Monday, 4 January 2016

The Rise of the Middle Class, Brazil (1839-1950)

This blog post was written by Maria Gomez Leon,
researcher in Economic History at 
University of Groningen
The rise of the middle class during the process of economic development has become a major research topic. This has been fuelled by the expansion of this social group in Latin America during the last decade. The Brazilian case is extra interesting due to the country’s recent economic growth accompanied by decreasing inequality, the reduction of absolute poverty and the rise of a new middle class. 

Between 2001 and 2010, Brazil’s GDP per head recorded an average annual growth of 2.4 per cent. Meanwhile, over the same period, 35 million previously poor people entered the middle class, enlarging the size of this class from 38 per cent of the population in 2002 to 53 per cent in 2012. Comparable episodes of rapid economic growth took place in Brazil in the past. Yet, little is known about the evolution of inequality and the presence of a middle class in Brazil over longer periods of time. Did a middle class exist in pre-industrial Brazil? How did it evolve until modern times?

In a recent EHES working paper, The Rise of the middle class, Brazil (1839-1950), I investigate the emergence and evolution of the middle class in Brazil between the mid-nineteenth and mid-twentieth centuries and its connection with inequality. To this purpose Brazil’s income distribution is explored from two dimensions: inequality and polarisation. From the inequality perspective, the paper gets into the debate on whether or not Brazil suffered from persistent inequality from the colonial era by providing a new continual series on Gini estimations. Then, from the polarisation dimension, it contributes by presenting a new middle class index (MCI), based on polarisation measures, which is applied to assess the evolution of the middle class in terms of income and also in terms of status. Notably, to calculate both inequality and polarisation, I use a self-constructed social table involving information on active population structure (by profession) and the income linked to these professional categories, taking into account differences in gender (male or female), condition (free or slave) and area (urban or rural). The investigation aims to fill the gap in the literature on Brazil’s income distribution before the mid-twentieth century as well as provide new insights on when the middle class emerged in Brazil and if there was any connection between the rise of the middle class and inequality.

This work yielded many interesting results. To begin with, results on inequality do not support the idea of persistent inequality in Brazil rooted in the colonial era (Bértola et al, 2012), while they do coincide with the hypothesis of low inequality levels associated with low income values (Milanovic, Lindert and Williamson 2010; Prados de la Escosura 2007). The figure below reflects this idea by showing that my Gini coefficients range between 0.2 and 0.35. It also shows a long-run decline in inequality until 1913, which was interrupted by a short-lived increase during the 1860s, followed by a reduction and a sharp increase from 1913 onwards.

Brazil’s inequality: Gini coefficients

The figure below suggests that low Gini values are quite plausible given the low income levels exhibited in Brazil, especially during the nineteenth century. This figure shows Brazil’s Inequality Possibility Frontier (the maximum attainable inequality for Brazil given its overall income) with the maximum Gini ranging between 0.3 and 0.6. My estimates remained below this frontier, starting from 0.2 at the beginning of the period and growing later from 1913 once GDP per head had begun to increase.

Brazil’s Inequality Possibility Frontier (1850-1950)   
Initially, these inequality trends might be interpreted as supportive of the presence of a middle class over the period, especially up to 1913 (when Gini coefficients were falling) with a reversal thereafter. The alternative interpretation, however, could be that low inequality values in the nineteenth century, since they pointed to low income levels, might have prevented the emergence of the middle class. The opposite could have happened during the twentieth century, when high inequality values could have been linked to an early phase of economic growth in a Kuznetsian sense (that is, to the transitional process from the traditional sector to a modern one), allowing for the appearance of different social groups. 

Ambiguous interpretations can be solved by applying polarisation measures to infer the presence of the middle class. In particular, I propose to use a new middle class index defined as the ratio between tri-polarisation and bipolarisation (further developed in section 3 of the paper). The method allows me to assess the evolution of the middle class evolution in terms of both income and status. Results from the MCI (Figure 3) suggest that the middle class in terms of income arose in the late nineteenth century, when the decline of the slave system led to a more competitive social order. Still, its emergence, in terms of both income and status, should be placed during the first three decades of the twentieth century, in a context of the expansion of industry and modernisation. Yet, between 1930 and 1950, still in a context of urbanisation and growth but increasing inequality and social repression, the middle class started to decline in terms of both income and status.  

Brazil 1839-1950: Middle Class index (according to status and income) 5- year moving averages. 
In summary, substantial social structural change occurred in Brazil over the period under review. The decline of slavery (started in the 1850s), the reduction of inequality (during the late nineteenth century), and the process of modernisation and urbanisation (from the early twentieth century) were crucial factors for the emergence of the middle class. Interestingly, during the early twentieth century, the increase in inequality linked to the increase in wage differences (associated, in turn, with productivity differences) did not impede, but rather fostered the rise of the middle class. Yet, from the 1930s the continuous increase in inequality, along with a low social cohesion, frustrated the consolidation of the middle class and the eradication of absolute poverty.

These results have relevant policy implications for recent theories on the emergence of the middle class in emerging economies in contraposition to their decline in Southern-European countries (after the last global financial crisis) and its connection with inequality. In the short-run: Is inequality when associated with modernisation unavoidable/ favorable to the emergence of the middle class? However, in the long-run: Does inequality impede the consolidation of the middle class even in the presence of economic growth? Another interesting question arising from this research would be the comparison of the rise of the middle class in other transitional economies in the past.

Working paper available here

Bértola, L., Castelnovo, C., Reis, E., & Willebald, H. (2012). Income Distribution in Brazil in 1870-1920. XVII Jornadas Anuales de Economía, Banco Central del Uruguay, Montevideo.

Milanovic, B., Lindert, P. H., & Williamson, J. G. (2010). Pre-industrial Inequality. The Economic Journal, 121(551), 255–72.

Prados de la Escosura, L. (2007). Inequality and Poverty in Latin America: A Long-Run Exploration. In T. Hatton, K. O'Rourke, & A. M. Taylor (Eds.), The New Comparative Economic History (pp. 291-315). Cambridge, Mass: MIT press.

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