Poverty and the new middle class in the decade of equality

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(2) Poverty and the new middle class in the decade of equality* (* Recent income equalization process). www.fgv.br/cps/desigualdade Rio de Janeiro, 26th September 2008 - Version 2.0 Original version – 19th September 2008 at 11 am.. Centro de Políticas Sociais Instituto Brasileiro de Economia Fundação Getulio Vargas. Coordination: Marcelo Cortes Neri - [email protected] Luisa Carvalhaes Coutinho de Melo. CPS staff: Samanta dos Reis S. Monte André Luiz Neri Carolina Marques Bastos Célio Pontes Ana Lucia Calcada Celso Fonseca. 2.

(3) The published papers are the sole responsibility of their authors. The opinions therein do not reflect, necessarily, the point of view of Fundação Getulio Vargas.. Poverty and the new middle class in the decade of equality / Coordinated by Marcelo Côrtes Neri & Luisa Carvalhaes. - Rio de Janeiro: FGV/IBRE, CPS, 2008. [93] p.. 1. Poverty 2. Economy 3. Income 4. Inequality 5. Economic Classes 6. Middle Class 7. Labour 8. Social welfare 9. Millenium Development Goals 10. Brazil I. Neri, M.C.; Carvalhaes, L II. Fundação Getulio Vargas, Instituto Brasileiro de Economia. Centro de Políticas Sociais. www.fgv.br/cps With support: SAS Institute www.sas.com ©Marcelo Neri 2008. 3.

(4) Poverty and the new middle class in the decade of equality Executive Summary The Brazilian National anthem states: “If with strong arm we have succeeded in winning a pledge of equality (…In thy bosom, O Liberty, Our hearts will defy death itself!)”. Winning this pledge rests upon a condition. Nevertheless, it is possible to begin pursuing it, not individually, but collectively. If a historian from the future would point out the main changes that occurred in the Brazilian society in the first decade of the third millennium, he would call it the decade of reduction of income inequality, or equalization of results - just as the 1990s was the decade of stabilization and, the 1980s, of redemocratization1. There is nothing similar to the inequality reduction observed since 2001 in the Brazilian documented statistics history (since 1960). The accumulated reduction is comparable, in magnitude, to the famous increase in inequality in the 1960s, which placed Brazil as the land of inertial inequity in the international psyche. According to World Bank data, 2005 data had already put Brazil as the 10th country in inequality in the world – we had been 3rd beforehand. In other words, the bad news is that we are still very unequal; whereas the good news is that there is much inequality to be reduced and, consequently, much income growth to be generated at the basis of the income pyramid. Roughly, it is as if Brazil had discovered – in this century alone – such reserves of pro-poor growth. For instance, in order to fight poverty, India - a poor country with half our inequality rates, hence more evenly poor - has one basic alternative to increase society’s income. Similarly, Belgium, an evenly rich country, does not have, in substantial terms, an additional alternative to improve the population welfare beyond growth. In the so-called Brazilian Belíndia, besides growth as a limitless source of well-being improvement, we have the option to reduce inequality as a way to. 1. The creation of formal job posts is the other feature of this decade; whereas increase in school enrolment and education as well as stabilization were the main features of the previous decades. Advances of the 1960s and 1970s were the economic miracle, i.e. economic growth.. 4.

(5) lessen poverty and improve well-being. Obviously, equality is finite as, for instance, the oil reserves, but we are very distant from their exhaustion. No other country in the world can reduce poverty through redistribution in such wide scale as Brazil. Fighting inequality has common grounds to fighting cholesterol: there is the good and the bad fight, with various consequences to the economic organism. Besides keeping incentives for income growth for all, it is necessary to reach the fundamental causes of inequality, approaching intergenerational differences of opportunities. In the last years, we have just begun exploring the surface of inequality in outcomes. The Brazilian flag aims to depict the country’s sky color – maybe reflecting our habit of too often looking upward. Brazilian high inequality is, however, a sign that we seldom look at the people standing beside us. It reflects – by revealed preference – our inability to see the stellar distances between people around us. The study of inequality measures the transversal distance between people; projecting it upward is similar to measuring the distance between the stars. If the study of Brazilian inequality were like analyzing the movement of celestial bodies, PNAD would be the device receiving and diffusing the light in Brazilian skies a year after its collection. PNAD allows star hunters to point to a reasonably clean atmosphere and observe the main relative movements in the previous year inside Brazilian society. Here, as if using an eye-glass focus, we will look at the relative displacements occurred in the income of the different Brazilian classes. Of all the changes observed since the recent release of IBGE’s 2007 PNAD, the most remarkable is the reduction in income inequality. Despite being a bit inferior to the major redistributions observed in the historical series such as 1986, 1990 and 2004, 2007’s gives sequence to the de-concentration trend that began at the turn of the century. Brazilian income inequality, which remained stagnated between 1970 and 2000, has had successive decreases year after year since 2001, comparable in magnitude to the only known displacement: the increase in inequality in the 1960s. Inequality of per capita household income measured by the Gini index fell c. 0,0074 points in 2007, 10% more than the pace of reduction assumed from 2001 to 2006 (0,0067). Among all these observed changes, income redistribution is, in our view, the 2007 highlight, especially because the growth of average per capita income of 2.3% was surprisingly low 5.

(6) both in comparison to the 2007 per capita GDP (c. 4%) as well as the previous years’ PNADs (9,16% in 200¨and 6,63% in 2005). Inequality is the driving force for the continuous poverty reduction that drops from 19.18% of the population in 2006 to 18.11% in 2007, that is, around 1.5 million people crossed the income line below 135 reais/ month per person. The number of extremely poor according to the new PNAD reaches 33,68 million people. The proportion of extremely poor falls 5,6% in 2007; hence below the 15% decrease in 2006, 10,33% in 2005, and 9,85% in 2004. Conversely, the pace of poverty reduction in 2007 is more than twice as fast the minimum required to meet the goal of reducing extreme poverty, according to the Millenium Development Goals (2,73%) and a bit higher than the pace observed in Brazil since 1993 (4.3%).. The year 2007 is the best synthesis of what happened to the main social indicators gathered throughout this decade. Firstly, the 2.26% growth of per capita income is the closest to the average of the last seven years (2,5% per year). Poverty as insufficient income falls 5,59% in 2007 against 6.7% per year in the period, once more, this year is closest to the decade average (6.72% per year). Finally, as we saw, the pace of per capita income inequality decrease measured by the Gini index is also the closest the decade’s average, c. 10% above it, which constitutes a historical mark.. 18 ,1 1. 19 ,1 8. 22 ,66. 25 ,27. 26 ,5 9 28 ,0 3. 27 ,50. 26 ,88 28 ,1 4. 28 ,6 5 28 ,8 2 28 ,37. 34 ,9 6 35 ,03. Poverty - % of the population - Brazil. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007. Source: CPS/FGV based on PNAD/IBGE microdata. 6.

(7) 526,27. 514,62. 471,44. 442,12. 428,67. 455,12. 453,78. 445,01. 471,72. 464,31. 460,55. 363,35. 344,93. 453,35. Income - Brazil. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007. Source: CPS/FGV based on PNAD/IBGE microdata. Brazilian income inequality is the outcome of an interaction of various causes, and also has its impacts on various areas in social life, beginning with crime, health, and reaching consumer markets. There is a deeper layer of income distribution sources that emerge today, such as education policies and previous structural reforms. There are also changes in past income policies, such as impacts from the minimum wage re-adjustments and the expansion of the Bolsa Familia. In 2007, maybe for being a non-election year, there aren’t effects from the expansion of public transfers, but a distinguished labor performance compared to previous years. The liquid generation of job posts was more than 50% inferior to the three previous years, with a liquid elimination of lower quality job posts, but with a record high in the generation of formal employment. The Brazilian labor market has become more ford-like and formal. There are signs that the so-called workforce blackout begins to affect the labor attraction dynamics and the evasion of young people from school, worsening the future scenario. This all happens amid the Pro-Uni program, which aims to increase access to higher education. Education has fallen 4.5% for young people aged between 18 and 24 years old, while the contingent of this group falls only 1.8%. Education statistics for younger students also shows saturation in terms of coverage advances – apart from those aged 5 and 6 years old who have seen the impact of the 9-year education system. This scenario shows the importance of measures and goals concerning the improvement in the quality of education, such as those from the federal government educational PAC and the Todos pela Educação civil society movement. Education and employment are, in this. 7.

