The Political Economy of Food Price Policy in Brazil
The Political Economy of Food Price Policy in Brazil
Abstract and Keywords
This chapter argues that the effects of the food price crisis of 2007–8 put pressure on two variables that are of central importance to the Brazilian government: inflation and social inclusion. The chapter describes how political institutions in Brazil have given rise to a policy-making process where fiscal stability and social inclusion are the overarching priorities, irrespective of the party in power. It could be expected that the food price crisis would have led to significant reactions by the government to safeguard those two central policy objectives. However, government and social groups’ reactions were relatively subdued, compared to other countries. The authors explain this by showing that the negative impacts of the food price increases on consumers was partly counterbalanced by the benefits from agricultural production. Before the crisis the country already possessed a series of mechanisms offering protection to the poor.
This chapter examines the impact of and the reactions to the world food crisis of 2007–8 in Brazil. It shows that the reactions by society and by the government were relatively subdued as compared to many other countries. It is argued that this outcome is surprising as there are good reasons to expect the government to be particularly concerned with the potential impacts of a shock of this nature. These reasons are related to the political incentives faced by the government, and particularly the president, to pursue social inclusion subject to monetary and fiscal discipline. The chapter traces the emergence of these incentives to a pair of beliefs that emerged after Brazil redemocratized in 1985. The first is a belief that policy must pursue social inclusion as a primary concern. It emerged as a reaction to the historic inequality in the country and the trauma from the authoritarian period from 1964 to 1985. The second belief is a fear of inflation that arose from the ten-year experience with hyperinflation from 1985 to 1994. Together these beliefs constrain government policy to prioritize fiscally sound social inclusion. Given these incentives, the food crisis of 2007 and 2008 posed a dual threat, as it undermined both social inclusion and price stability. The absence of any great reaction by the government is therefore somewhat of a puzzle.
(p.385) The main purpose of the chapter is thus to explain this puzzle. This is done by first describing the sharp transformation undergone by the country’s economy and polity in the past two decades. In the economic realm Brazil has tamed inflation, reached investment grade in 2008, accumulated over US$350 billion in reserves, become an agricultural powerhouse, discovered extensive oil reserve, reduced poverty and for the first time in its history significantly reduced inequality. It is true that in this period economic growth was lacklustre and many economic problems persisted, yet it remains the case that an impressive transformation has taken place.
In terms of political institutions the country has also experienced a dramatic transformation, with a clear consolidation of democracy. The chapter argues that despite the fact that political institutions give the Brazilian president substantial powers, they simultaneously provide for a series of checks and balances which constrain that power to be used for the greater good rather than to pursue private interests. The upshot is that the president (irrespective of party or ideology) faces strong incentives and constraints to use those powers to pursue the agenda of fiscally sound social inclusion described above.
Given this economic and political background the chapter proceeds to describe the circumstances that mitigated the impact of the food crisis when it hit in 2007–8, so that only minor policy adjustments were needed. The first of these circumstances is the fact that Brazil is a major producer and exporter of agricultural goods. Ferreira et al. (2009) show that although this shock did in fact reduce household welfare hitting the poorest the hardest, the compensating effect of income from labour in agriculture, together with transfers from governmental social programmes, mitigated that impact considerably. This was especially true for the poorest deciles, which were thus spared from the brunt of the crisis.
Brazil already had in place, prior to 2007, an extensive system of social protection through which the government realized transfers to the poorest cohorts of the population. These programmes, headed by the Bolsa Família conditional cash transfer schemes, have managed to redistribute resources without generating perverse work incentives or other major distortions. When the food crisis hit the country the pre-existence of these mechanisms meant that only parametric changes to the level of benefits were needed, as opposed to having to set up a new programme. In the same vein the government was able to use its networks of large public banks to increase the level of credit in the economy as a reaction to the concurrent financial crises, thus also contributing to insulate consumers and the economy from the potential hardships of food price increases. The upshot was that the pass-through of higher world food prices to inflation and the exchange rate was relatively limited, not endangering either of the government’s core concerns: inflation and social inclusion.
(p.386) The chapter also discusses the Brazilian biofuel programme in the light of the criticism that such use of agricultural resources could be a cause of the food crisis. It is argued that the Brazilian programme, based on alcohol made from sugar cane, is energetically efficient and given the availability of land and water in Brazil does not crowd out the production of food crops.
