Inclusive Growth: What the Experiences of Argentina and Brazil Tell Europe

Juan O’Farrell and Soledad Villafañe, Guest Bloggers

Latin American countries’ experiences over the last decade have been widely described as a success story for reducing income inequality. In a work to be published this month, we analyze how the coordination between labor and macroeconomic policies with a clear objective of employment creation and welfare expansion explains the progress made in Argentina and Brazil towards income redistribution with economic growth. Under different macroeconomic regimes, but with similarly active promotion of wage increases and labor institutions, both countries achieved an expansion of employment, wages, and social protections, breaking a long period of downward trends. These factors are behind the reduction in the gap between the rich and the poor.

What these experiences show is that, contrary to the view of labor institutions (like the minimum wage, collective bargaining, etc.) as “rigidities,” these can be key drivers of inclusive development. This holds significant relevance beyond Latin America for an important reason: despite the evidence and increasing consensus of the role of declining wage shares in the unfolding of the global financial crisis, policymakers (especially in Europe) still resist abandoning the mantra of labor market “flexibilization” and internal devaluation as a way out of the crisis. Furthermore, there was an attempt this year to reintroduce the idea of flexibilization in G20 documents.

The improvements on income distribution in Argentina and Brazil can be observed both in terms of primary and secondary income distribution: in both countries we can see improvements in terms of the Gini coefficient and the wage share of national income. Although official statistics for functional distribution of income are available only until 2008 and 2009, we updated the data for Brazil until 2011 using the work of Neto (2013), and for Argentina until 2012 using our own estimates. (Note the data are not comparable across countries because while Brazil uses the wage share of GDP, Argentina uses wage share of gross value added). What we can see is that after a long period of decline, both countries show a clear improvement in the wage share, starting in 2003 for Argentina and in 2004 for Brazil (with only a brief interruption in 2010).

Figure 1 Gini Index (Per capita family income)

Source: Elaborated with data from EPH (INDEC) Argentina and IPEA Brazil

Figure 2. Wage share of GDP – Brazil

Source: Neto (2013) with data from SCN/IBGE from 1995 to 2009 and his own estimates for 2010 and 2011.

Figure 3. Wage share of gross value added – Argentina

Source: DNNC/INDEC 1993-2008 and own estimates 2009-2012

The global financial crisis found both countries in a better situation to face the shock than in previous crises. This time, they had greater autonomy to respond with anti-cyclical policies, and both of them implemented policies to protect employment and income as a strategy to sustain economic growth.

Although both countries recovered quickly from the crisis, the pace of social improvement—in terms of poverty reduction and income distribution—slowed down. One of the reasons is that, since 2008, there has been a reduction on the speed of employment creation combined with macroeconomic tensions. In Brazil, there was financial and exchange rate volatility followed by diminished industrial export capacity. In Argentina, inflation followed by diminished competitiveness and capital flight.  These new problems have posed new challenges and sparked new debates about the alternatives for returning to the development path of redistribution with growth. However, even during the less virtuous post-crisis phase, both countries continued reducing income inequality, especially through social protection policies, in particular social transfers as the Universal Child Allowance (AUH) in Argentina and Bolsa Familia in Brazil.

It is interesting to analyze similarities and differences of these two experiences, in terms of policies and outcomes. Despite different macroeconomic strategies (inflation targeting in Brazil and managed float regime in Argentina), both countries placed domestic demand and national production as key growth engines. However, the institutional frameworks and policies to achieve this goal varied in each case. In Argentina, the government took an active role in promoting wage increases through collective bargaining and minimum wage policies, plus increases in pensions and household transfers. In Brazil, minimum wage policies were more relevant, achieving significant improvements also in wages of informal-sector workers. The expansion of credit to low income families and social transfers also played an important role. Argentina’s strategy was more conducive to the increase in the wage share. The Brazilian way was better at narrowing the income gap between registered and not registered workers, but achieved less in terms of wage share increases.

This has implications beyond labor and macroeconomic policies, for debates on the role of the state, development and democracy. Argentina and Brazil, like most Latin American countries, experienced until the 2000s severe crises and increased levels of social exclusion. Debates at the turn of the century shared a pessimist tone on the possibilities of breaking the path of exclusionary development. Recent trends challenge these views, replacing the paradigm of trickle-down economics with the search of particular institutional arrangements that promote redistribution with growth. A pragmatic but decisive strategy of state intervention was the key behind these processes that not only bring better development, but also increase the legitimacy of democracy as a political system that can effectively expand social rights.

Theoretically, this comes to confirm something that we already know: institutions matter. This has to be highlighted especially for the case of Argentina, which is constantly presented as a case of a populist regime that disregards the importance of institutions. What this stereotype ignores is that Argentina only achieved significant social progress after a patient process of repairing and building social and labor institutions, from labor laws to collective bargaining and trade unions. This poses a challenge for political economists working in the region, a challenge to work on the conceptualization of institutions beyond the mainstream view that reduces them to property rights and the rule of law.

The challenges ahead are many and the social and economic tensions are visible in both cases, demanding better and more sustainable policies. But in times when the main developed economies rush to lower wages and workers’ protections as a strategy to restart growth, it seems a fair idea to search for lessons in the way these two countries recovered from their own crises of ten years ago.

Juan O’Farrell is a Technical Assistant at the Directorate of Research and Macroeconomic Coordination, Ministry of Labor, Employment, and Social Security, Argentina.

Soledad Villafañe is the Director of the Directorate of Research and Macroeconomic Coordination, Ministry of Labor, Employment, and Social Security, Argentina.