(8) order, the most fundamental determinants of the future level of income inequality in the country. Overall, 2007 shows that achievements and/or challenges cannot be measured by their quantity, but by their quality, be it of income, employment or education. In terms of education, we need to take advantage of the reduction in the number of children and adolescents to increase school time and to improve students’ learning and performance. In this work, we have to understand the causes of the increasing job market formalization to foster it as the workforce harvests the fruits of a better quality education and as labor institutions change for the better. Finally, the small growth in the PNAD average income in these years has had its impact leveraged also by qualitative upgrades: the greater inequity of income combined with the greater sustainability of these movements as an outcome of the labor expansion that currently unfolds. Otherwise, like the decade so far seen as a whole, 2007 is less remarkable for its generalized income growth for all population strata, than for the observed inequality reduction. The inequality measured by the Gini index falls 1.32% above four of the five years of the inequality reduction decade: 1,2% in 2002, 1% in 2003, -1,9% in 2004, -0,6% in 2005 and -1,06% in 2006. According to graph 1, the accumulated income gain between 2001 and 2007 by each tenth part of the population. Growth rates are decreasing as we move from the first (49,25%) to the last tenth (6,70%) – this progressive feature is not so well translated by the apparently small changes in the Gini index series. (2007/2001). Accumulated variation of average income 49,25% 43,41% 38,03%. 34,79%. 31,98%. 30,28% 24,75% 19,65% 14,37% 6,70%. 10. 20. 30. 40. 50. 60. 70. 80. Source: CPS/FGV based on PNAD/IBGE microdata. 8. 90. 100.

(9) Pulling the 2007 year survey from the analysis, we notice income reductions in the two extremes of the income distribution continuum, particularly among the 10% poorest of -5,3%, which seems to indicate an increase in the number of people with a null income against past years’ trend. We observe a virtual stagnation of per capita income in 2007 - -0,1% among the 10% richest. The tenths that have gained more in 2007 are the 5th, 6th and 7th – which will cause a reduction in the polarization of the distribution, hence producing a relative growth of the so-called new middle class, as will shall see ahead.. Accumulated variation of average income - Brazil (2007/2006). 3,52%. 4,25%. 4,88%. 5,96%. 5,64%. 5,27% 4,03% 2,52% -0,13%. -5,22%. 10. 20. 30. 40. 50. 60. 70. 80. 90. 100. Source: CPS/FGV based on PNAD/IBGE microdata. PNAD data reveal an impressive reduction of income in the PNAD residual that considers the so-called Bolsa Família effect: a decrease of more than 5% in income in the first tenth as a result of an increase of 50% in the null incomes. As a result, we receded from the MDG of 1US$, in terms of income from social transfers and have all become more confused. As we announced last year, Brazil had already accomplished the first, and maybe most famous, goal of the UN MDG concerning a reduction in extreme poverty of 50% in 25 years. While the accumulated decrease between 1992 and 2005 had been 54,61%, by adding 2006 data to the series, there is an accumulated reduction of 58,54%. Our perception is that the Social Program Supplement introduced in the 2006 and 2004 PNAD seems to be creating this distortion. The 2004 and 2006 Supplement years were exceptional in terms of income indicators’ impacts: 2004, for the inequality decrease; 2006, for the general prosperity. These years 9.

(10) would be better than the previous ones, even in terms of statistical precision, because the supplement encourages PNAD questionnaire respondents to report their income and especially the income of their relatives in a stronger way than usual. Such questions from the 2004 and 2006 supplements are: do you receive bolsa familia? Do you receive the benefício de Prestação Continuada (BPC)?; How many people receive these benefits in your household?, etc. This would cause changes in the cake and in the distribution among various resource allocations that are directly inferred from the data. By being less nihilistic, we could compare 2007 to 2005 or the pre-2004 years only. This would solve the problem because the difference among data collection tools in different years tends to eliminate distortions.. ,3 1. 4, 9 4. 9 4 ,6. 6,00. 5,3 2. 6 ,1. 5. 7 ,3. 6 ,6. 3. 6. 7,9. 0 7 ,5 8. 2. 4. 8,00. 7,5. 8 ,0. 7, 7 7. 10,00. 8, 6 9. 12,00. 11. 11 , 73. Extreme Poverty US$ 1 PPP Brazil. 4,00 1992 1993 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007. Source: CPS/FGV based on PNAD/IBGE microdata. Extreme Poverty Accumulated Variation In relation to the Millenium Goals - Brazil. 1993. 1995. 1996. 1997. 1998. 1999. 2001. 2002. 2003. 2004. 2005. 2006. 2007. -3,58% -33,76%. -25,92% -31,46%. -36,06% -35,38% -32,48% -43,48% -37,25%. -47,57%. -54,61% -60,03% -57,92%. Source: CPS/FGV based on PNAD/IBGE microdata. 10.

(11) There is still another warning about the PNAD. As a result of the supplementeffect, the proportion of zeros goes from 1,2% in 2006 to 1,8% in 2007 – numbers which are based only on positive income like these indicate a greater improvement in inequality and in the average than what should have been observed this year, but which causes the inverse effect in the remaining years (except maybe for 2004). The problem is how to combine the supplement-effect with partial statistics that do not consider those with zero income, as released in the official publications with PNAD tabulations. In the PNADs without special supplements, those without income grow. Our suggestion is to calculate statistics for all Brazilians and only for those with a positive income. As users, our suggestion to increase the statistical precision of the PNAD would be to have a supplement every year. Back to the poverty line proposed by the Center for Social Policies (CPS/IBRE/FGV) – higher than the UN’s – we observe an accumulated decrease of 48,5% of the respective insufficiency in the 1992-2006 period. We are not there yet, but we are close to poverty’s half-life, according to the new PNAD data and the FGV line. The average poverty reduction annual rate from 1992 to 2006 was -4,43% per year, which is almost twice as much as the necessary rate to halve extreme poverty within 25 years – that would be 2,73% per year.. Given the different time horizons involved, we will compare the statistics in terms of the average annual growth rate allowing a direct comparison with the results obtained in the last year. The 5,59% poverty reduction rate in 20o7 suggests, for instance, that in the mathematics of the MDGs, we have advanced in the last year what, according to the deal, we should have advanced in 5,1 years. In its turn, the poverty reduction observed since the end of the 2003 recession reaches on average 11,8% per year, that is, each year of the period we call Lula’s Real corresponds to 4,1 years of accomplishment of the MDG commitment – while in the original Real boom period (1993 to 1995) we reduced poverty on average at 10,74% each year, confirming the parallels between the two episodes explored here.. 11.

(12) 47 ,0. 41 ,9 6. 38 ,1 1 38 ,6 9 37 ,6 4 39 ,8 5. 36 ,3 7. 37 ,3 9. 4. ,0 1 37. 36 ,7. 30 ,9 8. 32 ,5. 2. 36 ,5 2. 45 ,0 8. 6. New middle-class – Class C - % of the po pulation - Brazil. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007. Source: CPS/FGV based on PNAD/IBGE microdata. Sources – among the immediate determinants of income distribution in Brazil, we have the level and inequality of the different income sources from private revenues from work, family transfer or assets to income transferred by the state such as pensions, social programs like unemployment benefit, rural social security and bolsa familia. We break down the per capita household income growth derived from different sources. Our departure point is the relation between the annual per capita evolutions for each income type, and then we gauge their relative weight in the total income composition. We split the individuals’ income in 5 pieces – separating social security benefits up to and above PIS, following our methodological and public policy suggestion made in 1998 – according to the table. We begin the analysis by the period covered by the new PNAD from 1992 to 2007. There has been an increase in the average per capita income received by each person that goes from R$ 344,93 to R$ 524,27 – an increase of 2,86% per year per person, or 52,65% accumulated in this period. Now, what explains this variation in income? First and foremost, labor factors with 71,16% of relative contribution towards income growth; and with 18,85%, social security above one minimum wage; The second type of security income (those up to one minimum wage) comes second with 6,73%. Other income sources such as official income transfers and other private incomes contribute relatively with 0,93% and 2,34%, respectively.. 12.

