Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized DEVELOPMENT IN A DEVELOPMENT LAND OF Brazil From Inside Vinod Vinod Thomas CONTRASTS FROM INSIDE BRAZIL Development in a Land of Contrasts VINOD THOMAS A COPUBLICATION OF STANFORD ECONOMICS AND FINANCE, AN IMPRINT OF STANFORD UNIVERSITY PRESS, AND THE WORLD BANK © 2006 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org E-mail: [email protected] All rights reserved. 123409080706 A copublication of Stanford Economics and Finance, an imprint of Stanford University Press, and the World Bank. 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Cover photos: Jeremy Woodhouse/Digital Vision/Getty Images, Michael Harvey/Panos Pictures, Yosef Hadar/World Bank, Sean Sprague, Panos Pictures. Cover design: Naylor Design, Inc. To Leila, who loves Brazil as much as I do. Map 1 Brazil Regions 80° 70° R.B. DE 60° 50° 40° 30° GUY FR. VENEZUELA GUIANA BRAZIL SURINAME (Fr) BoBoaa ANA COLOMBIA VVistaista REGIONS AMAPÁAMAP¡ STATE CAPITALS RORAIMA A TLANTIC OCEAN ° ° NATIONAL CAPITAL 0 MacapMacapá· 0 RIVERS Negro BelÈBelémm s STATE BOUNDARIES ManauManauss Amazona S„oS„Sãoo LuÌLuÌLuíss REGION BOUNDARIES FoFortalezartaleza NONORTHRTH P ARÁAR¡ INTERNATIONAL BOUNDARIES MARANHÃOMARANH√ O TeresinaTeresina RIO AMAZONAS CEARÁCEAR¡ GRANDE NataNatall DO NORTE João s PARAÍBAARAÕBAARAÕBA PIAUI PessoPessoaa cantin PERNAMBUCOPERNA RecifRecifee ACRE PoPortorto To NORTHEAST MBUCO RioRio VVelhoelho BrancBrancoo ALAGOAS MaceiMaceióó 10° TOCANTINS Sobradinho 10° Reservoir AracajAracajuu RONDÔNIAROND‘NIAROND‘ NIA SERGIPE MATO BAHIA PERU GROSSO SalvadoSalvadorr Francisco CENTER GOIAS o CuiabáCuiab· F. D. ã WEST BRASÕLIBRASÍLIAA S BOLIVIA GoiâniaGoi‚niGoi‚ nia MINAS BRAZIL GERAIS MATO GROSSO Belo DO SUL Grande HorizontHorizontee ESPÍRITOESPÍRITO SANTO CampoCampo VVitóriaitóriitória 20° GrandeGrande SOUTHEAST 20° √ Parana SSÃOO PAULO PARAGUAY RIO DE JANEIRO CHILE Rio de JaneirJaneiroo A TLANTIC PARAN¡ARANÁ SãoSão PauloPaulo CuritabaCuritaba P ACIFIC OCEAN Paraguay STA CATARINA OCEAN FlorianópolisFlorianópolis guay SOUTH Uru 0 250 500 750 1000 KILOMETERS This map was produced by the NOVEMBER 2005 ARGENTINA na Map Design Unit of The World Bank. RIO GRANDE PoPortorto AlegrAlegree 0 200 400 600 MILES The boundaries, colors,denominations and Para DO SUL anyother information shownon this map do 34378 IBRD not imply, on the part of The World Bank Group, any judgment on the legalstatus of ° ° 30 URUGUAY 30 any territory,or any endorsement or 80° 70° 60° 50° 40° 30° acceptance of such boundaries. CONTENTS Foreword: A New Look at the Land of Contrastsix Prefacexi Acknowledgmentsxv Abbreviationsxvii Introduction1 Brazil’s Goals1 Interrelated Themes5 1A World of Difference9 Growth Trends and Patterns12 Trade and Innovation17 Macroeconomic Stability19 Incidence of Poverty23 Regional Diversity24 2Welfare27 Brazil’s Inequalities28 Overview of Differences within Brazil29 Inequalities in Education33 Differences in Remuneration35 Distribution of Public Spending36 Income Distribution and Poverty38 Urban Scale of Poverty39 Beyond Income Poverty41 v vi CONTENTS 3Productivity45 Productivity and Growth46 Lessons from Other Countries51 Returns to Better Services55 Payoffs to Infrastructure57 Business-Friendly Environment58 Knowledge and Technology61 Access to Financial Services 63 Flexible Labor Laws 66 4Sustainability 69 Precious Assets70 Value of Forests 72 Endangered Biomes 80 Water Resources 82 Agricultural Practices 84 Rural Development Patterns 86 5Institutions 91 Agents for Change 92 Fiscal Flexibility94 Regulatory Framework: Licensing 97 Service Delivery98 Integration across Sectors99 Decentralization of Government101 Participation of the People102 Governance and Corruption105 How Institutions Help or Hinder107 6Quality111 