The Consequences of the Social Contract in Income Inequality: A comparison study of Germany and Brazil

Abstract

Reputable international organisations, such as OECD and ECLAC have revealed that although the tools actually do exist to tackle inequality, policy-makers have not been able to undertake effective policies to face this phenomenon (ECLAC, 2012) (OECD, 2011). Also a new team of researchers, led by Dani Rodrik, have created a network named Economics for Inclusive Prosperity (ECONFIP). In their introductory brief, they claim that the economy is not only the foundation of the market, but it should serve for the inclusive prosperity of all, not only for the top 1% (Rodrik, Naidu & Zucman; 2019). This ECONFIP group take some of their institutional approaches from Karl Polanyi, namely the double movement and embeddedness: “crucial markets (e.g. the “fictitious commodities” of labour, land, and capital) must be embedded in non-market institutions, the “rules of the game” supplied by government” (Rodrik, Naidu & Zucman; 2019: 6). Also, Kate Raworth (2018: 171) takes a multidimensional approach by delving into the correlation of income inequality with health - life expectancy – as well as education levels.

Two very different approaches of welfare state policies from Brazil and Germany are taken to study their impact on income inequality from 1990 to 2016. On the one hand the (a) Corporatist-welfare model, represented by Germany, and on the other hand; the (b) hybrid between a Residual and Universal model according to the Esping-Ansersen (1990) classification, as undertaken by Brazil. Both have been proven to possess advantages and drawbacks regarding their impact on income inequality. This study goes in line with the literature that describe the welfare state models in emerging countries and more specifically, Latin American countries. The most known welfare state classifications from Titmuss (1974) to Esping Andersen (1990) are mainly focused on European countries. However, Latin American countries have not been the object of welfare state classifications until recently when Julianna Martinez (2007) has undertaken one of the most comprehensive study regarding Latin American welfare state classifications (Ubasart-González & Minteguiaga, 2017).

On the one hand, for the quantitative study, Germany and Brazil represent the cases of this longitudinal comparative study, which are analysed from 1990 to 2016, or the latest data available depending on the source of the database. The dependency relation between the explanatory variables together with the control is tested through a multiple linear regression. This statistical model is commonly used to test the relationship between two or more explanatory variables and a response variable by fitting a linear equation to observed data.

On the other hand, the descriptive study attempts to give an explanation for the results of the empirical study by analysing the following elements: the direction of social expenditure (how to spend the social budget) and the finance of this social budget (who contributes to the welfare state). Social expenditure allocations are divided and analysed through a longitudinal study from the early 1990s to the mid-2010s to understand the modifications in the social expenditure function in both countries. Afterwards, the different components of the social budget are classified from a sociological perspective following the so-called welfare classification of Esping-Andersen (1990). This descriptive analysis frames the results of this study within the current debates about the different outcomes of a welfare model in one and another socioeconomic context, especially within the discussions between less developed and OECD countries.

The conclusions of the thesis show that social contract plays an important role in reducing income inequality. In developing countries (Brazil) the focus on social assistance policies may help at first to bring people from the informal to the formal social contract. However, once most of the population work in formality conditions, welfare states policies become more complex and its power its more limited due to the existence of stronger forces that affect the strength of the formal labour market (dualization in the case of Germany).