(13) Basis social security – mw. Soc. security. 9,05 7,6. 25,67 10,24. 76,96 38,86. 3,71%. 1,17%. 6,32%. 4,66%. 2,34%. 0,93%. 6,73%. 18,85%. Year. Income all sources. Income all jobs. Other private Public transfer income – BF. 2007 1992. 526,27 344,93. 404,13 282,17. 10,46 6,06. Annual growth rate (%). 2,86%. 2,42%. Relative contribution to income growth (%). 100%. 71,16%. abovet-basis > mw. Source: CPS/FGV based on PNAD/IBGE microdata. The analysis of the last PNAD in relation to the previous one presents even more impressive results with relation to the variation in income as a result of labor factors. Income from work and from social security boosted the growth of total income that reached 2,26% on average, compensating for those decreases of official income transfers and other private transfers. In terms of relative contribution, that is, considering the participation of each income in the total, income from work reached the highest rate of 120,24%, while other private income contributed negatively towards the growth of total income (-18,61) and the concept of public transfer falls a barely believable -17,75%. Following the tradition of more than a decade by the Center for Social Policies at the Fundação Getulio Vargas, we aim to provide information on social indicators based on income. The research that gave origin to this paper was carried out in a record time. The lag between the microdata release of PNAD in IBGE and its launch was one hour and forty minutes. CPS poverty statistics was broadcast live at GloboNews noon news program. The research was officially launched on Friday, at 11am – 24 hours after microdata was released – with an interactive. data. base,. video. and. text.. The. research. website. www.fgv.br/cps/desigualdade has an interactve data bank that enables the user to break down and analyse the levels and changes in the social indicators based on income from his perspective. It is like a vessel’s hatchway through which one can observe PNAD from where no one has ever been.. 13.

(14) Poverty and the new middle class in the decade of equality 1. Introduction. Of all the changes observed since the recent release of IBGE’s 2007 PNAD, the most remarkable change is the reduction in income inequality. Despite being a bit inferior to the major redistributions observed in the historical series such as 1986, 1990 and 2004, 2007’s gives sequence to the de-concentration trend that began at the turn of the century. Brazilian income inequality, which remained stagnated between 1970 and 2000, has had successive decreases year after year since 2001, comparable in magnitude to the only known displacement: the increase in inequality in the 1960s. Inequality of per capita household income measured by the Gini index fell c. 0,0074 points in 2007, 10% more than the pace of reduction assumed from 2001 to 2006 (0,0067). Among all these observed changes, income redistribution is, in our view, 2007’s highlight, especially because the growth of the average per capita income of 2.3% was surprisingly low both in comparison to the 2007 per capita GDP (c. 4%) as well as the previous years’ PNADs (9,16% in 200¨and 6,63% in 2005). Inequlaity is the driving force for the continuous poverty reduction that drops from 19.18% of the population in 2006 to 18.11% in 2007, that is, around 1.5 million people crossed the income line below 135 reais/ month per person. The number of extremely poor according to the new PNAD reaches 33,68 million people. The proportion of extremely poor falls 5,6% in 2007; hence below the 15% decrease in 2006, 10,33% in 2005, and 9,85% in 2004. Conversely, the pace of poverty reduction in 2007 is more than twice as fast the minimum required to meet the goal of reducing extreme poverty according to the Millenium Development Goals (2,73%) and a bit higher than the pace observed in Brazil since 1993 (4.3%).. The year 2007 is the best synthesis of what happened to the main social indicators gathered throughout this decade. Firstly, the growth of per capita. 14.

(15) income of 2.26% is the closest to the average of the last seven years (2,5% per year). Poverty as insufficient income falls 5,59% in 2007 against 6.7% per year in the period, once more, the year that is closest to the decade average (6.72% per year). Finally, as we saw, the pace of per capita income inequality decrease measured by the Gini index is also the closest the decade’s average, c. 10% above it, which constitutes a historical mark.. If a historian from the future would point out the main changes that occurred in Brazilian society in the first decade of the third millennium, he could call it the decade of reduction in the income inequality, or equalization of results - just as the. 1990s. was. the. decade. of. stabilization. and,. the. 1980s,. the. redemocratization2. There is nothing similar to the inequality reduction observed since 2001 in the Brazilian documented statistic history (since 1960). The accumulated reduction is comparable, in magnitude, to the famous increase in the inequality in the 1960s, which placed Brazil as the land of inertial inequity in the international psyche. According to World Bank data, 2005 data had already put Brazil as the 10th country in inequality in the world – we had been 3rd beforehand. In other words, the bad news is that we are still very unequal; whereas the good news is that there is much inequality to be reduced and, consequently, much income growth to be generated at the basis of the income pyramid. Roughly, it is as if Brazil had discovered – in this century alone – such reserves of pro-poor growth. For instance, in order to fight poverty, India - a poor country with half our inequality rates, hence evenly poor - has a basic alternative to increase society’s income. Similarly, Belgium, an evenly rich country, does not have, in substantial terms, an additional alternative to improve the population welfare beyond growth. In the so-called Brazilian Belíndia, besides growth as a limitless source of well-being improvement, we have the option to reduce inequality as a way to lessen poverty and improve well-being. Obviously, equality is finite as, for instance, the oil reserves, but we are very distant from their exhaustion. No other country in the world can reduce poverty through redistribution in such wide scale as Brazil. Fighting inequality has 2. The creation of formal job posts is the other feature of this decade; whereas increase in school enrolment and education as well as stabilization were the main features of the previous decades. Advances of the 1960s and 1970s were the economic miracle, i.e. economic growth.. 15.

(16) common grounds to fighting cholesterol: there is the good and the bad fight, with various consequences to the economic organism. Besides keeping incentives for income growth for all, it is necessary to reach the fundamental causes of inequality, approaching inter-generational differences in opportunities. In the last years, we have just begun exploring the surface of the outcomes inequality.. Brazilian income inequality is the outcome of an interaction of various causes, and also has its impacts on various areas in our social life, beginning with crime, passing through health, and reaching the consumer markets. There is a deeper layer of income distribution sources that emerge today, such as education policies and previous structural reforms. There are also changes in past income policies such as the impacts from the minimum wage readjustments and the expansion of the Bolsa Familia. In 2007, maybe for not being an election year, there isn’t a harvest of the effects from the expansion of public transfers, but a distinguished labor performance compared to previous years. The liquid generation of job posts was more than 50% inferior to the three previous years, with a liquid destruction of inferior quality job posts, but with a record in the generation of formal employment. The Brazilian labor market has become more ford-like and formal. There are signs that the socalled workforce blackout begins to affect the labor attraction and the evasion of young people from school, worsening the future scenario. This all happens amid the Pro-Uni program, which aims to increase access to higher education. Education has fallen 4.5% for young people aged between 18 and 24 years old, while the contingent of this group falls only 1.8%. Education statistics for younger students also shows saturation in terms of coverage advances – apart from those aged 5 and 6 years old who have seen the impact of the 9-year education system. This scenario shows the importance of measures and goals concerning the increase in the quality of education, such as those from the federal government educational PAC and the Todos pela Educação civil society movement. Education and employment are, in this order, the most fundamental determinants of the future level of income inequality in the country.. 16.

(17) Overall, 2007 shows that achievements and/or challenges cannot be measured by their quantity, but more by their quality, be if of income, employment and education. In terms of education, we need to take advantage of the reduction in the number of children and adolescents to increase school time and to improve students’ learning and performance. In this work, we have to understand the causes of the increasing formalization to foster it as the workforce harvest the fruits of a better quality education and as labor institutions change for the better. Finally, the small growth in the PNAD average income in these years has had its impact leveraged also by qualitative upgrades: the greater inequity of income combined with the greater sustainability of these movements as an outcome of the labor expansion that currently unfolds.. Workplan. If the study of the Brazilian inequality were like analyzing the movement of celestial bodies, PNAD would be the device receiving and diffusing the light in Brazilian skies a year after data collection. PNAD allows star hunters to point to a reasonably clean atmosphere and observe the main relative movements in the previous year inside the Brazilian society.. Here, as if using an eye-glass focus, we will look at the relative displacements occurred in the income of different Brazilian classes. Following the tradition of more than a decade by the Center for Social Policies at the Fundação Getulio Vargas, we aim to provide information on social indicators based on income. The research that gave origin to this paper was carried out in a record time. The lag between the microdata release of PNAD in IBGE and its launch was one hour and forty minutes. CPS poverty statistics was broadcast live at GloboNews noon news program. The research was officially launched on Friday, at 11am – 24 hours after microdata was released – with an interactive data base, video and text3.. 3. A diferença mais fundamental desta versão está neste plano preliminar e no anexo sobre informações regionais.. 17.

