This paper discusses the changing social contract in Brazil by examining the correlation between beliefs and distribution policies that have shifted over the last thirty years. It is based on the premise that such a large punctuated change in beliefs and the ensuing shift in social contract is a relatively rare event in the modern world.
Using both a literature review and the Bénabou (2000) model to show the means by which a change in beliefs can lead to a new social contract. The paper refers to this transformative process as ‘dissipative inclusion’ as it entails effective inclusion but at the expense of significant dissipation of rents. It argues that the net effect of these competing forces result in higher economic growth and well-being. It also argues that this interpretation is difficult to determine from the data because the dissipation is more easily observable than the growth-inducing effects of the inclusion.
Key Findings:
- Brazil has moved from a high-inequality low-redistribution social contract before 1985 to one characterised by lower-inequality, higher-redistribution today. The repressive years under military dictatorship and the oppressive years under hyperinflation motivated the shift in beliefs. The resulting belief of fiscally sound social inclusion has been the driving force reducing poverty and inequality. This is ‘dissipative inclusion’.
- It is tempting to suggest that governments could tweak the process to enhance inclusion and avoid distortions. Naturally, there is room for interventions to improve the terms of the trade-offs. However, the fundamental nature of dissipative inclusion has no short-term fix because it is determined by the distribution of power in society. In the long run, however, the process of dissipative inclusion should endogenously change the distribution of wealth and power, allowing for less inefficiencies and consequently more growth.
- The key element in ‘dissipative inclusion’ is the existence of some force pushing for inclusion that is capable to match and overcome the formidable forces that naturally resist redistribution. In Brazil the force is the overarching belief in social inclusion. Any country trying to achieve the same goals motivated by some less powerful force would fail in the face of strong resistance.