Quantity and Quality: Practical Implications112 Nature of Stabilization 113 Impact of Government Spending 114 Educational Achievements 117 Results of Health Programs 119 More from Social Protection 123 Resources for the Future 124 7Brazil’s Agenda 127 Investing in All Assets 128 Growth and Beyond 130 More Productivity from All131 Sustainability for Poverty Reduction132 CONTENTS vii Political Reform133 Shift to a Focus on Quality134 Tying It Together 135 Bibliography139 Index147 Boxes 1.1Determining the Size of the Primary Surplus15 2.1Welfare Differences31 3.1Total Factor Productivity46 4.1Environment and Growth 71 5.1The Development Cycle 93 6.1The Notion of Quality112 7.1Scoring Goals 129 Figures 1Quality Threads across the Themes6 1.1 Public Sector Net Debt and Primary Surplus as a Share of GDP21 2.1 Distribution of Household per capita Income, Selected World Regions, 1990s29 2.2 Net Secondary Enrollment and per capita GDP, Selected Countries, 199834 2.3Wage by Skill Level, 1990s36 2.4 Impact of Taxes and Transfers on Reducing Inequality, Selected Countries37 2.5 Ceará: Baseline Poverty and Poverty Adjusted for Education Expenditures43 3.1Evolution of TFP in Brazil, with U.S. Comparison50 3.2Years to Resolve Insolvency, 200360 3.3Expanding Opportunities: Brazil and the Rep. of Korea62 3.4 Credit to the Private Sector as a Share of GDP, Selected Countries, 200364 4.1 Average Yearly Deforestation in the Amazon, 1978–200475 4.2Deforestation in the Amazon by State77 4.3 Percentage of Deforestation along Paved and Unpaved Roads79 5.1 Public Spending on Social Protection in Selected Countries and Regions, as Percentage of GDP95 5.2 Control of Corruption in Latin America and the Caribbean, 2004106 viii CONTENTS 6.1Evolution of Earmarked Revenues, 1970–2002116 6.2 Municipal Administrative Expenses per Student and Student Pass Rate119 6.3 Infant Mortality and GDP per capita, Selected Countries120 6.4 Where Health Care Is Obtained, by Consumption Quintile, Urban Brazil, 1997121 Maps 1Brazil Regionsiv 4.1Comparative Size of the Brazilian Amazon and Europe74 Tables 1.1 Growth Rates of Real GDP: Selected World Regions and Countries 13 1.2 Comparing Debt and Deficits in Brazil, China, and India 20 2.1 Proportion of Each Age Group in Poverty, Latin American Countries, 1998 33 3.1 Growth of Output, Physical Capital, Human Capital, and TFP 48 3.2 Penetration of Microfinance in Latin American Countries, 200165 4.1 Annual Carbon Dioxide Emissions, Top 20 Countries, 200073 4.2Comparing Benefits and Costs of Water Programs84 6.1 Health Quality Indicators in Brazil, India, and China 122 FOREWORD: A NEW LOOK AT THE LAND OF CONTRASTS João Paulo dos Reis Velloso Vinod Thomas’s book is not a view from the outside, or a foreigner’s work. It is the work of someone who has made himself a part of Brazilian society and who, from inside, offers reflections on Brazil—which, as Tom Jobim says, “is not a country for amateurs.” The overarching theme of the book is the right one: development in a land of contrasts. Let us remember that Roger Bastide, who also observed Brazil from inside in 1957, entitled his book Brazil, Land of Contrasts. What has changed since then? Almost everything, and yet the contrasts remain. There have been large economic, social, and political changes. The mass of society is far more expressive and politically involved today. We need only recall that in the first return to democracy, in 1945, the country had 7.4 million voters, about 11 percent of the population. Today it has 120 million voters, or 67 percent of the population. The economy has been modernized, the capitalist ethos has spread across the regions, mass communication has reached every part of the country, and basic education (though of varying quality) has become