(18) We offer a data bank in the research website allowing everyone to see their respective social group statistics, like young people, women, rural workers, etc. separately (panoramas) or jointly ( simulator of estimated statistical models or mirror). The intention is not only to give our interpretation to the main changes in income, but also to allow each one to tell a social story from the wealth of data based on the PNADs.. Apart from describing: how much has the Brazilians’ pocket changed? When did it change? (last 15 years until 2007 PNAD) and Whose income has changed? the research aims to identify: what has changed in Brazilians’ pocket? For instance, income from work may fall more to the unemployed and increase the income from unemployment benefit? Our last objective as researchers is by asking “Why did it change?” to find out how to change the economic situation of Brazilians for the better, starting with the poorest of the poor. This path implies identifying the determinants of changes in the distributive cake. We offer the decomposition of the evolution of different income sources and their impacts on the pockets of Brazilians from different social strata, open by their demographic and individuals attributes. We also analyse the cost-benefit of public transfers in terms of poverty reduction. Beside the traditional dive of the CPS into the fresh series of PNAD national microdata on inequality and poverty as insufficient income, this work will pay special attention to the expansion of the so-called New Middle Class, including access to durable goods and productive assets. Data indicate that 2007 is the Year of the New Middle Class. Sections of this work approach the following topics: inequality, poverty, the new middle class and changes in income sources. The appendices at the end help to observe the main changes in regional data from PNAD.. The research website has an interactve data bank that enables users to break down and analyse the levels and changes in the social indicators based on income from his perspective. It is like a vessel’s hatchway through which one can observe PNAD from where no one has ever been.. 18.

(19) All combinations may be analyzed for the whole group of the population or for the open subgroups: i) demographic features such as gender, age, years of education, ethnic background and position in the household; ii) socio-economic features like maternity, job position; iii) spatial features such as housing location, area (rural, metropolitan, urban), States.. 19.

(20) 2. The Decade of Income Inequality Reduction The study complements the IBGE statistics that deal with the total household income, excluding the null values from the average and income inequality calculations. Here, we work with per capita household income from effective household members, but including the null income as captured superbly by PNAD (IBGE) through nine questions about income asked directly to the people at their homes. We describe the evolution of social indicators based on income such as inequality, poverty and well-being analyzing their close determinants and some of their consequences. In other words, we describe the various aspects of the “Brazilians’ pockets” that would be, according to some economists, the most sensitive part of the “human anatomy”.. Overall, 2007, like the decade so far seen as a whole, is less remarkable for its generalized income growth for all population strata, than for the observed inequality reduction, according to the following chart: Per Capita Income Inequality. 0,5546. 0,5620. 0,5680. 0,5717. 0,5829. 0,5886. 0,5957. 0,5937. 0,6001. 0,6004. 0,6019. 0,5994. 0,5832. 0,6068. Gini - Brasil. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007. Source: CPS/FGV based on PNAD/IBGE microdata. The inequality measured by the Gini index falls 1.32% - above four of the five years of the inequality reduction decade: 1,2% in 2002, 1% in 2003, -1,9% in 2004, -0,6% in 2005 and -1,06% in 2006.. Next, we present the accumulated income gain between 2001 and 2007 by each tenth part of the population. Growth rates are decreasing as we move from the first (49,25%) to the last tenth (6,70%) – this progressive feature is not so well translated by the apparently small changes in the Gini index series. 20.

(21) Accumulated Variation of the Average Income - Brazil (2007/2001). 49,25% 43,41% 38,03%. 34,79%. 31,98%. 30,28% 24,75% 19,65% 14,37% 6,70%. 10. 20. 30. 40. 50. 60. 70. 80. 90. 100. Source: CPS/FGV based on PNAD/IBGE microdata. Pulling the 2007 year survey from the analysis, we notice income reductions in the two extremes of the income distribution continuum, particularly among the 10% poorest of -5,3%, which seems to indicate an increase in the number of people with a null income against past years’ trend. We observe a virtual stagnation of per capita income in 2007 - -0,1% among the 10% richest. The tenths that have gained more in 2007 are the 5th, 6th and 7th – which will cause a reduction in the polarization of the distribution, hence producing a relative growth of the so-called new middle class, as will shall see ahead.. Accumulated Variation of the Average Income - Brazil. 3,52%. 4,25%. 4,88%. 5,64%. 5,96%. 5,27%. (2007/2006). 4,03%. 2,52%. -0,13%. -5,22% 10. 20. 30. 40. 50. 60. 70. 80. 90. 100. Source: CPS/FGV based on PNAD/IBGE microdata. PNAD data reveal an impressive reduction of income in the PNAD residual that considers the so-called Bolsa Família effect: a decrease of more than 5% in income in the first tenth as a result of an increase of 50% in the null incomes. 21.

(22) As a result, we walked away from the MDG of 1US$, receded in the income from social transfers and have all become more confused. Our perception is that the Social Program Supplement introduced in the 2006 and 2004 PNAD seems to be creating this distortion. The 2004 and 2006 Supplement years were exceptional in terms of income indicators’ impacts: 2004, for the inequality decrease; 2006, for the general prosperity. These years would be better than the previous ones, even in terms of statistical precision, because the supplement encourages the PNAD questionnaire respondents to report their income and especially the income of their relatives in a stronger way than usual like do you have bolsa familia, BPC, etc. This would cause changes in the cake and in the distribution among various resource allocations that are directly inferred from the data. We could compare 2007 to 2005 or the pre-2004 years only. This would solve the problem.. There is still another warning about the PNAD. As a result of the supplement-effect, the proportion of zeros goes from 1,2% in 2006 to 1,8% in 2007 – numbers which are based only on positive income like these indicate a greater improvement in inequality and in the average than what should have been observed this year, but which causes the inverse effect in the remaining years (except maybe for 2004). The problem is how to combine the supplement-effect with partial statistics that do not consider those with zero income. In the PNADs without special supplements, those without income grow. Our suggestion is to calculate statistics for all Brazilians and only for those with a positive income.. Tables below allow the reader to deepen the analysis of the variation by different periods, while opening the level of income by year. 22.

(23) Per capita Household Income Variation 2007 Lula Lula I FHC FHC II FHC I Década Total. 2007/2006 2007/2002 2006/2002 2002/1993 2002/1998 1998/1993 2007/2001 2007/1992. TOTAL 2,3% 13,1% 13,1% 25,3% -3,5% 29,8% 16,0% 52,6%. 10 -5,2% 31,7% 31,7% 66,6% 8,8% 53,2% 49,2% 108,5%. 20 3,5% 30,2% 30,2% 39,9% 5,5% 32,6% 43,4% 87,0%. 30 4,3% 27,4% 27,4% 33,9% 2,4% 30,7% 38,0% 76,1%. 40 4,9% 26,2% 26,2% 29,8% 0,0% 29,8% 34,8% 67,9%. 50 5,6% 23,2% 23,2% 30,1% -0,3% 30,5% 32,0% 66,1%. 60 6,0% 21,8% 21,8% 29,2% 0,6% 28,5% 30,3% 63,1%. 70 5,3% 17,5% 17,5% 29,0% -2,7% 32,6% 24,8% 55,1%. 80 4,0% 14,9% 14,9% 28,8% -3,5% 33,4% 19,6% 52,9%. 90 2,5% 11,5% 11,5% 27,3% -4,4% 33,2% 14,4% 48,9%. 100 -0,1% 7,6% 7,6% 20,3% -5,2% 26,9% 6,7% 45,8%. 30 4,3% 5,0% 6,2% 3,3% 0,6% 5,5% 5,5% 3,8%. 40 4,9% 4,8% 6,0% 2,9% 0,0% 5,3% 5,1% 3,5%. 50 5,6% 4,3% 5,4% 3,0% -0,1% 5,5% 4,7% 3,4%. 60 6,0% 4,0% 5,1% 2,9% 0,1% 5,1% 4,5% 3,3%. 70 5,3% 3,3% 4,1% 2,9% -0,7% 5,8% 3,8% 3,0%. 80 4,0% 2,8% 3,5% 2,9% -0,9% 5,9% 3,0% 2,9%. 90 2,5% 2,2% 2,8% 2,7% -1,1% 5,9% 2,3% 2,7%. 100 -0,1% 1,5% 1,8% 2,1% -1,3% 4,9% 1,1% 2,5%. Per capita Household Income Variation - Annual Atual Lula Lula I FHC FHC II FHC I Década Total. 2007/2006 2007/2002 2006/2002 2002/1993 2002/1998 1998/1993 2007/2001 2007/1992. TOTAL 2,3% 2,5% 3,1% 2,5% -0,9% 5,4% 2,5% 2,9%. 10 -5,2% 5,7% 7,1% 5,8% 2,1% 8,9% 6,9% 5,0%. 20 3,5% 5,4% 6,8% 3,8% 1,3% 5,8% 6,2% 4,3%. Source: CPS/FGV based on PNAD/IBGE microdata.

