s poverty BBC World News America, Gary Duffy (28/5/10)
Brazil’s development spurs economic quality hopes BBC World News America, Matt Frei (27/5/10)
Brazil’s air industry takes off BBC World News America, Paolo Cabral (24/5/10)
‘Our growth quality is better than China’ BBC World News America, Marcelo Neri (25/5/10)
Brazilian economy poised to overtake UK’s BBC News Today, Matt Frei (27/5/10)
Data
Economic data Banco Central do Brasil
Brazil Economy EconomyWatch
Brazil CIA World Factbook
Brazil Geognos
Brazil data World Bank
Questions
- What are the main causes of (a) inequality and (b) poverty in an economy? What is the difference between these concepts?
- How does the government subsidised housing programme aim to help low income households. Use a diagram to illustrate the effect.
- What policies can be used to reduce the equality gap?
- Are those living in the favelas in absolute poverty? How do we distinguish between absolute and relative poverty? Is it the same across the world?
- What are the adverse effects of fast growth in Brazil?
Over the past 13 years of the Labour government, the incomes of the richest 1 per cent in the UK have grown substantially faster than that of other income groups, as they also did under the previous Conservative governments from 1979 to 1997. But, thanks to complex redistributive policies, including tax credits, the rise in relative poverty that occurred in the 1980s and 90s has been arrested. With the exception of the top 1 per cent, disposable income growth has been similar across the income groups.
As Larry Elliott, the Guardian’s Economics editor argues:
During the Thatcher-Major years, real incomes for the richest fifth of the population rose fastest, averaging growth of about 2.5% a year. The next richest quintile did a little less well, the middle 20% a bit less well still, and so on all the way down to the poorest 20% of the population, which saw the smallest real income gains of less than 1% a year.
Under Labour, the very high rewards secured by the top 1% of earners has obscured an even distribution of real income growth across the five quintiles.
The new coalition government maintains that anti-poverty policies have failed:
… Iain Duncan Smith, the work and pensions secretary, made a statement trashing Labour’s record: “Vast sums of money have been poured into the benefits system over the last decade in an attempt to address poverty, but today’s statistics clearly show that this approach has failed. Little progress has been made in tackling child poverty, society is more unequal than 50 years ago and there are more working age people living in poverty than ever before.
A new approach is needed which addresses the drivers behind poverty and actually improves the outcomes of the millions of adults and children trapped in poverty.”
The following articles explore what has been happening to inequality and poverty and look at the policies proposed by the coalition government. The data on inequality are also given, along with commentary on them by the Institute for Fiscal Studies
Articles
Labour’s poverty record may be flawed, but the damage was done by the Tories Guardian, Larry Elliott (24/5/10)
The distribution of income: For richer, for poorer Guardian editorial (24/5/10)
What the poverty figures show Guardian Joe Public blog, Julia Unwin (chief executive of the Joseph Rowntree Foundation) (21/5/10)
Data and reports
Households Below Average Income (HBAI) 1994/95-2008/09 Department for Work and Pensions(19/5/10)
Households Below Average Income (pdf file) National Statistics, First Release (20/5/10)
Effects of taxes and benefits on household income Office for National Statistics (see also, especially Tables 26 and 27)
Poverty and inequality in the UK: 2010 Institute for Fiscal Studies
A range of poverty data The Poverty Site
Questions
- What has happened to the distribution of original, gross, disposable and post-tax income distribution (a) by percentage shares of quintile groups of income; (b) in terms of gini coefficients? (See the “Effects of taxes and benefits on household income” reference above.)
- Why is income inequality likely to increase unless strong redistributive policies are pursued by the government?
- What are ‘the drivers behind poverty’?
- To what extent is there a trade-off between economic growth and redistributing incomes from rich to poor?
- Why is it argued that in an increasingly interdependent world, senior executives have to be paid extremely high salaries and be given very large bonuses in order for a company to recruit sufficiently talented people and yet wages have to be kept low to allow goods to remain competitive?
- Why was income much more equally distributed in the 1960s and 70s than it is today?
- What redistributive policies is the new coalition government in the UK pursuing? What factors will determine their success?
For many people, internet access is something we take for granted and if you can’t afford to connect, you might be seen to be in relative poverty. Whilst you can afford food, clothes, housing etc, other goods and services are increasingly being seen as necessities. Everyone should be able to afford a mobile phone, a television, the internet. These are all factors that contribute towards a feeling of social inclusion, which is something the government has promoted since its election in 1997.
Although internet access is the norm for most people, in the UK our internet speeds are actually significantly slower than those in other industrialised countries. All this could be about to change, with Labour’s proposal for a 50p monthly tax on households’ landlines to fund super-fast broadband across the country. However, this plan has been condemned by some influential MPs, who argue that the tax is regressive.
“We believe that a 50 pence levy placed on fixed telecommunication lines is an ill-directed charge. It will place a disproportionate cost on a majority who will not, or are unable to, reap the benefits of that charge.”
More important, they argue, is to make sure that everyone has internet access, rather than that everyone has fast access, which is not needed at the moment. When there is a demand for high-speed access from the masses, the market will provide it. However, the government argues that high-speed access is crucial to our economic growth, as it allows access to huge social, economic and health benefits. On the other hand, could such a tax reduce growth, by limiting technological innovation? The Conservatives have promised that if elected, they will scrap this broadband levy and instead aim to fund high-speed internet access by providing ‘BT’s rivals with regulatory incentives to roll out new telecoms networks’. This highly contentious issue is discussed in the articles below.
