Poverty and Income Inequality in Rural Brazil: An Analysis of the Recent Decline Steven Helfand, Rudi Rocha e Henrique Vinhais Forthcoming in Portuguese in Pesquisa e Planejamento Econômico as “Pobreza e Desigualdade de Renda no Brasil Rural: Uma Análise da Queda Recente” PACDEV 3/2010

I. Introduction: The Issues What happened to rural poverty in the past 15 years? “Recent decline” in inequality in Brazil (IPEA book, 2006). –How does rural Brazil compare to Brazil? How have alternative factors contributed to the decline in rural poverty?

I. Introduction: The Questions Why did rural poverty decline? Decompose changes in rural poverty into growth and inequality components for and Why did income grow? Analyze evolution of sources of income. Why did inequality decline? Decompose changes in inequality into changes in shares and changes in concentration of each income source. Provide estimates of the magnitude of contributions to the decline in rural poverty: Earned income, Bolsa Familia, Social security

II. Methods and Data 1) Methods a) Decomposition of changes in poverty b) Decomposition of changes in Gini 2) Construction of variables 3) Limitations of PNAD and related issues

Methods a) Decomposition of changes in poverty into income and inequality components (Datt and Ravallion, 1992) P t = a measure of poverty z = the poverty line  t = mean income L t = a vector of parameters that describe the Lorenz curve

Poverty change due to change in mean income from t to t+n, holding inequality constant + Poverty change due to change in inequality from t to t+n, holding mean income constant + Residual

Estimate a quadratic Lorenz curve: L = cumulative % of income p = cumulative % of population a, b e c parameters to be estimated ε = random error

And use the estimated parameters for the simulation m = b 2 -4ª n = 2be-4c e = -(a+b+c+1) r = (n 2 -4me 2 ) 1/2

Methods: Decomposition of change in Gini  Gini is a measure of overall income inequality (0 => 1)  Concentration coefficient is a measure of income inequality for each source of income (-1 => +1)  Gini = sum of concentration coefficients weighted by shares. c = concentration coef. s = income share k = income source

Decomposition of change in Gini into -Changes in shares (s) of income sources -Changes in concentration (c) of income sources

III. Results 1) Decomposition of evolution of poverty

Rural BR vs BR: : Similar: income dominates : Distinct: income grows, Gini falls more, pov. falls more.

But in robustness check to alternative definition of “rural” for , the magnitudes are reversed.

III. Results 2) Why did income grow?

Income growth for rural Brazil:  Earned income fell as a share of total income from 81% to 72%  Social security grew steadily, and in 2005 represented 23% of rural income -Changes in 1988 Constitution -Women, retirement age, benefits -Increasing real value of min. wage  Bolsa Familia grew significantly in recent years

Coverage: Leakage?

III. Results 3) Why did inequality decline?

88% de-concentration ; 12% change in shares

What have we learned about ?  Rural poverty reduction (9.7pp) -Income growth 43%, ineq. decline 55% -Brazil: -5%, 105%  Income growth per capita (9.8%) -Earned income flat -Social security explains 69% ( 37%); BF 38% ( 382%) -Brazil: income -1%; EI -5% ; SS 18%; BF 96%  Inequality decline -60% earned income -44% BF -Social security has increased inequality in both periods -Brazil: BF only accounts for 25% of decline

Final issues: Robustness to change in defn. of rural? Results robust, and contrast w/ Brazil even greater Regional differences matter a lot

Conclusions The “persistence of rural poverty” is not an accurate characterization: -Poverty still unacceptably high (46% in 2005) -But poverty fell by 15pp Poverty and ineq. fell faster in rural areas Rural poverty reduction did not occur uniformly across regions.

Conclusions BF explained around 40% of poverty reduction in recent period - Through income and inequality channels - Expansion of coverage Social security explained about 25%! - Through income channel only - Expansion of coverage - Increase in real benefits (tied to min. wage) Labor income explained about 33% In exclusively rural areas, social security and Bolsa Familia have similar magnitudes: BF: 37%SS: 27%

Conclusions Expansion of social security in 1990s and BF in 2000s are unlikely to be repeated in the future. –These programs combined to explain all of income growth –Alternative engines of income growth must be found –Earned income still represents over 70% of income The Northeast –Home to 2/3 of rural poor; poverty fell least here –Earned income declined –Requires special attention in terms of research and policies

The End

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