(24) Isolating the two last years of PNAD, the average income of Brazilians increase, according to PNAD, 2,26% in 2007 and 9,16% in 2006, against 4% and 2,3% respectively of per capita GDP growth, even after a methodological revision of the national accounts.. The first number in 2006 suggests a Chinese-like. growth, while the last one points to a stagnation Haitian-like. In 2007, numbers are closer, but inverted. In fact, PNAD tends to present greater volatility in boom periods such as in post-Real period and the 1999 and 2003 recessions, as well as in the 2004-2007 recovery. What appeases us is that, in the total 1995-2007 period, the two series converge to closer numbers up to the third decimal, as the index numbers with a 100 basis in 1995 (stability when deflators and changes in the monetary pattern do not constitute a source of noises) show in the graph below. Per capita household income PNAD* X Per Capita GDP 120 115 110 105 100 95 90 2007. 2006. 2005. 2004. 2003. 2002. 2001. 2000. 1999. 1998. 1997. 1996. 1995. Renda Per Capita PNAD. PIB Per capita. * Deflacionado pelo INPC centrado no final do mês. (vide Neri 1995) Fonte: Banco Central, IPEA e IBGE.. Sen’s Social Welfare Measure In order to provide a final synthesis, we have added the effects of the average and inequality to a simple social welfare function proposed by Amartya Sen, Nobel Prize in Economics. This function multiplies the average income by a measure of equity, given by one minus the Gini index (that is: Average * (1 – Gini)). Therefore, inequality works as a factor that decreases welfare in relation. 24.

(25) to the level of average income. For instance, the average income of 526,27 reais per month per Brazilian would be the value of the social welfare according to Sen’s simples measure, if equity were full. But in truth it corresponds to 44,51% of this value, 234,40 reais, given the extreme Brazilian inequality. The discount woul be even greater if the index were only 40,43% of the average income in 2001, before the inequality reduction began. In the table below, we present the year-on-year evolution of the income average, of income inequality and the combination of both, given by Sen’s welfare measure. The chart shows the growth of the average income and of the synthetic measure of welfare by Sen from 1993 to 1998 (at 2007 constant prices), with an emphasis on the 27% growth between 1993 and 1995, when the average income sees a strong recovery and inequalilty, only a slight reduction. In the 2001-2007 period, the redistributive aspect plays a major role in determining welfare. As a consequence of the new cycle of distributive improvement on the two fronts in 2004, welfare recovers the 1998 and 2004 levels and sees a 7,6% growth in 2005 and 10,68% from 2003 to 2007 – which, in its turn, has a welfare growth of 31,09% in a performance comparable to the Real biennium when it. 471,44. 442,12. 428,67. 455,12. 453,78. 445,01. 471,72. 464,31. 460,55. 526,27. 363,35. 344,93. 453,35. Income - Brazil. 514,62. rose 27,12%, reinforcing the parallel aspects between both episodes.. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007. Source: CPS/FGV based on PNAD/IBGE microdata. 25.

(26) Sen Social Welfare Index (1976). 234,41. 225,40. 203,65. 189,35. 178,81. 187,26. 183,47. 180,83. 188,64. 185,53. 183,35. Per Capita Income*. 142,88. 143,76. 181,62. well-being Brazil. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007. Source: CPS/FGV based on PNAD/IBGE microdata. The accumulated variation in the average income and the income inequality contained in the chart shows that both periods in questions are marked by increases in the cake and by improvements in its distribution. While in the post-Real period the main component was growth, in the last period the main component was the reduction of income inequality. The last table sums up these effects through the variation in the Poverty index.. 3. Poverty Successive studies by the Centro de Políticas Sociais (CPS/IBRE/FGV) which were launched with a similar title in the same period last year (immediately after PNAD microdata had been released) have shown two marked changes in the poverty levels in Brazil: one in the 1993-95 period, in which the proportion of people below the poverty line fell 18,47%, and another one in 2003-05, in which it fell 19,18%. These two episodes 10 years apart have been separated by a period of relative stability in poverty levels, interrupted only in 1998 and 2002. The existing parallel between these two episodes of permanent poverty reduction, just as the transitory fluctuation in election years, could be seen in the graph below:. 26.

(27) 18 ,11. 19 ,18. 22 ,66. 25 ,27. 28 ,03. 26 ,59. 27 ,50. 28 ,14. 26 ,88. 28 ,37. 28 ,82. 28 ,65. 35 ,03. 34 ,96. Poverty - % of the population - Brazil. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007. Source: CPS/FGV based on PNAD/IBGE microdata. The novelty in this year’s chart is 2007, that not only gives sequence to the achievements observed since 2003, but it is also the best year in the historical series, constituting the isolated year in the historical series, when poverty falls less, 5,59%. In October 2007, the proportion of extremely poor reaches 18,11% of the population – 33,6 million of people – with a per capita income below 135 reais/month in Sao Paulo’s metropolitan area prices or 127 reais at average national prices weighted by the population of each state. Next, we present some results from this panorama in a simple and direct way. Other income information and also concerning access to consumption items can be accessed in the site.. 1992 34,96. Total. Categoria. 1993 35,03. 1995 28,65. 1996 28,82. 1997 28,37. Poverty % 1998 1999 26,88 28,14. 2001 27,5. 2002 26,59. 2003 28,03. 2004 25,27. 2005 22,66. 2006 19,18. 2007 18,11. Income 1992 1993 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 344,93 363,35 453,35 460,55 464,31 471,72 445,01 453,78 455,12 428,67 442,12 471,44 514,62 526,27. Source: CPS/FGV based on PNAD/IBGE microdata. Millenium Development Goals It is worth noting that the trends and fluctuations in income insufficiency above mentioned are not robust to all other poverty lines, or for the 1$S/day adjusted for purchasing power parity based on the MDG. For instance, we see a 5,28% increase between 2006 and 2007, as extreme poverty moves from 4,69% to. 27.

(28) 4,94% of the population4. We use the MDG framework to consider the long-term trends of poverty and their determinants.. 4,9 4. 4,6 9. 6,00. 5,3 2. 6,1. 5. 7,3. 6,6 3. 6. 7,9 2. 7,5 8. 8,00. 7,5 0. 8,0 4. 7,7 7. 10,00. 8,6 9. 12,00. 11 ,31. 11 ,73. Extreme Poverty US$ 1 PPP Brazil. 4,00 1992 1993 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007. Source: CPS/FGV based on PNAD/IBGE microdata. As we announced last year, Brazil had already accomplished the first, and maybe most famous, goal of the UN MDG concerning a reduction in extreme poverty of 50% in 25 years. While the accumulated decrease between 1992 and 2005 had been 54,61%, by adding 2006 data to the series, there is an accumulated reduction of 58,54%, as shown in the next chart5.. Extreme Poverty Accumulated Variation In relation to the Millenium Goals - Brazil. 1993. 1995. 1996. 1997. 1998. 1999. 2001. 2002. 2003. 2004. 2005. 2006. 2007. -3,58% -33,76%. -25,92%. -31,46% -36,06% -35,38% -32,48%. -43,48% -37,25% -47,57%. -54,61% -60,03% -57,92%. Source: CPS/FGV based on PNAD/IBGE microdata. Back to the poverty line proposed by the Center for Social Policies (CPS/IBRE/FGV) – higher than the UM’s – we observe an accumulated 4. We also work with the extreme poverty line adjusted for ppp, corresponding to R$ 47,6 at Greater Sao Paulo today’s prices, adjusted for regional differences in living costs, according to the appendix. This same procedure of internal price and costs adjustments was applied to the CPS line, corresponding to R$ 124,63. See Ferreira, Lanjouw e Neri (2003). It is worth noting that 1994 and 2000 are averages, of adjacent years. PNAD was not collected in these years. 5 Three weeks ago, the UM announced the achievement of this goal, confirming CPS predicted accomplishment.. 28.

(29) decrease of 48,5% of the respective insufficiency in the 1992-2006 period. We are not there yet, but we are close to poverty’s half-life according to the new PNAD data and the FGV line. The average poverty reduction annual rate from 1992 to 2006 was -4,43% per year, which is almost twice as much as the necessary rate to halve extreme poverty within 25 years – that would be 2,73% per year.. Given the different time horizons involved, we will compare the statistics in terms of average annual growth rate allowing a direct comparison with the results obtained in the last year. The 5,59% poverty reduction rate in 2006 suggest, for instance, that in the mathematics of the MDGs, we have advanced in the last year what, according to the deal, we should have advanced in 5,1 years. In its turn, the poverty reduction observed since the end of the 2003 recession reaches on average 11,8% per year, that is, each year of the period we call Lula’s Real corresponds to 4,1 years of accomplishment of the MDG commitment – while in the original Real boom period (1993 to 1995) we reduced poverty on average at 10,74% each year, confirming the parallels between the two episodes explored here.. Just as we use the Millenium Development Goals to consider the longterm poverty trends, we apply electoral cycles to understand some social oscilations.. Poverty Future Scenarios This is a traditional section in our annual studies of poverty released soon after the Pnad launch, where we make projections for the next year. In general, there is information about two trimesters of the national accounts (per capita GDP growth of 4,5% and 6% for 12 months until the third trimester) data from the metropolitan job market from PME and Caged covering at least the same period, allowing the projection of PNAD growth and of the inequality rates, choosing a Lorenz curve of reference and making an association with synthetic indexes, notably the Gini index. Nonetheless, we have faced more difficulties in foreseeing the product trends rather than the inequality’s in 2005 and 2006.. 29.