18.2 Country Context
Brazil has recently undergone such a dramatic process of change that it is in many respects a much different country than it was a couple of decades ago. Understanding these changes is crucial to understand why Brazil was affected in the way it was by the food price crisis and why the different actors reacted as they did. This section will simply describe the changes, leaving to a later section a political economy analysis of how and why these changes came about.
From 1913 to 1980 Brazil was one of the fastest growing countries in the world. It industrialized over that period through a process of import substitution with high levels of state dirigisme. During this period Brazilians came to believe that this process of intense growth would lead the country to developed nation status. Endowments in the form of land, natural resources, climate, geography, population, and a huge potential internal market seemed to provide the necessary conditions for continued prosperity. Yet this confidence in the future did not last. Starting in the mid-1970s the country stagnated with falling levels of productivity and near-zero economic growth until the end of the century, an experience which substituted the confidence and optimism with an obstinate cynicism and disbelief about the country’s ability to ever get back on track.
The defining mechanism through which this perverse situation was reached was the period of severe hyperinflation that started after the demise of the military dictatorship in 1985. That regime had steered the country through the ‘Brazilian miracle’ of 1968–73, but gradually lost power as a deteriorating economy added to the dissatisfaction due to the political repression. With redemocratization there came to dominate a rejection of anything associated with the old authoritarian ways, ushering in a dominant belief in inclusion, democracy, participation, transparency, citizenship, and other similar values. Far from being innocuous statements of intent this belief became a crucial determinant of many political choices that shaped the country’s path to the present day. We will argue below that these beliefs are key for understanding the impact of the food price crisis in Brazil.
(p.387) One of the first consequences of this belief was a rejection of the fiscal and monetary austerity of the last decade of the military dictatorship. In the new regime policies had to be inclusive and open. Notwithstanding the merits of such values, the lack of concomitant forces for assuring the fiscal viability of these new policies resulted in a prolonged process of hyperinflation. Brazilian history in the twentieth century had been a succession of recurring periods of high inflation interspersed with a brief periods of reprieve. But what the country experienced from 1985 to 1994 were several orders of magnitude more painful and disrupting, with average annual inflation at 1,050 per cent and a maximum of 2,012 per cent in 1989. This was an experience that severely traumatized the Brazilian people. As one government plan after another failed to improve the situation, there came to prevail a sense of hopelessness and a feeling that inflation and all its perverse consequences were an integral part of Brazilian life.
In 1994 inflation was finally tackled with the creation of a new currency, the Real, instituted by a plan lead by Fernando Henrique Cardoso who would be the president of Brazil until 2002. Yet despite the success on the monetary front, few people at that time would have predicted the changes that the country would go through in the following years. At that point the country had been through a political opening, with a massive extension of the franchise, and was in the midst of economic liberalization, with removal of trade barriers, privatization, and a reduction of the state’s role as a producer. Nevertheless, both the economy and the polity remained in many ways so dysfunctional and suffered from so many seemingly intractable problems, that even the most optimistic analysts would not have dared dream of the transformation that was to come.
The key to understanding this transformation is the rise of a new belief that complemented in a crucial way the belief in inclusion, both of which remain active to the present day. This new belief is a strong aversion to inflation, that is, recognition by policy makers, politicians, voters, and society in general of the perils of inflation. It translates into an unwillingness to accept policies and choices which may lead to short-term benefits at the risk of sparking of a renewed process of inflation. Perhaps the best evidence of the real constraining force of this belief was the surprising conversion of President Lula once in office in 2003, reneging the leftish policy agenda his party had defended for years in the opposition, only to continue the fiscally disciplined macroeconomic policies of his predecessor.
It is the conjugation of these two beliefs, inclusiveness and fiscal discipline, that has been the determining force of policy-making in Brazil in the past decade and a half. It thus follows that consideration of these constraining forces is essential to understand how policy makers reacted to the food price crises in Brazil. Note that an increase in food prices has the potential (p.388) to directly affect issues which lie at the core of both of these beliefs: (i) rising food prices overwhelmingly affect the poor and excluded; and (ii) food price increases are a direct threat to inflationary expectations. Therefore, there are very good reasons why policy makers and society in general would have been concerned with the crises and willing to take measures to dispel their perverse potential effects. What measures were effectively taken will be addressed in the following sections, as will a political economy argument that explains why that was the chosen line of action. Before this, in the rest of this section we will briefly describe the transformation that has taken place in Brazil.
