Income distribution and social expenditure in Brazil

This paper examines trends in income distribution in Brazil and the determinants of income inequality, including social expenditure. The distribution of income in Brazil is among the most unequal in the world and also highly skewed regionally, with the richest state enjoying a per capita income seven times that of the poorest state. The Real Plan, in force since July 1994, has been associated with a reduction in inequality, due to the extremely high growth of the incomes of the poor. Nevertheless, not all aspects of the Real Plan have favored low-income groups, as the real decline in public sector prices has primarily benefited upper-income groups. Government social expenditures (19 percent of GDP in 1990) have tended to exacerbate income inequalities. Among the most important determinants of income inequality is extreme disparity in educational attainment, yet a large share of education spending is allocated to universities, primarily benefiting upper-income groups. Primary education expenditures per student vary markedly from region to region, with municipal Northeast schools receiving a fraction of the resources of state schools in the South. In the health sector, expenditures are heavily oriented toward curative hospital care, disproportionately benefiting higher-income regions. Social insurance expenditures, which absorbed an estimated 8 percent of GDP (excluding those granted by local governments), largely benefit higher-income groups. A number of policy options for improving the equity and efficiency of social expenditure merit further examination. User fees could be introduced in higher education, and expenditures reallocated toward inputs demonstrating an ability to increase educational attainment levels in primary education. Options in the health sector include shifting spending to preventive and primary care, further decentralizing health administration to municipalities, and, subject to constitutional constraints, imposing user fees on the nonpoor. Options for more equitable social insurance expenditure include raising retirement ages, reducing replacement rates, and phasing out length-of-service pensions.