(30) The proportion of extremely poor people in Brazil (individuals living with less than R$ 135 a month at São Paulo prices in October 2006) will fall fom 18,11% in 2007 to 17% in 2008, a 6,31% drop, if the national per capita income grows 4% in the year. If the income growth is similar to last year’s (9%) the poverty rate will fall to 16% of the population, a 11,5% decrease. The reduction will be even greater if this growth comes hand in hand with some reduction in inequality. If the 3% expansion were combined with a decrease in the Gini index. For instance, from the average income level and the income distribution in 2007, a 2% growth as observed would lead to a poverty reduction around 40% lower than the observed. We track the inequality scenario chosing a Lorenz curve as reference and making the association with synthetic indexes, notably, with the Gini index, one of the most popular.. Poverty Scenarios. Per capita Household Income Brazil Growth Effect of 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% Source: CPS/FGV based on PNAD/IBGE 19% microdata 20% 21% 22%. % Extremely poor. Variation. 526,27. 18,11. 0,00. 531,53 536,80 542,06. 17,73 17,54 17,25. -2,08% -3,12% -4,76%. 547,32 552,59 557,85. 16,97 16,76 16,59. -6,31% -7,43% -8,36%. 563,11 568,37 573,64 578,90. 16,40 16,21 16,03 15,85. -9,46% -10,48% -11,48% -12,45%. 584,16 589,42. 15,66 15,49. -13,51% -14,44%. 594,69 599,95 605,21 610,48 615,74 621,00. 15,31 15,16 14,99 14,89 14,73 14,54. -15,45% -16,26% -17,21% -17,75% -18,68% -19,73%. 626,26 631,53 636,79 642,05. 14,35 14,20 13,98 13,75. -20,75% -21,58% -22,82% -24,06%. Source: CPS/FGV based on PNAD/IBGE microdata. Poverty eradication costs A useful measure in the design of public policies is the income gap (P1). That is, how much income is still needed on average for the extremely poor to. 30.

(31) be able to meet their basic needs. Using our income gap line as the basis, the average deficit in monetary terms of each extremely poor Brazilian would be R$ 53,61 monthly at average prices in Brazil – going back to the level over the one prior to 2004, when it was R$ 52,32 at constant prices. In 2006, the same statistics were R$ 50,6. Data shows some deepening in the acuteness of poverty (captured by the P2 index – please see the statistics in the panorama of evoluation in the site, open by all socio-demographic characteristics in the 1992-1997 period) – in opposition to its small extension (p0). Data on income reduction in the first tenth and the increase of the proportion of people with very low income measured in the poverty line indicate that the winners have been the middle groups. Back to the 2007 calculations, as just a part of Brazilians are below the line, data show that R$ 9,71 would be necessary per person on average to totally reduce poverty in Brazil, totaling R$ 1.776 billion per month and R$ 21,3 billion in the year. Information reveal how much it would cost to complement each Brazilian’s income up to the national R$ 127 line (or R$ 135 at Sao Paulo met area prices), that is, the lower value of transfers to hoist each extremely poor up to the level of their basic needs. This exercise should not be understood as advocating some specific policies, but as a reference to the social opportunity cost of unfocused policies. Data is useful to trace the target of policies and organize its financing sources. Total Poverty Population Rate. Year. Brazil 2007 Brazil 2006. 186029533 183305600. 18,11 19,32. Poor Population 33.686.228 35.405.477. P2* 5,08 4,8338. Source: CPS/FGV based on PNAD/IBGE microdata. . Notes: Effective household members . * Average Quadratic Poverty Gap - Poverty acuteness. (Considers inequality among the; poor. Minimum transfers to erradicate poverty. Brazil 2007 Brazil 2006. R$ person. R$ total month. 9,71. 1,805,836,942. 9,77. 1,790,895,712. 21,670,043,298. R$ non poor 11,85. R$ extremely poor 53,61. 21,490,748,544. 12,11. 50,58. R$ total year. Source: CPS/FGV based on PNAD/IBGE microdata. 31.

(32) Simulators of Income, Poverty and the New Middle Class (Class C) http://www3.fgv.br/ibrecps/RETCM/SIM_PNAD_eng/renda.htm. A system of probability simulators was developed from multivariate models applicable to continuous interest variables (e.g. Income) or discreet variables (e.g. the probability of being below the poverty line); or, still, belonging to the new middle class, controlled for individual and geographical attributes derived from the microdata. The estimated results may identify, for instance, various factors relating to income, income insufficiency and their impacts. Once found, all these factors are synthesized into one probability indicator. This exercise, in a user-friendly and interactive way, allows to calculate the probability of one individual being poor or not, given his socio-demographic, geographical and economic features.. Tool used to simulate probabilities through the combination of their attributes – select the features in the form below and click on Simulate. Charts show, in the following order: - average income values, - probability of being below the poverty line or not; - probability of being in the middle class.. One of the bars represents the Current Scenario according to the selected features; the other bar shows the Previous Scenario, with the previous simulation.. 32.

(33) 4. The New Middle Class. Definition of Economic Classes Contrary to the analysis of relative income distribution where we map out the relative share of each group in the total income, we focus here on the share of the population that is inside fixed parameters for the whole period. In other words, we are concerned with the absolute income of each person. The present approach is similar to that used in the analysis of absolute poverty, only we are also concerned with the other frontiers likes those that determine the entry into the middle class and the exit of this group towards the upper class.. We could make an analogy in which the relative distributive analysis is a fixedsized pizza graph where for a group to win, another has to diminish. In the absolute analysis here used, beyond the distributive dance, the size of the pizza can change. What is behind the result is that, not only have the lower income population won a relative greater slice of the pizza (inequality reduction), but the same has increased its size (growth). In the present analysis, we are concerned not only about the relative slice, but about the quantity of the pizza owned by each social strata. Given that our classification is based on income from work, we refer to the group in active age between 15 and 60 years old. The Class C is the central class, below A and B and above D and E. In order to quantify the layers, we calculate the household per capita income from work, and then express it in terms of total household income from all sources. The central C layer is located between R$ 1064 and R$ 4561 at today’s São Paulo prices. Our class C is located immediately above the 50% poorest and 10% richest at the turn of the century6. Heuristicaly, the boundaries of class C would be the frontiers to the Indian and Belgian side of our Belindia. Here, we investigate the migrations between these different Brazils. Our class C receives on average the average income in society, that is, it is the middle class in the statistical sense. Class C is the closest image to the average of the Brazilian. 6. O status relativo de renda dos 10% mais altos vis a vis o resto da distribuição era segundo os estudos de David Lam e Ricardo Paes de Barros o que diferencia a concentração de renda no Brasil frente à de outros países, como os Estados Unidos que não é um país particularmente igualitário.. 33.

(34) society. Given inequality, the average income in Brazilian is high in relation to the inferior strata of the distribution. In comparison with the rest of the world: 80% of the people in the world live in countries with per capita income levels lower than Brazil’s. the income distribution in Brazil is close to that observed in the world. We have an adjusted income by purchasing power parity (PPP) similar to the world’s and the internal Gini is similar to those observed between per capita GDP and PPP among these countries. That is, our middle class would not be different to that observed in the world using the same methods. Perhaps because of this, the most recent study about the world middle class by Goldman Sachs (The Expanding Middle) generates results that are close to our class C, or middle class: their R$ 859 to R$ 4296 against our R$ 1064 to R$ R$ 4591, both expressed in reais at Great Sao Paulo today’s prices. Other international studies vary greatly about the definition of the middle class from R$ 115 to R$ 516 in the Barnajee & Duflo study from the MIT in 2007 up to R$ 2435 to R$ 10025 from the Banco Mundial (Global Economic Prospects, 2007). The latter is closest to the definition of middle class in the developed countries, according to the Goldman Sachs study. Our class C is within their limits that vary among themselves. Some look at our class C and see it as a low middle class, and to our class B and see it as an upper middle class. The most important is to have a consistent and define criterion. In any case, a person belonging to our class A, who considers himself to be middle class, could look for the words Made in USA behind his mirror. According to our previous study using PME, the share of class C rose 22.8% from April 2004 to April 2008, in the same period our class A and B rose 33,6%. Therefore, for those who think that the middle class is richer than our class c, the conclusion that the middle class grew is not affected – quite the contrary. Long story, short: the numbers below show the boundaries of the social classes measured in term sof the total household income from all sources per month (quickly followed by an explanation):. 34.

