This week S&P downgraded Brazil’s credit rating to junk status, the latest in a series of bad economic news for the country. A recent piece at Bloomberg profiles one of the country’s many economic problems dragging Brazil down: its generous civil service benefits, which distort the labor market. More:
In July, the Brazilian state of Minas Gerais announced 32 job openings at its labor court. It received 134,270 applications.There is nothing exceptional about Minas Gerais or its labor court. But with unemployment soaring and Brazil heading for its worst slump since the Great Depression — Standard and Poor’s just downgraded its credit rating to junk — landing a civil-service job is like winning the lottery. It comes with an outsized paycheck, lifetime tenure and perks that can include a chauffeur and free flights.“The public sector offers stability: You pass the test and you have a job for the rest of your life,” said Guilherme Alves, 21, who was studying numbing legalese in Brasilia at one of the hundreds of schools around the country dedicated to passing a state employment exam. “It’s awesome.”
As Bloomberg explains, there are two major consequences of this system for the country’s economic health. On the one hand, most private employers cannot compete with such generous benefits, particularly during an economic downturn. On the other, Brazil itself can’t afford to pay government employees this much forever, particularly when it has such poor credit.Behind this story is some key historical background. Brazil is a racially polarized society and for many decades dark-skinned people and children from poor and rural backgrounds were largely frozen out of competition for government jobs—as well as most good jobs in the highly protected and regulated formal economy. Like many other Latin American countries, Brazil skimped on public education in elementary and secondary schools, and splurged on universities. What this meant was that middle class families who could send their kids to private schools were almost certain to see their kids get into the university system (and state university education was heavily subsidized) and from there, they faced little competition for civil service and cushy private sector jobs.Government jobs were and are highly coveted, with high salaries, great fringe benefits, and some of the most generous pensions in the world. Similarly, many formal sector jobs enjoy European levels of job protection and benefits. But for years, the great majority of Brazilians worked in the informal sector. They were poorly educated and they had few job protections and miserable wages. For many, hunger and destitution were a constant presence.That system—a kind of Third World imitation of the blue model social systems of Europe and North America—is breaking down now. This is partly for the same reasons that Europeans and Americans are having to adjust, and also partly because Brazil’s poor people are unwilling to be treated so unfairly anymore. Slowly, the government is moving away from supporting privileged (and largely white) enclaves, and moving toward a more open society where more resources are going to those most in need.The fightback is fierce. Civil servants (and the politicians who share in the benefits of the system) don’t want to lose their privilege, and the middle class fears a decline in university quality as well as tougher competition for places, and it’s doing what it can to hold on to its power. When the economy was growing and the world hailed Brazil as one of the BRIC superstars, these conflicts were easier to manage. But now the economy is in recession, and everybody is feeling the pain.If getting the economics right weren’t hard enough, that is, Brazil also faces a tough uphill slog to develop the kind of political consensus that can help it make fundamental and often painful reforms. Part of the challenge is that the technocrats who are among the prime beneficiaries of the old system are, inevitably, playing a major role in any reform process. This is not unlike what we see in the United States, where the upper middle class of professionals and managers is fighting to preserve its power and standing even as the economic foundations of the old system are shaken. Our civil service, very much like Brazil’s, would rather fight change than accelerate it. Similarly, our universities don’t want to lose their privileged places and our political/media establishment is much more interested in trying to defend the old system than to push reform.But in both the U.S. and Brazil, reform is exactly what’s needed.