When the Brazilian economy was hit by a crisis in 1999 that forced a massive devaluation of its currency, there were suspicions that the hard-earned price stability would be lost. Staving off this fate would require a level of fiscal discipline that many doubted the country could muster. Nevertheless, since then macroeconomic policy has been centred on stringent primary surplus targets that have prioritized fiscal discipline and monetary stability over all other policies and goals. This is quite a remarkable accomplishment as the cuts required to meet those targets go against the natural instincts of politicians who typically have short political horizons.
The benefits of this line of macroeconomic policy have not yet been reflected in particularly high rates of growth of gross domestic product (GDP), which has been rather average. The new circumstances have, however, laid a foundation of stability and order that has been crucial for other transformations that not only reflect important achievements but should also facilitate future growth. Perhaps the most conspicuous sign of this transformation was the achievement of ‘investment grade’ in 2008, which has improved the country’s access to international capital markets. This promises to have a big economic impact as the lack of savings is often recognized as one of the major constraints on growth in Brazil (Hausmann 2008). Partly as a consequence of this change Brazil has lately been one of the major recipients of foreign direct investment in the world. Together with high commodity prices this has led to an unprecedented level of foreign reserves, which has provided considerable financial security to the country in the midst of the current global crisis. This level of reserves is currently higher than the country’s external debt, which has always been perceived by Brazilians as evidence of their country’s weakness and vulnerability. In this sense the fact that in 2010 Brazil became a creditor to the International Monetary Fund (IMF) and has, in 2011, offered to help out financially with the European crisis, has been particularly symbolic. Another sign of the new times has been inclusion of Brazil in the Brazil, Russia, India, China, and South Africa (BRICS) group of large emerging nations, and with it the status (p.389) of being a key player in international fora, in contrast to the very marginal position it held just a few years back. Similarly the choice of Brazil to hold the 2014 World Cup and 2016 Olympics reflects the country’s new-found prestige.
Two other changes that are of extreme importance for the analysis of the impact of food price increases in Brazil are the recent falls in the level of poverty and of income concentration. Poverty rates have been halved since 1993 (from 43 per cent to 21 per cent of the population) and income concentration has fallen almost every year since 1995 (Gini index of 0.601 to 0.543). These changes have been brought about by, among other factors, the end of inflation, conditional cash transfer programmes, and real increases in the minimum wage (Barros et al. 2007), which in turn are consequences of the dual beliefs in fiscally sound inclusion. These changes are unprecedented and highly consequential. Brazil has traditionally been one of the most unequal countries in the world, a position that until very recently has been impervious to all the policies that sought to rectify that situation. These changes have given access to millions of new consumers to markets that used to be beyond their reach, dramatically expanding the extent of the internal market and its future growth possibilities.
Even in education, an area where Brazil has always been most vulnerable, there have been important improvements in recent years. Although it remains low in international rankings, the past decade has seen persistent improvements. More importantly, these improvements have been the result of extensive and innovative reforms based on a willingness to measure, evaluate, and benchmark performance at many different levels (OECD 2010). These reforms have focused not only on funding but also on testing, community participation, completion rates, teacher wages and training, and increases of the school day/calendar/curriculum among other areas. Over half a million graduates and 10,000 PhDs are now produced every year and the share of published scientific papers among all countries has risen from 1.7 per cent to 2.7 per cent since 2002.1
A final area where dramatic improvement has materialized in the past decade has been agriculture. Brazilian agriculture has historically been plagued by distortions and inefficiencies that have impeded the full potential of its natural endowments from being realized. Problems such as excessive concentration of land ownership, low productivity, poor infrastructure, and thin markets have often been exacerbated by the very policies that sought to address them (Rezende 2006). Perverse subsidies and ill-conceived land and rural labour reforms have led to inverted price signals for capital and labour relative to the country’s natural endowments of these factors. (p.390) Rather than achieving redistribution land reform has weakened property rights and distorted land use decisions, for example leading to an underuse of tenancy (Alston and Mueller 2010). Up until the mid-1990s the standard diagnostic of Brazilian agriculture was that severe structural change, through a real land reform and greater government involvement, was the only way to set the sector on the right path. It is thus surprising that by the mid-2010s Brazil had, with barely any such structural change, become one of the world’s agriculture powerhouses. Today Brazil is either the major or one of the major, producers and exporters of a long list of products such as coffee, sugar, orange juice, beef, pork, chicken, soybeans, maize, cotton, and a major player in an even longer list. This achievement has been reached through investment in high-level agricultural research and innovation. The Economist (28 August 2010) has even suggested that the recent Brazilian model of agriculture could be a template to help solve African agricultural problems. Additionally Brazil is currently one of the few countries in the world that still has a viable expanding agricultural frontier, even without including the Amazon. Similarly the availability of water and great scope for growth as infrastructure improves, means that Brazilian agriculture will likely occupy an even more prominent place in the production of food and fuel in the future.
