Brazil's Response to the Food Crisis

The summer of 2012 saw one of the worst droughts on record in the United States and Eastern Europe, which led the prices of internationally traded soybeans and corn to set record highs.  In July, the World Bank Food Price index, which measures the price of internationally traded food commodities against the U.S. dollar, saw a 10% jump from one month to the next.  While the index and prices generally have moderately declined since then, international food prices still remain near record highs.  There is now a sense that high, volatile prices have become the new normal (Food Price Watch).  While Brazil is a net food exporter and has increased its food production capacity in recent years, the country has nonetheless felt the pinch of high food prices, and too many Brazilians still find themselves in extreme poverty.  In that context, what has been Brazil’s response to the crisis, and how can policymakers ensure greater food security for their citizens?

In the 1970s and 1980s, Brazil instituted a number of programs geared toward helping the poor pay for food expenses.  During this time, the National School Food Program provided meals for all students enrolled from pre-school to the second grade.  Additionally, in 1976, the Brazilian government began the Worker Food Program to assist low-income workers meet their basic food needs. The National Milk Program for Needy Children, which aimed to provide needy families with one liter of milk per day began in 1986.  While these programs did succeed in helping some families meet the basic necessities, they suffered from a lack of political prioritization as well as from targeting that was not sufficiently selective (Pessanha).

In the 1990s, Brazil created the National Food and National Monitoring Program in order to centralize priorities and more effectively monitor food problems as they arose and identify the social groups most vulnerable to food security issues.  However, this program fell victim to the austerity measures put in place by then-president Fernando Collor de Melo.  The turbulence of the political environment together with the serious macroeconomic imbalances of the era prevented a focus on food security issues.  The topic came into focus again in the early 2000s.  This period saw the launch of the Fome Zero (“Zero Hunger”) program, which was one of President Lula’s principal objectives after his election in 2001.  The program is built on four main pillars: access to food; strengthening family agriculture; income generation; and finally, implementation and social responsibility (Pessanha).

Fome Zero has been the basis for the poverty programs Brazil has recently gained a reputation for, such as Bolsa Família, inter alia.  Bolsa Família is a targeted conditional cash transfer program that provides funds to low-income families with schoolchildren to pay for food-, education-, and health-related expenses contingent on school attendance.  Fome Zero also offers insurance and financing benefits to family farmers, guaranteeing income for 6 months in cases of severe drought and offering 100% financing to certain small-scale farmers.  It also aims to generate income for socially excluded populations through microcredit financing, education, and food-for-work programs. 

These measures are in keeping with the recommendations by Marie Chantal Messier, a Senior Nutrition Specialist at the World Bank.  She states that in order to protect mothers and young children from malnutrition, “a balanced strategy of income growth and investment in more direct interventions into health and nutrition are needed.”  Brazil’s focus on income growth through Fome Zero, in conjunction with other measures to generate this growth, has allowed the Brazilian middle class to grow significantly in recent years, with the income share of the second-highest quintile doubling in the last decade and the middle class comprising nearly a third of Brazil’s inhabitants (up from 15% in the 1980s) (World Bank).

However, even in light of Brazil’s impressive performance in diminishing income inequality, much is left to be done to adequately address the food crisis, as evident by the significant increase in food prices recently.  Rising food prices and inflation as a whole hurt poor consumers the most, as it forces them to devote more of their limited income for the same amount of goods.  In order to adequately measure this discrepancy, Brazil developed a consumer price index (IPC) for those who earn up to double the minimum wage to measure how inflation affects low-income consumers.  The IPC-C1, as this index is called, saw an increase of 7.15% in the last 12 months, versus only 6.16% for the normal IPC.  Notably, food costs for low-income consumers have risen 14.69% in the last 12 months, with astronomical increases in onions and tomatoes, especially, which respectively climbed 25% and 10.5% in March alone (IBRE). 

