How Brazil Reversed the Curse

Way back in the 1970s, when Brazil's economy seemed unstoppable, South America's biggest nation earned a disparaging moniker: Belindia. Society, by this metaphor, was divided into two lopsided parts—a petite and prosperous Belgium surrounded by a vast and destitute India. Pundits spent years parsing the reasons.

But the underlying meaning was hard to miss. While the overall economy boomed, only a tiny elite was blessed. So Brazil rose to become one of the top 10 economies—and one of the most unequal societies—in the world.

Now Brazil may need a new metaphor. One of the most reliably abysmal income gaps in the world has finally started to shrink, and it may herald a region-wide shift. Thanks to a complex cocktail of economic gains such as the end of chronic high (at times hyper-) inflation and plummeting interest rates, soaring enrollments in primary schools and, more recently, plenty of well-targeted cash handouts going directly to the poorest households (bypassing wasteful welfare bureaucracies), Brazil managed to slash the number of people living on $2 a day or less from about 36 percent in 1992 to just over 19 percent last year. Now the gaping divide between Brazil's haves and have-nots, as measured by the Gini coefficient, is also starting to narrow. Brazil's fell by 5 percent (.59 to .56) from 2001 to 2006. So have Mexico's (.543 to .509) and, more modestly, Chile's (.563 to .562) over the past decade—thanks largely to the same mix of anti-poverty strategies. So rapidly have fortunes turned that Brazil is being hailed by some analysts as an unlikely bellwether for fighting poverty policies worldwide. "The '90s were the years of economic stabilization," says economist Marcelo Neri of the Getúlio Vargas Foundation, a Brazilian business school. "This decade is going to be remembered as the era of falling inequality."

Once again the sages are asking why. Boilerplate economics deserves part of the credit. While the Latin American Street may grumble over "neoliberals," it was free-market reforms that helped break down a long-encrusted social order that grated especially against the poor. Greater fiscal responsibility curbed compulsive government borrowing, bringing down interest rates and encouraging lenders to spread credit to even low-income consumers, long written off as unbankable. Chronic high inflation was practically eliminated by the mid-'90s, ending one of the more pernicious taxes on the poor; while governments could be refinanced through bonds that paid just a bit more than the inflation rate, workers watched helplessly while their cash wages melted in their pockets. "There is clearly now much stronger political commitment to macroeconomic stability and keeping inflation low," says Anoop Singh, head of the International Monetary Fund's Western Hemisphere department. "This is good news for bringing down both poverty and inequalities."

Policymakers also did their part through massive campaigns in the 1990s to get children out of the workplace and into the classroom. Brazil, for example, had 97 percent of school-age kids in the classroom as early as a decade ago; those students are now being rewarded with better jobs.

But one of the most celebrated government initiatives is a new brand of grant to the extremely poor known in policy argot as conditional cash transfers (CCTs). All turn on the same principle of paying a small stipend—say, $10 to $50 per month—to the poorest families on condition that they keep their children in school and take them for regular checkups at the local health clinic.

The most rigorous of the CCT schemes is the decade-old Chile Solidario, which awards small two-year grants to families who must not only keep their children in school but also report to social workers and look for jobs. Mexico's Oportunidades, begun in 2002, tracks the progress of some 5 million families on a sophisticated computer database, which has caught the attention of officials from Ankara to New York. After a visit to Mexico, New York Mayor Michael Bloomberg launched his own version, Opportunity NYC, last March. The grandest scheme by far is Brazil's Bolsa Família, or the Family Stipend, which gives some 11.1 million families—nearly a quarter of the 183 million population—up to $50 a month for an unspecified period. (Officials are still debating a cutoff point.) Several stipend programs had been launched in the mid-'90s but they were unified and spread across Brazil after 2003, under the government of Luiz Inácio Lula da Silva.

Economists generally applaud targeted cash transfers on the ground that paying the poor to improve their own lot is far more efficient than throwing money at top-heavy poverty-relief bureaucracies. It is also far cheaper. A textbook case is Brazil, where the government spends more than $500 billion, close to half its GDP, on social programs such as the loss-making pension system that mostly benefits the nonpoor. "With Bolsa Família you reach a quarter of the population by spending just 1 percent of GDP," says Neri. "That's a far better deal." Because of its sharper focus on the poor, Bolsa Família was just as effective in lowering Brazilian inequality as the massive pension system, at only a fifth the cost, Neri says.

Not everyone agrees, of course. In the wrong hands, aid can easily turn into an old-fashioned populist handout. Nicaragua's Zero Hunger project gives families a cow and three chickens, which is unlikely to change lives, while studies show Brazilian leaders crank up the stipend awards around election time. More worrisome, much less attention has been paid to getting people off the stipend. "There's something wrong when 50 million people are getting income transfers," says economist Eduardo Giannetti of Ibmec, a São Paulo business school. "I fear that Bolsa Família is being sold as a way of life and not as an emergency aid program." Skeptics also point out that the rising poor may sink again if the Brazilian economy softens and the government supply of cash dries up.

Longer-term, transforming society will take much more. "We have to improve education in order to see a real reduction in inequality," says Na?rcio Menezes, an education specialist at Ibmec. If not, critics warn, globalization can actually worsen the opportunity gap. "As countries grow faster and globalize, there's going to be increasing demand for people with tech skills. Unless the education system is geared to meeting those needs, you'll [find] that the benefits will go to a narrow group of people, and inequality will increase," says the IMF's Singh. And Belindia will re-emerge.