The Political Economy of Inequalities in Brazil and China

As academic and policy debate over inequality booms worldwide, Brazil and China are, for different reasons, the two most discussed cases among large middle-income developing countries. Although Brazilian inequality levels have been historically sensitively higher, both countries stand nowadays among some of the most unequal societies, with official estimations for their Gini coefficient of household per capita income respectively at 0.526 and 0.474 in 2012. Both have also employed a set of public policies that aim at reducing such levels, and somehow these policy intervention packages do resemble themselves. Nevertheless, historical and institutional causes and, as this article will argue, the social coalitions that sustain such high levels of inequalities do vary radically.

International comparable data on inequality are notoriously difficult to make and our article brings no contribution in that sense. Rather, through a comparative political economy perspective, we aim at identifying and comparing which leading social forces have been hegemonic in forging the distributional outcomes in Brazil and China in the last decade. This article employs a neo-gramscian approach when addressing social coalitions dynamics and relies on Poulantzas’ theorization of power blocs into the State. We argue that the understanding of inequalities, their causes and set of policies implemented to mitigate them must include some problematization and characterization of the political economy of the power bloc formation. Otherwise, a crucial stake of an unequal society’s wealth composition is left out of policy discussions and interventions. We aim at addressing the following research questions: which are the class fractions within Brazilian and Chinese States that have been sustaining the accumulation regime and its distributional outcome for the past decade? To which extend do they differ or resemble each other? How did their dynamics within the power bloc help shaping the current distributional outcome?

Brazilian narrative has been told in a context of falling income inequality due to successful public policies that coupled labour market improvements with social protection schemes. After long being perceived as almost a natural feature of Brazilian landscape, inequalities have been a central target for public policies from the Worker’s Party administration that has been in power since 2003. Such policies have included minimum wage increases above inflation, formal labour market expansion, and a sound minimum income scheme.

Recently, some Brazilian researchers have started contesting the reported drop in inequalities. They argue that if the information on the income performance of the top 1% is correctly computed, using data from tax sources and not only household surveys, inequality in Brazil was stable and did not decline from 2006-2012. Echoing Atkinson and Piketty’s point, they argue that it is thus crucial to detail the dynamics of the top 1% richest in the society. And that is highly financialized, as in several other countries in the world. As we will further argue, over the past decade and thus during all Worker’s Party administrations, the financial-banking class fraction kept a hegemonic position in the power bloc within the State and was thus capable of forging a macroeconomic regime aligned with its interests.

China, for its turn, rapidly ‘retreated from equality’, to use Riskin’s expression, and settled into an uneven growth path marked by both very fast poverty reduction but also strong urban-rural divide. When decomposing inequalities, the China Household Income Project (CHIP) estimated that the difference of rural and urban incomes responded alone to 54% of national inequalities. The Chinese Communist Party has also allegedly been trying to address such imbalance through relevant policies such as the abolishment of rural taxes and fees, rural infrastructure development and public investment in the West provinces, a basic pension insurance program for rural areas, and the rural cooperative medical insurance program. Results, so far, have been modest, and the official urban-rural income gap fell from the historical peak of 3.3 times in 2009 to 3.1 times in 2012.

Chinese elite and the richest top 1% have a very different relationship with the financial sector if compared to Brazil. They did rely heavily on cheap credit offered by the banking sector in order to dig their first bucket of gold during the privatization of once collective enterprises (offered at already very low prices). And they continued to rely on cheap credit during the real estate expansion and housing bubble, when several fortunes were built. But until very recently Chinese top 1% had not relied on banking or financial profits for the bulk of their income and wealth generation. This may have started to change with growing speculation in the stock market. But still, it has been a singular feature of the only major country that systematically refused to liberalize its financial system. Qualified as a ‘financial repression’ by its liberal critics, the State-controlled system has been characterized by strong capital controls, restrictions on the entrance of foreign players, State control over major banks, and interest rates strongly based on the productive sector investment needs. How this dynamics impacts the formation the power bloc within the Chinese Communist Party, its recent trends towards liberalization and its distributional outcome are some of the features that this article will explore.

Our article should be organized as follows. Besides an introduction, it will provide a reflective review of the literature on Brazilian and Chinese inequalities and their recent institutional and policy evolution. Next, our theoretical approach will be briefly outlined, and we will then provide a detailed discussion of both countries’ political economy dynamics, centered around class fractions within the power bloc and their influence on policy and on the State. We will then discuss the impacts of such power bloc formation over the distributional outcomes. The last section will summarize our conclusions.