According to the Brazilian Central Bank, wholesale food prices have actually fallen, but the Bank faulted the costs of freight and other services for preventing lower prices from reaching consumers (Cobucci).  Statistics bear up this claim: in 2012, Brazil’s port infrastructure was rated 2.6 out of 7 (with 1 being “extremely underdeveloped” and 7 being “well developed and efficient by international standards”) by the World Bank and in 2010, only 13.5% of Brazil’s roads were paved.  Additionally, in 2010, Brazil’s total network of roads stands at 1.5 million kilometers; in contrast, the network of roads in the US (which is comparable in territory size) stands at over 6.5 million kilometers.  Although speaking of Latin America generally, a World Bank news article stated that that logistics expenses comprise between 16 and 26% of Latin American GDP, and between 18% and 32% of the value of commodities.  In contrast, in OECD countries, these figures are both 9% respectively (“What are the facts about rising food prices and their effect on the region?”).

In this context, while Brazil has been laudable in increasing access to food for underprivileged populations through inclusion of the poor in economic growth and conditional cash transfer programs, Brazilian policymakers must concomitantly focus on increasing market access for goods through domestic logistics and infrastructure improvements.  This would allow for three major advances:

1)      the economic and social inclusion of underserved regions of the country;

2)      a decrease in transportation costs; and,

3)      expanded market access for farmers in underconnected regions of the country.

Meanwhile, Brazil should also work to update its famed Bolsa Família, which is not automatically indexed to the IPC.  To ensure adequate assistance levels are maintained in times of inflation, the program must be indexed to the food sector of the IPC.  Brazil should further consider chaining Bolsa Família payments to the IPC-C1 (the low-income IPC) to give the poor a greater cushion when inflation rises. 

Works Cited

Cobucci, Luciana. "BC Vê Risco De Alta Inflação Em 2013, Mas Promete Medidas." Jornal Do Brasil. 2 Apr. 2013. 15 Apr. 2013.
"Food Price Watch." The World Bank. Aug. 2012. Web. 15 Apr. 2013.

"High Food Prices: Latin American and the Caribbean Responses to a New Normal." The World Bank. 15 Apr. 2013.

Instituto Brasileiro De Economia. 15 Apr. 2013.

Messier, Marie Chantal. "Rising Food Prices: Time to Put Your Money Where Your Mouth Is?"  20 Aug. 2012. 15 Apr. 2013.

Pessanha, Lavínia Davis Rangel. "A Experiência Brasileira Em Políticas Públicas Para a Garantia Do Direito Ao Alimento." Instituto Brasileiro De Geografia E Estatística. N.p., n.d. Web. 15 Apr. 2013.

Rocha, Cecilia. "Developments in National Policies for Food and Nutrition Security in Brazil." Development Policy Review 27.1 (2009): 51-66. Print.

"What Are the Facts about Rising Food Prices and Their Effect on the Region?" The World Bank. 13 Sept. 2012. Web. 15 Apr. 2013.

"World DataBank." The World Bank DataBank. N.p., n.d. Web. 15 Apr. 2013.

Quantitative Easing's Effects on Brazil

Quantitative Easing.  Did your eyes just glaze over?  QE is a term that can make even the most educated person's eyes roll back in her/his head, but bear with me, it's actually not that difficult of a concept.  In the U.S., QE refers to the Federal Reserve purchasing back long-term U.S. treasury bonds it had sold to private investors.  By purchasing these bonds back, the Fed effectively drives down the interest rates for long-term bonds, incentivizing investors to look elsewhere for investments with higher rates of return.  The idea is to stimulate the economy by driving investors who normally would flock to purchasing Treasury bonds to instead invest in the private sector.  The result is an injection of cash into the economy, with the hope that this new money will be spread throughout the economy as the investors are pushed to better investments and the larger amount of money that banks hold in reserve allows for banks to increase lending.  Where does this money come from though?

Well, the short answer is that the Fed created it out of thin air.  When the Federal Reserve engages in QE, it's said that money is created "by the stroke of a pen." Since we are no longer basing our money on gold, the dollar is worth what the Fed says it is (and the currency market fluctuates accordingly, but more on that later).  If a central bank declares that its reserves are higher today than yesterday, then so be it. This might sound like suspiciously like "printing money" at first, and although the ideas are similar, QE is actually a different process, although the distinguishing line between them is rather thin.  The act of printing money refers to an actual increase in the money supply, while QE is more indirect.  Instead of literally printing money and giving it to consumers, QE creates potential money in the form of bank reserves (Jensen).  Like I said, the distinguishing line is rather thin.