(35) Definição das Classes Economicas Renda Domiciliar Total de Todas as Fontes Por Mes Limites. Inferior* Superior Classe E 0 768 Classe - D 768 1064 Classe - C 1064 4591 Classes – A e B 4591 * inclusive - calculada a partir da renda per capita e convertida. Definição das Classes Econômicas Renda Domiciliar Per Capita de Todas as Fontes Por Mês Limites. Classe E Classe D Classe C Classes A e B. Inferior* Superior 0 135 135 282 282 1218 1218. * inclusive www.fgv.br/cps. Simulator of Economic Class – Which one is yours? http://www.fgv.br/ibrecps/RETCM/Lorenz/index.htm The definition of this new middle class, or class C, in the research is that whose total family income remains between R$ 1064 e R$ 4591. For those who reckon themselves to be poor for the parameters used in the research, we suggest using the simulator available in the site to see which percentage of the population is below you. For instance, we can use the example of someone who bears the costs of living in the Greater Sao Paulo area and lives with four people at home – the average size of household there. If the total household income was R$ 1064,00, 45,7% would live below this person’s family. This is the beginning of class C, or the new middle class. Then, if the family’s total income were R$ 4591,00, it would have around 92% of the Brazilian population. 35.

(36) below it. Fill in your data and see on the next page which is the percentage of the Brazilian population who belong to poorer families than yours.. Economic Class Simulator. (find out the share of the population with Income below yours) Number of people in 4 household. 4.561,00 Total Household income (R$): State. SP. region. Simulate. M etropolitan. RReset. Economic class simulator http://www.fgv.br/ibrecps/RETCM/Lorenz/index.htm. População abaixo de sua renda (%). Cenário Anterior. Cenário Atual. Renda Familiar Total (R$): 1064. Renda Familiar Total (R$): 4561. Numero de Pessoas no Domicilio: 4. Numero de Pessoas no Domicilio: 4. Estado: SP. Estado: SP. Região: Metropolitana. Região Metropolitana. Source: CPS/FGV based on PNAD/IBGE microdata. Source: CPS/FGV based on PNAD/IBGE microdata. 36.

(37) Measuring the New Middle Class. This new FGV research about the new middle class shows, based on Pnad microdata recently available, that the rise of this class is a national phenomenom that began before the launch of the Real plan. The same class would represent 30,9% of the Brazilian population in 1993, then 47,1% in 2007 with a 2,5% yearly growth in the period. In the Cardoso years, it grew at a historical pace of 2,5% per year; in the Lula administration, it grows at 4% per year. In the last year, despite the cake of Brazilians having not grown so much, there is much more baking powder for the middle class which grows at 4,4%. Accumulated variation of the middle-class. TOTAL 2007. 2007/2006. 4,4%. Lula. 2007/2002. 21,6%. Lula I. 2006/2002. 16,5%. FHC. 2002/1993. 24,9%. FHC II. 2002/1998. 3,5%. FHC I. 1998/1993. 20,7%. Década. 2007/2001. 23,5%. Total. 2007/1992. 44,7%. Annual Variation of the Middle-class. TOTAL 2007. 2007/2006. 4,4%. Lula. 2007/2002. 4,0%. Lula I. 2006/2002. 3,9%. FHC. 2002/1993. 2,5%. FHC II. 2002/1998. 0,9%. FHC I. 1998/1993. 3,8%. Década. 2007/2001. 3,6%. Total. 2007/1992. 2,5%. Source: CPS/FGV based on PNAD/IBGE microdata. 37.

(38) Here we present some results generated from this panorama in a simple and direct way. Other income and access to durable goods information can be accessed in the site.. 1997 37,01. Class C 1998 1999 37,39 36,37. Categoria Total. 1992 32,52. 1993 30,98. 1995 36,52. 1996 36,74. 2001 38,11. 2002 38,69. Category Total. 1992 10,59. 1993 10,41. 1995 10,61. Proportion of formally registered employees 1996 1997 1998 1999 2001 2002 10,54 10,61 10,63 10,34 11,31 11,47. 2003 37,64. 2004 39,85. 2005 41,96. 2006 45,08. 2007 47,06. 2003 11,77. 2004 12,44. 2005 12,96. 2006 13,45. 2007 14,17. Source: CPS/FGV based on PNAD/IBGE microdata. There are at least two perspectives to conceptualize Middle Class.Various indicators point to a boom in class C: house, car, computer, credit and employment registration are all in their historical levels. The first additional way to define the economic classes E, D, C, B and A is by their consumption potential. The Brazil Criterion uses access and number of durable goods (TV set, radio, washing machine, fridge and freezer, video or dvd player), bathrooms, domestic servants, level of education of the head of the household. This criterion estimates the weights from a mincerian income equation. Beyond measuring this, we suggest the complementary conceptualization to measure the evolution of the new middle class in Brasil also from the producer’s point of view. That is, from the capacity to really keep the consumption potential through time. This type of concern with education and occupational insertion consists of criteria applied in England, Portugal and India. The innovative aspect of the methodology is its capacity to look to symbolic aspects of the middle class such as employment registration booklet, entry into an university or into the Information and Technology era – also, we combine the social status aspect related to the private demand for good, which were a monopoly of the State, such as social security, school, health and real estate credit. Since the seminal work of Robert Hall in 1977, we know that the current consumption contains information about future consumption patterns. The analysis of this expenses breakdown, separating hedonism from productive capacity to the same level of. 38.

(39) expenses is useful. In terms of La Fontaine’s fable, one must distinguish between the ants and the consumerist grasshoppers. Another way to conceptualize the middle-class is through the analysis of the attitudes and expectations of people. Consumers survey from the Instituto Brasileiro de Economia in the Fundação Getúlio Vargas on a monthly basis for Brazil follows this direction. This kind of survey which was much developed in the 1950s and 1960s by George Katona, a behavioural psychologist who greatly admired the economist James Tobin.. Following this line, Thomas. Friedman, an international columnist for the New York Times in his recent Bestseller “The world is flat” defines middle class as that which has a well defined plan of social ascension for the future. This industry of individual dream realization is the fundamental engine for the acquisition of wealth by nations. The fuel is the drive to rise in life; the lubricant would be the work and business environment. Complementarily, we propose the Future Happiness Index (FHI) developed by the CPS in a project for the Inter-American Development Bank, based on a sample of more than 132 countries covered by the 2006 Gallup World Poll microdata.. The new Middle Class is half today Including the present one, FGV presented two recent studies which put the New. Middle Class inthe map of social researches in Brazil – i.e. Class C family who earns between R$ 1064 e R$ 4591 per month in the Greater Sao Paulo area. In the first study launched in August, the middle class reached 51,89% of the population in the 6 main metropolitan regions, having grown respectively 6,18% in the last year and 22% in the last four years. In the second study, the first one launched that is based on the new IBGE 2007 PNAD. The new middle class reached 47,05% of the Brazilian population in October 2007, when data was collected. In the ensemble of the Brazilian metropolitan areas, the new middle class was 50,35% in 2007. According to marcelo Neri, research coordinator: By projecting a 6,2% growth of the last 12 months of. the first research to the national coverage of the second research, an exact 50% of the population is now in the middle class, that is, 93,8 millions of Brazilians would be in class C today.. 39.

(40) What is the middle class? For those who reckon that the boundaries of Class C considered as the new middle class are low: it is located immediately above the 50% poorest and 10% richest. at the turn of the century. Our class C receives on average the average income of society, that is, the middle class in the statistical sense. In comparison with the rest of the world: 80% of the people in the world live in countries with per capita income levels lower than Brazil’s. Therefore, it is not low in Brazil or in the rest of the world. The most recent study about the world middle class by Goldman Sachs (The Expanding Middle) generates results that are close to our class C, or middle class: their R$ 859 to R$ 4296 against our R$ 1064 to R$ R$ 4591, both expressed in reais at Great Sao Paulo today’s prices. The most important is to have a consistent and define criterion. Now, the share of class C rose 22.8% from April 2004 to April 2008, in the same period our class A and B rose 33,6%. Therefore, for those who think that the middle class is richer than our class c, the conclusion that the middle class grew is not affected – quite the contrary. Other indicators show the occurrence of a boom in class C: house, car, computer, credit and formal employment are all in their historical record levels. Now with the crisis made in USA, the question is: until when?. In time The research website has a Simulator based on the last PNAD allowing you to fill in you data with the household income, among others, and to see how many Brazilians are below you: http://www.fgv.br/cps/desigualdade/. Welcome to Belindia!. 40.

