Remember Afghanistan?

We are trying to ignore some of Megan McArdle's ignorant rantings--how many ways can you call someone stupid?--but boy, is she stupid.

James Wimberly on the fighting between police and gangs in Brazil: [snipped]

I'm skeptical that the issue is inequality, if only because there have been a lot of very unequal countries in history but not many where the police effectively ceded large chunks of territory to the rule of violent gangs--I'm struggling to think of any after Sherwood Forest, but that's undoubtedly a product of my limited historical knowledge.

Still, something clearly went pathologically wrong here. It would be nice to know what.

Her commenters educate her a little but someone who couldn't think of even one place partially ruled by local warlords isn't going to learn much anyway.

McArdle could look up information regarding Brazil's economic inequality but that would take work 'n' stuff.

The reasons for Brazil's enormous and persistent income inequality are obviously complex and can only be explored briefly in this article. The first set of reasons stem from the nature of the world economy. In recent decades, income distribution has grown more unequal in general, many of the developed economies included. The primary culprit is probably the increasing income gap between skilled and unskilled workers. But that gap is especially notable in developing countries, which typically exhibit a labor surplus, a problem that became especially acute in Brazil's case with the post-1945 surge in population growth. Brazil since the 1920s, furthermore, has gone through a phase of rapid industrialization. This process is necessarily capital- rather than labor-intensive, and industry therefore can afford to pay wages well above those of less prosperous employers. This further contributes to the wage gap.2 Because the productivity gains from industrialization tend to go disproportionately to the owners of capital, this further suppresses the labor share of national income.

Yet another factor has been the mode of Brazil's insertion into the world economy. The country's continuing heavy dependence on primary product exports, right up to the present day, has meant that Brazil was not gaining proportionately from the export of products that were high value-added. As is well known, higher value-added exports were among the keys to rapid growth (and improvement in income distribution) in the East Asian economies. Wages paid in Brazil's primary product sector have instead remained low because of the labor surplus.

The second set of reasons are historical factors specific to Brazil. They have to do with the power of its elite to influence government policy-both taxes and benefits-to its economic advantage. Government policy on taxes and public benefits has consistently favored the 5 to 10 percent of the population who control most of the wealth and have been able to control the levers of government. In practice, the federal government acts as a powerful channel for redistributing income from those on the bottom to those on the top. The general revenues of the Brazilian federal government, for example, are generated by a relatively regressive tax system, which is heavily dependent on payroll taxes and indirect taxes (Baer 2001, 79, 277; see also Weylancl 1996, chap. 5). A detailed analysis would undoubtedly show that the lowest income tax payers receive significantly less in return for their taxes, dollar for dollar, than do the middle and upper classes.

Yet another example of successful elite defense of self-interest is the government pension system (federal, state, and municipal). This is currently running a huge deficit (the deficit for the system covering federal employees is currently estimated to be $20 billion a year) which must be made up out of general revenues. (For a comprehensive survey of this topic, see World Bank 2001b.) According to the World Bank, "statistics indicate that less than 1 percent of social security spending reaches the poorest 10 percent of Brazilians, while about 50 percent is cornered by the wealthiest 10 percent" (World Bank 2001b, 3).

Other examples of regressive redistribution routinely occur at both the federal and state levels. It has been especially true in the liberal use of tax incentives, "which tend to favor the better-off classes. One instance is the heavily subsidized interest rates the federal government charged to (primarily large-scale) farmers on their loans in the 1980s. All in all, the net effect of the Brazilian government's fiscal policy is almost certainly regressive (Macedo 1991, 31; see also De Albuquerque 1991, 51).3

Further examples of the elite's success in protecting its interests are easy to find (Power 2000).4 To take a prominent recent example, the Cardoso government tried at least four times to get the congress to lower the exorbitant top range of federal pension benefits. Each time, it met defeat after an intense lobbying effort led by the beneficiaries, which, of course, included, inter alia, members of Congress. Another such case is free tuition at federal universities, which many members of the Cardoso government readily acknowledged should be changed. Because individuals often can get sufficient education to pass the entrance exam only if they can afford private tuition for primary and secondary school, this represents a significant distributional bonanza for the children of well-to-do families, the majority of whom could afford to pay part or all of the university tuition costs. The injustice of this de facto regressive system is all the more striking, given how badly Brazil's public system of primary and secondary schools has been underfunded (Birdsall and Sabot 1996). Whenever change is mentioned, however, students (and many faculty) stage enormous demonstrations-effectively frightening the government into leaving the system unchanged. The Cardoso government did not tackle the issue of universal free tuition at federal universities, for example, not wanting to risk the political costs of attempting reform.

The rich drains the country of money, the middle class goes along as long as they are still getting their cut, and the poor are left to fend for themselves, under laws and customs designed to steal their labor and work them until they die.