Going back to the idea of the value of the dollar, as anyone who has taken an Econ class knows, the more money a government prints, the less that money is worth, and that's bad.  Econ textbooks like to cite the example of Germany after World War I, where inflation reached 41 percent per day and people reportedly had to cart their money around in wheelbarrows to make a modest purchase.  Inflation of this magnitude is, of course, bad.  But low inflation actually helps the economy and that's why the Fed uses inflationary measures like QE.  When people expect prices to increase, they purchase goods sooner rather than later to avoid paying more.  Thus, low inflation kind of greases the wheel of the economy.  Also, low inflation makes debt an attractive investment by lowering the absolute value of the loan over time.

The Fed also likes QE because it lowers the value of the dollar relative to foreign currencies.  This makes it cheaper for foreign countries to buy American goods, which boosts the export sector, and consequently, the nation's economy.  This brings us to Brazil, whose president is none too happy with U.S. monetary policy.  During her visit to Washington in April, she called QE a "monetary tsunami" and warned that "Brazil will continue to take whatever actions are required to offset the detrimental effects of QE policies." Of course, as the dollar depreciates, the Brazilian real increases in value, which creates a disincentive for the Brazilian economy, centered as it is around exports.  The numbers back this up.  When the first round of QE was implemented in January 2009, the exchange rate for reais stood at US$1 = R$2.33.  A few days after QE1 ended in March 2010, the dollar had slid to R$1.77.  Its value dropped even more after the N.Y. Fed president called for QE2 in October of that same year.  Is this really a bad thing though?

At face value, we can look at the depreciating dollar as disincentivizing exports around the world and harming export-led economies, but really, the result is much more nuanced.  Arguably, QE (among other monetary tools) has saved the U.S. economy from ruin.  A bankrupt U.S. economy would do much more harm to the economies of other nations than a depreciating dollar.  By saving the U.S. from the brink, the Fed staved off economic disaster at the cost of depreciation in the short-term.  In the grand scheme of things, even export-led economies such as Brazil will benefit from this policy.  In fact, if we look at statistics on Brazil's economy, it seems they haven't even suffered much in the short term.  From 2008 to 2010, their annual GDP growth averaged just over four percent (even including 2009, when they experienced a negative growth rate of 0.6 percent).  And, while their exports as a percentage of GDP decreased during those years, so too did their imports.  This decrease may have been simply a shift in their economy--the same three year period saw an increase in services as a percentage of their GDP by approximately the same amount as the decrease in exports.  Whether this indicates a more permanent change to a service-based economy remains to be seen, and definitely warrants further study.

Sources:Blackden, Richard. "Brazil President Dilma Rousseff Blasts Western QE as 'monetary Tsunami'" The Telegraph. 10 Apr. 2012. Web. 31 May 2012.
Goodwin, Neva R., Julie A. Nelson, and Jonathan Harris. Macroeconomics in Context. Armonk, NY: M.E. Sharpe, 2009. Print.
Hebron, Julian. "Quantitative Easing: Rate Recap & Timeline." The Basis Point. 23 June 2011. Web. 01 June 2012.
Jensen, Dr. Mark. Message to the author. 31 May 2012. E-mail.
Reuss, Alejandro. "Why Is the Government Buying Long-Term Bonds?" Dollars and Sense: Real World Economics. Web. 01 June 2012. 

"World DataBank." The World Bank Databank. World Bank. Web. 01 June 2012. 