(41) The Brazilian Dream Even before the discussion about who is the new Brazilian middle class came up, the FGV study had planned to launch a subjective measure of the middle class. Middle class would be a state of mind in which life is expected to improve in the future. We have shown in the research entitled “Jovens, Educação, Trabalho e o Índice de Felicidade Futura” that, among 132 countries, Brazilians present the greatest expectations of happiness for 5 years into the future. In a scale from 0 to 10 reported directly by the interviewees, the average grade for satisfaction with life in 2011 was 8,78 in Brazil, surpassing the United States (9th place in the ranking) and Denmark, the world leader of current happiness, but the 3rd one in terms of future happiness. The worst in this ranking is Zimbabwe.. Future Happiness (Five years) total Population. Mais. Future Happiness (Five years) Total population. Menos. Future brazil venezuela denmark ireland jamaica canada. Future 4,04 4,86 5,04 5,10 5,13 5,22 5,31. zimbabwe cambodia paraguay haiti bulgaria ethiopia uganda. 8,78 8,52 8,51 8,32 8,25 8,14 –. –. Source: CPS/FGV based on the Gallup World Poll 2006 – IADB Project FUTURE HAPPINES YOUNG PEOPLE FROM 15 TO 29 YEARS OLD. s o n a 5 a i u q a d , 0 1 a 0 e d s n e v o j s o d a r u t u F e d a d i c i l e F 5 5 5 a e, . . t d 67 8 9 0D a a 1 i5 d 5. 5. 5o .. M46 78 9N a t o N é. (. ). Source: CPS/FGV processed the Gallup World Poll 2006 microdatta – in an FGV project for the IADB. 41.

(42) Income Source We have developed here, a new methodology that decomposes the per capita household income growth in different sources. We depart from the relation between the per capital annual evolution of each type of income, and we ponder it by their relative weight in the composition of the total income. We split the individual income in five pieces, according to the table below. Other Year. Income from Income all All sources jobs. private income. Public transfers- BF. S. security Social Security base Post-base> MW MW. Income Changes Panorama http://www.fgv.br/ibrecps/RETCM/RETCM_rendaPNAD/index.htm.. The. website of the present research provides na interactive data bank that allows each one to decompose and analyze the levels and the income changes from their own perspective. Here we trace a snapshot of 2007 and some of the observed changes in view of the previous year. It is possible to analyze the income growth for different years and the socio-economic features, by accessing the site of the research.. 42.

(43) PNAD 1992 a 2007 Next, we present the application of this decomposition at the national level. We begin the analysis by the period covered by the new PNAD from 1992 to 2007. There has been an increase in the average per capita income received by each person that surpasses R$ 344,93 to R$ 524,27 – an increase of 2,86% per year per person, or 52,65% accumulated in this period. Now, what explains this variation in income? First and foremost, labor factors with 71,16% of relative contribution towards income growth. With 18,85%, social security above one minimum wage; The second type of security income (those up to one minimum wage) comes second with 6,73%. Other income sources such as official income transfers and other private incomes contribute relatively with 0,93% and 2,34%, respectively.. Income Changes Panorama 1992 to 2007 – (in relation to 1992 – 15 years). Other Inco me f rom Income a ll A ll sou rces jo bs. Year 2007 1992 Yea rly Growth Rate (%) Relative Contributio n Income Grow th (%). private in co me. Pu blic tran sfers- B F. So cial Secu rity b ase MW. S. security Po st-b ase>. MW. 526 ,27 344 ,93. 404,13 282,17. 10,46 6,0 6. 9,05 7,6. 25,67 10,24. 76,96 38,86. 2,86%. 2,42%. 3,71%. 1,17%. 6,32%. 4,66%. 100%. 7 1,16%. 2,34%. 0,93%. 6,73%. 18,85%. Source: CPS/FGV based on PNAD/IBGE microdata. PNAD 2006 a 2007 The analysis of the last PNAD in relation to the previous one presents even more impressive results with relation to the variation in income as a result of labor factors. Income from work and from social security boosted the growth of total income that reached 2,26% on average, compensating for those decreases of official income transfers and other private transfers. In terms of relative contribution, that is, considering the participation of each income in the total, income from work reached the highest rate of 120,24%, while other private income contributed negatively towards the growth of total income (-18,61). 43.

(44) Income Changes Panorama 2007 (in relation to 2006 – 1 year). Previdencia. Ano. Renda todas as fontes. Renda todos os trabalhos. Outras rendas privadas. 2007 2006. 526,27 514,62. 404,13 390,11. 10,46 12,63. 9,05 11,12. 25,67 23,83. Pós-piso > SM 76,96 76,92. 2,26%. 3,59%. -17,18%. -18,62%. 7,72%. 0,05%. 100%. 120,24%. -18,61%. -17,75%. 15,78%. 0,34%. Taxa Crescimento Anual (%) Contribuição Relativa Crescimento Renda (%). Piso Transferências Previdencia Pública - BF SM. Source: CPS/FGV based on PNAD/IBGE microdata. Next, we present the 2007 results compared with different years since 2001. This information can be processed through the Income Decomposition Panorama, for different population groups, just like the other combinations of the period. We see increases ever higher of the contribution of income from work in the total (capture by the last line in the following tables).. 2001 to 2007 Other Income all private jobs income. Public transfers. Social Security Base MW. S. security Post- base> MW. 10,46 11,96. 9,05 4,23. 25,67 16,38. 76,96 68,16. 2,28%. -2,21%. 13,51%. 7,78%. 2,04%. 73%. -2,40%. 5,19%. 11,56%. 12,65%. Public transfers. Social Security Base MW. S. security Post- base> MW. Year. Income from All sources. 2007 2001. 526,27 453,78. 404,13 353,04. Yearly Growth Rate (%). 2,50%. Relative Contribution Income Growth (%). 100%. 2002 to 2007 Other Income all private jobs income. Ano. Income from All sources. 2007 2002. 526,27 455,12. 404,13 351,58. 10,46 12,2. 9,05 5,88. 25,67 17,97. 76,96 67,49. Yearly Growth Rate (%). 2,95%. 2,83%. -3,03%. 9,01%. 7,39%. 2,66%. Relative Contribution Income Growth (%). 100%. 75,15%. -2,80%. 4,01%. 10,05%. 13,59%. Source: CPS/FGV based on PNAD/IBGE microdata. 44.

(45) 2003 to 2007 Other Income all private jobs income. Public transfers. Social Security Base MW. S. security Post- base> MW. 10,46 10,57. 9,05 4,59. 25,67 18,96. 76,96 66,54. 5,36%. -0,26%. 18,50%. 7,87%. 3,70%. 78,62%. -0,12%. 3,80%. 6,68%. 11,03%. Ano. Income from All sources. 2007 2003. 526,27 428,67. 404,13 328,02. Yearly Growth Rate (%). 5,26%. Relative Contribution Income Growth (%). 100%. 2004 to 2007 Income all jobs. Other private income. Public transfers. Social Security Base MW. S. security Post- base> MW. 526,27 442,12. 404,13 336,93. 10,46 10,96. 9,05 7,04. 25,67 18,62. 76,96 68,56. Yearly Growth Rate (%). 5,98%. 6,25%. -1,54%. 8,73%. 11,30%. 3,93%. Relative Contribution Income Growth (%). 100%. 80,07%. -0,64%. 2,34%. 8%. 10,24%. Ano. Income from All sources. 2007 2004. 2005 to 2007 Income all jobs. Other private income. Public transfers. Social Security Base MW. S. security Post- base> MW. 526,27 471,44. 404,13 357,62. 10,46 11,94. 9,05 8,33. 25,67 21,2. 76,96 72,34. Yearly Growth Rate (%). 5,66%. 6,30%. -6,40%. 4,23%. 10,04%. 3,14%. Relative Contribution Income Growth (%). 100%. 84,96%. -2,88%. 1,33%. 8,02%. 8,57%. Ano. Income from All sources. 2007 2005. Source: CPS/FGV based on PNAD/IBGE microdata. 45.