While in many ways Brazil is undergoing the positive transformation described above, a myriad other constraints on the country’s economic growth and the improvement of the population’s quality of life still persist or are getting worse. Infrastructure is crumbling or lacking, corruption is high, taxation is excessive, social security marches towards insolvency, etc. This section has not argued that Brazil has overcome all the major problems it faces, but rather that it has undergone a fundamental and unexpected transformation in recent years. It is thus a much different country than it was just a decade ago and as such the impact and reaction to the food price crisis has been much different than it would have been in the absence of this transformation.
18.3 The Evolution of Food Prices in Brazil
18.3.1 The Impact of the Food Crisis on Internal Prices in Brazil
Figure 18.1 shows the annual change in the general price level in the Brazilian economy and the variation in the food component of inflation. Because of its hyperinflationary past the price index is closely followed by policy makers. Unexpected upward variations can trigger immediate policy responses. The figure shows that in 2007 and 2008 the inflation of food (p.391) items increased dramatically, suggesting a strong transmission from international markets. The effect of food inflation was felt in total inflation contributing to a rise of approximately 2 per cent from early 2007 to mid-2008. Although this was not enough to derail the Central Bank from its official target, it was certainly enough to raise concerns. In Figure 18.2 we show the changes in food prices at a more disaggregated level. The increases were not homogenous across food items. Of the six items we show, cereals suffered the greatest variation, having reached price increases of approximately 60 per cent in mid-2008. Similarly the price of meats and milk exhibited sharp increases, whereas vegetables, which are not typically tradable, actually fell over most of 2007.
As shown in Figure 18.3, although there is some pass-through from world market prices for staples, the volatility is significantly less in the domestic market. Finally, Figure 18.4 shows the evolution of the price of a basket of staples that is deemed the minimum necessary for an average family to survive for one month. This is a common index of the cost of living that is often used in Brazil. The data shows a sharp increase in early 2007 above the trend. This is a good indication that the cost of living was directly affected by the world food crisis and that it was felt by the poor that normally spends a large fraction of its income on food.
In this section we provide a brief description of political institutions in Brazil. We have already described the intense economic and social transformations that have taken place in Brazil in the past two decades. Here we analyse the concomitant political changes that have been both cause and consequence of those transformations. The focus is on describing who are the main actors, what are their motivations, how they interact and what are the characteristics of the policies that emerge from these political transactions.
The most important aspect of political institutions in Brazil is the overwhelming power of the president. The Brazilian president has a series of powers and prerogatives that in essence have allowed him/her to closely control the agenda in congress, such as strong decree power, line-item veto, monopoly of proposal in some specific areas, and a series of political currencies with (p.393) (p.394) which to buy support.2 The upshot has been high levels of governability and the ability to approve much of the president’s reform agenda. Given the history in Latin America of poor outcomes associated with strong executives, this characteristic of Brazilian political institutions might seem like cause for alarm. However, contrary to most Latin American cases of caudillos, juntas, and populist strongmen, Brazilian presidents in the past two decades have increasingly faced a series of constraints and incentives that have checked the power of the executive thus restricting the use of that power towards directions generally more compatible with public welfare than with that of private groups. This has gradually led to greater rule of law and inclusiveness and is in great part responsible for the above mentioned impressive transformation in the economy.