The Capability Approach to Poverty

When we say someone is poor, what does that mean exactly?  The definition of poverty and how to best address it have been the subject of much debate over the years.  Nobel Prize-winning economist Amartya Sen has proposed a radical change in how we view poverty.  Instead of solely addressing monetary measures, his approach, dubbed " the capability approach" (CA) to development views development as an enhancement of human capabilities, not the maximization of utility or monetary income.  This approach instead focuses on indicators for well-being that measure the ability to live what Amartya Sen—this approach’s pioneer—calls a “valued life.”  Accordingly, CA proponents argue that poverty should be defined as a “failure to achieve certain minimal or basic capabilities, where ‘basic capabilities’ are the ‘ability to satisfy certain crucially important functionings up to certain minimally adequate levels’” (Laderchi et al. 253).

CA thus radically changes the measures for human development and poverty in comparison to other development approaches, some of which are based on measuring people’s welfare via their utility and assuming that people will act to maximize this utility.  CA advocates argue that utilitarianism is an inadequate measure of well-being, as a person could theoretically be satisfied with what Sen calls “physical condition neglect,” while these individuals’ desires are constrained by what they view as possible outcomes.  These choices are further influenced by the cultural context the individual experiences, which significantly influences expectations (253).  Thus, the implications of CA for measuring human development and poverty indicate a move away from focusing on monetary income as the end measure in well-being; instead of monetary income serving as a sufficient condition for well-being (one in which achieving a certain level of income necessarily causes an individual to rise out of poverty), monetary income will be an adequate condition, or one condition among other externalities needed to improve welfare (254). 

CA thus changes the focus from an absolute one-size-fits-all approach for welfare measurement to a more nuanced approach that takes into account context and focuses on outcomes.  Poverty and welfare assessments under this approach will consider the fact that some people need a larger amount of resources to obtain the same achievements.  Therefore, the implications of CA are that poverty alleviation programs that use capability assessments as their basis for welfare measurement can be tailored to the context of the region, and accordingly target the individuals who need the most help in realizing their potential.  

Brazil's Bolsa Família I mentioned in my previous post is fruit of the capability approach.  It is less concerned with raising income beyond a certain arbitrary threshold and more concerned with allowing individuals to achieve their true potential by way of education, which, as a corollary will almost necessarily increase an individual's earnings, lifting him/her out of poverty.

Source:

Laderchi, Caterina Ruggeri, Ruhi Saith, and Frances Stewart. "Does It Matter That We Do Not Agree on the Definition of Poverty? A Comparison of Four Approaches." Oxford Development Studies 31.3 (2003): 243-74.

Conditional Cash Transfers

Conditional Cash Transfers can be an effective social program that helps to alleviate poverty. They provide discretionary money that can pay for both the direct and opportunity costs of education, which include books and supplies, as well as lost income of child labor. It has been argued that 21 percent of the reduction in the GINI coefficient in Mexico and Brazil is due to CCTs (Soares et al. 218). Other studies in Brazil indicate that the dropout rate was decreased from 10 to 0.4 percent, while employment of children between ten and fourteen fell by just over 30 percent (Franko 516). These statistics are immediate measures of the success of CCTs; however, the most important measures of these programs’ success—indicators that would show that CCTs broke the intergenerational poverty cycle, such as dropout and graduation rates of the children whose grandparents are now receiving cash benefits to keep their future parents in school—will not be available for decades. Nevertheless, the statistics available now show much promise.

Furthermore, the theory behind CCTs is sound. It is very much a capabilities approach to poverty alleviation and addresses future foundations for growth. Money is not the end measurement, it is the means to an end, with the “end” here being investment in human capital via education. However, there are issues with the program; since it addresses future foundations for growth, it does not address adults in poverty now. Nor does it address how these families will survive once the children have graduated and the family no longer receives the subsidies they may have come to depend on.

Source:
Franko, Patrice M. The Puzzle of Latin American Economic Development. Lanham: Rowman & Littlefield, 2007. Print.
Soares, Sergio, Rafael Guerreiro Osório, Fabio Veras Soares, Marcelo Medeiros, and Eduardo Zepeda. "Conditional Cash Transfers in Brazil, Chile, and Mexico: Impacts upon Equality." Carnegie Endowment Fund. Web. 5 May 2012.

Welcome!

My name is Bryan Mulholland and I am a Masters student studying Latin American Political Economy, with an emphasis on Brazil, at Georgetown University's School of Foreign Service.