The Broadband tax: dead in the water? BBC News, Rory Cellan-Jones (23/2/10)
Broadband tax plan condemned Press Association (23/2/10)
Social tariff users need to be made aware of broadband tax exemption Broadband Expert (17/2/10)
Broadband tax could dissuade technology innovation Broadband (27/1/10)
Tories pledge rise in broadband speed Financial Times, Andrew Parker and Ben Fenton (9/2/10)
Fast broadband: an election issue? BBC News, Rory Cellan-Jones (3/2/10)
Questions
- What will be the effect of a tax on landlines? Illustrate this on a diagram and think about who will be affected. What type of tax does it represent: direct, indirect, specific, ad-valorem, etc?
- Is the tax fair? Why is it argued to be regressive?
- How will the Conservative party’s aim to provide regulatory incentives to BT’s rivals allow them to provide high-speed internet access? Is their solution better than Labour’s proposal?
- Why might the provision of high-speed internet access (a) stimulate economic growth and (b) constrain economic growth?
- Use a growth model to illustrate the importance of technological progress in achieving high levels of economic growth.
- How will a tax affect households? Consider the impact on income and consumption and hence on aggregate demand.
The New Economic Foundation (NEF) is “an independent think-and-do tank that inspires and demonstrates real economic well-being.” It aims “to improve quality of life by promoting innovative solutions that challenge mainstream thinking on economic, environmental and social issues. We work in partnership and put people and the planet first.” It has just published a study into pay, A Bit Rich: Calculating the real value to society of different professions (see link below). This argues that narrow notions of productivity, whilst having some relation to pay, are a poor way of judging the worth of particular jobs to society.
“In this report NEF … takes a new approach to looking at the value of work. We go beyond how much different professions are paid to look at what they contribute to society. We use some of the principles and valuation techniques of Social Return on Investment analysis to quantify the social, environmental and economic value that these roles produce – or in some cases undermine.
Our report tells the story of six different jobs. We have chosen jobs from across the private and public sectors and deliberately chosen ones that illustrate the problem. Three are low paid – a hospital cleaner, a recycling plant worker and a childcare worker. The others are highly paid – a City banker, an advertising executive and a tax accountant. We recognise that our incentives are created by the institutions and systems around us. It is not our intention therefore, to target the individuals that do these jobs but rather to examine the professions themselves.”
So, to what extent do rates of pay reflect the ‘true value’ of what is being created? How could we establish this ‘true value’? Does pay even reflect marginal productivity in the narrow private sense? The report and the articles look at these issues.
A Bit Rich New Economics Foundation (14/12/09), (see also)
Top bankers destroy value, study claims Financial Times, Chris Giles (14/12/09)
Hospital cleaners ‘worth more to society than bankers Telegraph, James Hall (14/12/09)
Cleaners ‘worth more to society’ than bankers – study BBC News, Martin Shankleman (14/12/09)
Cleaners worth more to society than bankers, says thinktank Guardian (14/12/09)
Hospital cleaners ‘of more value to society than bankers’ Scotsman, Alan Jones (14/12/09)
Bankers and accountants a drain on the state, says think-tank Management Today (14/12/09)
Are cleaners worth more than bankers? BBC World Service (14/12/09)
Questions
- What is meant by the marginal productivity theory of wage determination? Does the NEF study undermine this theory? Explain.
- Why are elite bankers, tax accountants and advertising executives paid so much more than hospital cleaners, waste recycling workers and childcare workers?
- “Until the prices of goods and services reflect the true costs of their production, incentives will be misaligned. This means damaging activities will be relatively cheap and profitable, while positive activities will be discouraged.” Explain this statement and whether you agree with it.
- To what extent can the misalignment of pay and social worth be explained by externalities?
- What is the basis for arguing that tax accountants and City bankers have negative social worth? Do you agree? Explain.
- What would happen if hospital cleaners were give a pay rise and bankers given a pay cut so that cleaners ended up with a higher pay than bankers?
- In the light of the NEF study, what policies should the government adopt toward pay inequality?
One of the biggest consequences of the recession has been a rise in unemployment. As the economy fell deeper into recession, unemployment began to soar and some believe that it could reach 3.5 million and remain high for the next decade.
But while many employees have lost their jobs or had they pay frozen, some of the biggest earners have received substantial pay rises! The bosses of the FTSE 100 companies have seen their average pay increase by 10% and have shared pay rises of more than £1 billion in the past year.
So as the economy plunged into recession and companies lost much of their value, we still saw an increase in the pay gap in the UK. The following articles look at the pay situation of some of the top bosses.
10% pay rise for the top bosses This is Money, Ryan Kisiel (14/9/09)
Guardian Executive Pay Survey 2009: Should pay be capped? Guardian (14/9/09)
What they make: The highest paid Chief Executives in Digital Media Guardian (20/3/09)
Executive pay jumps despite recession: Report Associated Press (14/9/09)
Unemployment could reach 3.5m and remain high for a decade, CIPD warns Telegraph, Martin Beckford (14/9/09
Questions
- How are wages determined in the labour market?
- Why do different people receive different wages? What should happen if two people receive different wages for doing the same job?
- What are the different (a) types (b) causes of inequality?
- Would a maximum price work if it was applied to wages?
- Discuss the advantages and disadvantages of different wages. If everyone was paid the same, would everyone be better off?