The two key beliefs that permeate the Brazilian society influence what kind of policies emerge. Together they provide a bias toward fiscally sound inclusion that affects policy-making in a fundamental way and constrain the president’s choices, shaping his/her incentives. In particular, every president in Brazil today is acutely aware that if inflation returns he/she will be punished by voters who rightly recognize that the end of monetary stability was due to a failure of the executive. Similarly, globalized international (p.395) markets would punish the country almost automatically if fiscal discipline even started to slide. That represents a credible threat and an important constraint for the president’s choice of macroeconomic policy given that Brazil has highly evolved and internationally integrated financial markets and thus much to lose if credibility is undermined. The discipline provided by these electoral and financial constraints have been manifest through an unwavering policy of high primary surpluses since 1999, under presidents of very different ideological lines, which in turn has led to the hard-earned credibility epitomized in the raising of the country’s sovereign debt to investment grade status.
The beliefs in inclusion and monetary stability do not imply that policy and its outcomes are generally efficient or that they always achieve their intended goals. Because achieving inclusion generally involves redistribution, especially in such an unequal country as Brazil, those groups that stand to lose from policy changes resist and use their political and economic power to avoid losing rights, privileges, and transfers. Some redistribution and inclusion is realized, but at the same time distortions, inefficiencies, and wastefulness are generated. To most observers, including much of the Brazilian population and academics studying the country, these distortions are glaringly apparent and given that there are so many superior alternative ways of organizing policy and socioeconomic relations, it simply seems absurd that things are done this way. The insistence on such inefficient behaviour is often written off as some form of irrationality or a cultural trait. In reality, these outcomes are driven by the beliefs that constrain policy in this way. An important result is that together with the highly visible distortions some hard to observe inclusion also takes place. While the distortions have immediate impact, the inclusion is silent and often only has impact in the long term. Nevertheless there is a large literature that argues that political and economic openness has been the key determinant of economic growth historically. We argue that much of the improvement in Brazil in the past decades is rooted in the inclusion that has silently taken place over this period. Clearly it would be preferable to have the inclusion without the distortions, but given the way things work in Brazil you cannot have one without the other. This is a process which we call ‘dissipative inclusion’.
A quintessential example is land reform which has, over the past half century, given incentives for land invasions, violence, rural conflict, deforestation, and undermining of property rights (Alston, Libecap, and Mueller 1999, 2010). At the same time an area of land equal to France and Portugal has been redistributed to landless peasants providing access to land, credit, and citizenship. That is, there has been dissipation of rents and also inclusion and it is not readily apparent what is the net effect. Alston et al. (2011) show that dissipative inclusion is not limited to land reform but is rather a ubiquitous (p.396) characteristic of policy-making in Brazil. In the next section we will show that this process also affects policies related to food prices.
One of the main mechanisms through which the powers of the executive are constrained is the existence of a series of checks and balances that together constrain and incentivize fiscally sound pursuit of social welfare by the president. These checks and balances involve an independent judiciary including a Supreme Court that routinely goes against the interest of the executive; a free, combative, and high quality press; a diverse civil society that has carved several institutionalized entry points into the policy-making process; independent and legally savvy public attorneys that view their mandate to protect society from the failings of government, among others. Even congress, where the executive always manages to build a majority governing coalition serves as a check of extreme behaviour by the president (Alston and Mueller 2006).
What are the characteristics of policies that emerge from such a system? Alston et al. (2008) argue that there are four related categories of policies in the Brazilian policy-making process. The first is a series of policies that aim to assure monetary stability, based on fiscal discipline, stringent primary surpluses, inflation targets and high levels of taxation, among others. These policies form a fiscal imperative that takes precedence over all other types of policies. That is, if inflation starts to rise, all other policies will be cut or put on hold to assure the fiscal imperative.
The second category involves a series of policies which the executive uses to purchase political support in congress and across political parties. This is a process of the exchange of ‘pork for policies’ which involves the distribution of relatively small concessions of pork and jobs in the federal government structure to coalition partners (small compared to the level of pork in the US Congress). These exchanges give the president the political governability to do whatever it takes to maintain the fiscal imperative.
The third category of policies is composed of those which have been hardwired into the country’s budget and are thus insulated against opportunistic changes by politicians including the president. These policies make up more than 90 per cent of the budget and are composed mostly of social security, civil service, education, and health. These are mandatory expenditures over which the executive has very little discretion and can thus not be cut to help with the fiscal imperative.
The final category includes all the remaining policies, which are not hardwired and over which the president has full discretion. These residual policies include investment in infrastructure, social policies such as anti-poverty programmes, environmental policy, land reform, etc. Importantly for the purpose of this chapter, many policies which would typically be used to address a shock in food prices are included in this category. Residual policies tend to be (p.397) volatile for two reasons. The first is that when the fiscal imperative is threatened, this is where the cuts will happen to re-establish monetary stability. The second is that these policies are funded by the small slice of the budget which is not hardwired and over which the president has full discretion (less than 10 per cent of the budget) so that whenever the officeholder changes many of these policies and programmes also change.
18.4 The Political Economy of the Food Price Crisis in Brazil
Figure 18.5 shows a timeline for events that are relevant to the food price crisis in Brazil. What stands out the most from the timeline is the relative absence of major governmental or societal reactions to the crisis. Although there are some government policies that are related to the impact of higher food prices especially on the poor, these are all quite minor adjustments of programmes and policies that were already in place, motivated by the overarching belief in social inclusion. The Bolsa Família programme, for example (p.398) (discussed in greater detail in the next two sub-sections) was instituted in 2004 by unifying several other social programmes that were already in place, some since the mid-1990s. The increase in benefit levels (in real terms) that took place as a reaction to the increase in food prices in 2007 and 2008 was just the fine tuning of a policy instrument that was already in place and working. Another remarkable fact shown by the figure is that Brazil had already been through a food price shock in 2002 and 2003. This shock was in fact greater than that experienced five years later but was motivated instead by the political uncertainty and exchange rate devaluation associated with the coming to power of a left-wing government for the first time in the country’s history. This experience with a drastic price shock before 2007–8 may have helped prepare the country to deal with that subsequent shock.
18.4.2 The Impact of the 2007–8 Food Price Shock Across Households
In order to analyse the political impact of the increase in food prices it is necessary not only to have a measure of the magnitude of that shock but also of its incidence across different types of households. If we want to understand the response by government to the food price crisis it is necessary to consider explicitly how different social groups, and particularly the poor, were affected.
A recent study by Ferreira et al. (2011) seeks to measure the impact of food price increases across percentiles of income classes. This study not only measures the effect on households’ expenditures, but also the countervailing impacts of increased wage income for those engaged in food production as well as the increases in social transfers by the government as direct measures to mitigate the impact of the crisis on the poor. The net measured effect is thus the result of the sum of three related components, an expenditure effect, a market income effect, and a transfer income effect.
Taking into account the countervailing effect on wages is particularly important in a country like Brazil that is deeply integrated in international agricultural markets and that thus stands to gain from commodity price increases. The results are presented using an assumption of 50 per cent pass-through of agricultural prices to wages.
In the same manner changes in official social protection programmes must be taken into account as they can mitigate the impact of increased food expenditure for the lower income percentiles. In Brazil this effect is potentially large as more than 11 million families (approximately 23 per cent of the population) receive transfers through the federal government’s flagship programme Bolsa Família, and more are benefited by other assorted programmes. (p.399) This amounts to a transfer of approximately 0.4 per cent of GDP. Brazil was one of the pioneering countries to adopt means-tested programmes in the late 1990s and today the Bolsa Família is the largest conditional cash transfer programme in the developing world.
The fact that these cash transfer programmes were already set up and running when the food price crisis hit in 2007 made it very easy for the government to use these channels to provide some compensating income to the poor. Because these programmes work through electronic cards that can be used in automated teller machines (ATMs) across the country, the transfers are more finely targeted at the beneficiaries avoiding being captured by local political intermediaries as was often the case in assistential programmes in the past. The government increased the benefits of the Bolsa Família and other programmes at both the intensive and extensive margins as an explicit response to the increase in food prices in 2008 (Neri 2011). According to Ferreira et al. (2011: 13) citing the Minister of Social Development, the average benefit of the Bolsa Família was increased in 2008 by 8 per cent with the stated ‘objective of improving the purchasing power of low-income families in the midst of the world food crisis’.
The final equation that is estimated explains the overall proportional change in household welfare bh due to the food price shock, as:
where are the budget shares for each commodity i, pi is the price of commodity i, wh is the market component of non-farm income, and τh is the transfer received by household h. Thus equation 1 explains the change in household welfare due to the food price shock as the sum of the three terms on the right hand side, respectively the expenditure, income, and transfer effects.
Figure 18.6 shows the results for the entire country. The expenditure effect is negative for all households but affects the poor considerably more than the rich. Households at lower percentiles suffered a welfare drop of approximately 12 per cent while the households at the higher percentiles lost only around 2 to 3 per cent. The average reduction in welfare across all households was of 7.5 per cent. However, once the labour income and transfer effects are added to the analysis the net impact changes considerably. The benefits of higher food prices accrue especially to the poorer households, especially in rural areas (Figure 18.7). The price incidence curve now takes an inverted U-shape with the very poor and the rich suffering little welfare loss and those from the tenth to the eightieth percentile suffering a loss of approximately (p.400) (p.401) 7 per cent on average. The transfer effect also improves household welfare, although the impact accrues mostly to the poorer twenty percentiles and is much smaller than the labour income effect.
The negative expenditure in rural areas was stronger than for the country as a whole, but once the other two effects are taken into account, the impact of the shock is significantly mitigated, with the poorest 10 per cent suffering almost no loss of welfare. The compensating effects of labour income and transfers were particularly important in rural areas. The expenditure effect in urban areas is smaller than in rural areas but the compensating income effect is also smaller, as there is little agricultural activity (Figure 18.8). The net effect is regressive with the poor faring worse than the rich, except for the very poor (the lowest 5 per cent), which receives a significant boost in welfare from governmental transfers (Figure 18.9).
These results help us understand why the response to the food price crisis was limited to an adjustment of existing programmes. Only a marginal increase of the transfers in social programmes was needed. The benefits from the increased value of agricultural production also had other indirect positive effects. A report by Federação da Indústria do Rio de Janeiro (FIRJAN) (2011) that calculated an index similar to the UN’s Human Development Index for each Brazilian municipality found that especially in the Centre West, where commercial agriculture is expanding greatly, increased income (p.402) from agriculture lead to higher tax receipts by municipal governments that in turn offered better public services to the population.
18.4.3 The Role of Social Programmes in Mitigating the Food Price Crisis
In 2003 when President Lula came to office the flagship programme of his government was the ‘Zero Hunger Programme’. Because this was the first time in Brazilian history that a left wing party had made it to the presidency, there were great expectations that social programmes would be given an absolute priority so as to set right what was seen as a historic social debt towards the poor and excluded. An Extraordinary Ministry of Food Security was created to administer the ‘Zero Hunger Programme’ in 2003. Keeping in the tradition of being inclusive and fostering participation, the programme is accompanied by a National Council of Food and Nutritional Security which has fifty-seven seats, thirty-eight of which are filled by representatives of civil society and nineteen representatives from ministries and the federal government. In the spirit of dissipative inclusion, this broad level of participation makes the process open and democratic but at the same time often leads to paralysis and irrelevance. This programme did not really create the means-tested cash transfer programmes in the Bolsa Família but rather brought together and expanded on a series of separate programmes that had already been created by the previous government as well as other sub-national governments. One of the sub-programmes within the ‘Zero Hunger Programme’ is the Programme for Food Acquisition which has the (p.403) objective of simultaneously strengthening small scale agriculture and providing food to the extreme poor. The idea is to link these social groups by purchasing the produce from family farms that find it hard to participate in regular markets and distributing it to vulnerable social groups, such as public schools, day care centers, asylums, soup kitchens, etc. According to Chmielewska and Souza (2011: 18) more than US$1.5 billion where used in this programme between 2003 and 2009 to purchase 2.6 million tons of food. In 2009 this benefited 138,000 family farms and provided food for approximately 13 million people.
The point to be stressed here once again is that these programmes were already in place when the food price crisis hit in 2007–8, reflecting a deep existing concern with poverty and food security. The ready availability of these policy instruments together with the mitigating effect of higher agricultural labour income described in the previous sections, meant that the reaction to the crisis could take place by simply strengthening actions that already existed.
18.4.4 Public Banks and Anti-cyclical Credit Expansion
While social programmes and gains in agricultural labour income were important compensating mechanisms that helped to mitigate the impact of the food price crisis on the poor, it was also the case that the crisis did not have a very significant impact on the rest of the population that is not directly affected by those mechanisms. One important reason for this was the anti-cyclical policy adopted by the federal government to counteract the financial crisis that took place almost simultaneously with the food price crisis. Contrary to much of the developed world, where interest rates were close to zero, Brazil had much leeway for monetary policy given one of the highest interest rates in the world. The government also expanded its Programme for Growth Acceleration to counteract the effects of the global depression. In addition, as a complementary instrument against the effects of the financial crisis the government promoted a strong expansion of the availability of public credit making up for the retraction of credit from the public national and foreign banks. This policy was very effective in propping up the level of economic activity, avoiding unemployment, and generally deflecting many of the debilitating symptoms of the financial crisis (IPEA 2011). As private credit diminished in the wake of the crisis public credit increased, avoiding a fall in total credit. This policy could be quickly deployed because Brazil has a very highly developed system of public banks composed of a development bank (Banco Nacional do Desenvolvimento (BNDES)), a commercial bank (Banco do Brasil), and a savings and loans bank (Caixa Econômica Federal). Regardless of the merits and demerits of having such a large state presence in (p.404) the banking system (and there are lots of controversies over this structure of the banking system in Brazil) the fact is that in the recent crisis it provided the government with a quick and effective instrument to counteract the effects of the global depression. Together with other measures, including reductions in various taxes on durable goods, these policies propped up the level of economic activity and consumption, with the result that consumers in Brazil were largely oblivious to the real extent of the world crisis. As a result of these policies millions of consumers made first-time purchases of goods such as refrigerators, cars, computers, as well as services such as airplane trips and holidays. The impact of these anti-cyclical policies also played an important role in counteracting the harmful effects of the food crisis and helps explain why the country was so lightly affected.
18.4.5 Biofuels and the Food Price Crisis
The use of agricultural land to produce biofuels is one of the main culprits listed in almost any discussion of the determinants of food price hikes.3 Because Brazil is one of the most advanced countries in the production and use of biofuels—practically all cars sold today can run on both gasoline and ethanol—it is worthwhile to consider to what extent this suggested link actually holds in the Brazilian case. We will just make two points about this issue. The first is to note that the nature of biofuel production in Brazil is significantly different than in most other countries, where the criticism is more applicable. According to The Economist (24 February 2011):
Not all ethanols are the same. Brazil, the world’s second-largest producer, makes its fuel mainly from sugar. Processing plants can go back and forth between ethanol and crystallised sugar at the flick of a switch, depending on prices. Brazil gets eight units of energy for every unit that goes into making it, so the process is relatively efficient and environmentally friendly. In contrast, American ethanol produces only 1.5 units of energy output per unit of input, but its inefficiency is underwritten by government subsidies and high tariff walls.
The second point to note is that although the area dedicated to sugar cane and other crops used for producing biofuels has grown significantly in the past decade in Brazil, this has not led to much displacing of the production of food crops. Brazil has over 400 million hectares (ha) of arable land, of which less than 40 million are currently in use; while the United States, with slightly less than 400 million ha of arable land, already uses approximately half that area (The Economist, 28 August 2010). In addition Brazil also holds access to (p.405) more water than practically any other country, though it is true that other inputs such as roads and ports are still constraining. Although the issue is clearly more complex than the two points raised here, they should at the least suggest that also when it comes to the issue of the link between food prices and biofuels, compared to most other countries there are several mitigating circumstances in the Brazilian case.
This chapter portrayed the subdued reaction by the Brazilian government and other players to the food price crisis of 2007–8 as a paradox. Given the incentives inherent in the country’s political institutions one would have expected that the threat presented by significantly higher food prices to have elicited a more rambunctious reaction. The chapter has shown that although the threat was indeed real, such a response was not needed. This was so partly because the crisis presented several benefits to the Brazilian economy that mitigated the effects on the poor and on inflation. Additionally, incentives in political institutions had, even before the crisis, led to the creation of several programmes and mechanisms to promote social inclusion and to maintain price stability, so that when those pressures emerged from the international hike in food prices, those objectives were already insulated or could be easily defended. These circumstances were not a coincidence or a stroke of luck, but rather structural characteristics of the Brazilian economy and political institutions, so that if food prices continue to increase, as seems likely to be the case, the analysis in this chapter indicates that Brazil will be well-placed to respond.
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(*) This chapter benefited from the comments and suggestions of Kenneth Baltzer, Antônio Márcio Buainain, Aercio S. Cunha, Per Pinstrup-Andersen, Danielle Resnick, Pedro Zuchi, as well as participants at the workshop on the Political Economy of Food Price Policy at Addis Ababa, 24–25 February 2012.
(1) The Economist, 6 January 2011.