Why is average income going up in Brazil?

. Jul 14, 2020
income brazil pandemic unemployment Photo: Maren Winter/Shutterstock

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We’re covering today Brazil’s puzzling increase in medium income. The rise of bankruptcies. And Petrobras’ plan for the post-pandemic world.

What is happening to Brazil’s average income?

Economic crisis, high unemployment rates (with even bigger levels of labor underutilization), and an uptick in bankruptcies. All of these factors are likely to indicate a massive fall in workers’ average income. That is what happened during the 2014-2016 crisis.

However, as the chart below shows, in 2020 the opposite has been observed. With the coronavirus crisis, workers&#8217; average income has abruptly <em>increased</em>.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3173636" data-url="https://flo.uri.sh/visualisation/3173636/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>How to explain.</strong> Economist Daniel Duque, of think tank Fundação Getulio Vargas, says there are multiple hypotheses to explain this highly counterintuitive trend.</p> <ul><li><strong>Composition effect.</strong> As we showed in <a href="https://brazilian.report/newsletters/brazil-weekly/2020/07/13/scientists-in-brazil-kick-off-groundbreaking-covid-19-research/">yesterday&#8217;s Weekly Report</a>, the crisis has shut down more low-paying jobs — which usually comprise tasks that don&#8217;t allow for remote work. Also, this crisis has been particularly harsh on informal workers — which earn less money than their formal counterparts. By reducing the universe of low-paying workers, the data could be skewed upwards.</li><li><strong>Survey issues.</strong> The pandemic has forced the Brazilian Institute of Geography and Statistics to abandon its traditional survey methods of in-person interviews, for an exclusively phone-based survey. That could alter the data, as lower-income people are less connected than high-income populations. During the 2018 presidential race, we discussed how <a href="https://brazilian.report/power/2018/06/28/brazils-presidential-polls-reliable/">telephone polls can over-represent rich population strata</a>.</li></ul> <p><strong>Why it matters.</strong> Mr. Duque&#8217;s research is yet another piece of evidence showing that the true effects are yet unknown&nbsp;—&nbsp;which hampers the country&#8217;s ability to weather the crisis.</p> <hr class="wp-block-separator"/> <h2>… Meanwhile, bankruptcies skyrocket in Brazil</h2> <p>After nearly five months since the coronavirus was first spotted in Brazil, the country is observing a worrisome — yet predictable —&nbsp;spike in bankruptcies and filings for administration. In June, the number of companies requesting court-supervised reorganization jumped 44 percent, and bankruptcy adjudications rose 71 percent, according to credit consultancy firm Boa Vista. The worst part is that this is just the beginning. Back in March, we warned that, after hospitals, bankruptcy courts would be the next public service <a href="https://brazilian.report/power/2020/03/26/brazil-justice-system-could-be-the-next-covid-19-victim/">overburdened due to the pandemic</a>.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/3173153" data-url="https://flo.uri.sh/visualisation/3173153/embed"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p><strong>Why it matters.</strong> The number of bankruptcy filings and administration requests was trending downward —&nbsp;but the coronavirus crisis kicked them back up.</p> <p><strong>Solidarity.</strong> For some experts, the surging numbers are still low, considering the size of the crisis. This may be explained by the fact that creditors have become more open to negotiating before enforcing debts in courts.</p> <p><strong>What&#8217;s next?</strong> Economists say it remains uncertain how sectors will escape the crisis. Nobody knows how long it will take for the economy to recover to pre-pandemic levels — and some industries will feel a harder blow. That should be the case of the entertainment, tourism, and food sectors, as consumers are likely to be wary to engage in these services until there is a vaccine or effective medication against Covid-19.</p> <hr class="wp-block-separator"/> <h2>Petrobras&#8217; pandemic strategy</h2> <p>The pandemic has accelerated downsizing plans for Petrobras, Brazil&#8217;s state-controlled oil and gas giant. The company will continue its move towards focusing its efforts on oil extraction from deepwater pre-salt layers —&nbsp;following other industry giants, which concentrated on more profitable activities.</p> <ul><li>The company plans to reduce its staff by 34 percent, close nine commercial buildings, and place half of its administrative team on remote work regimes. Petrobras also plans to sell USD 27 billion in assets by 2023 —&nbsp;though the crisis could make this plan all but a longshot.</li></ul> <p><strong>Why it matters.</strong> Petrobras&#8217; moves will deeply affect entire chains of suppliers and several locations where the economy revolves around the company. In Rio&#8217;s city center, for instance, merchants say the oil company&#8217;s remote work system has impacted their sales.</p> <p><strong>Process.</strong> This downsizing process started after Operation Car Wash revealed a systemic corruption scheme within the company — which <a href="https://brazilian.report/business/2019/08/03/petrobras-recovery-crisis-debt/">bled its resources and pushed it to the brink of collapse</a>. Over the past decade, Petrobras has lost around 20 percent of its market value.</p> <p><strong>Oil crisis.</strong> In the short term, Petrobras could revitalize smaller oil fields, which require smaller investments. However, even cheaper solutions are daunting in the pandemic world. Oil prices have plummeted in 2020 — Brent spot contracts fell from USD 67 to 42. Consultancy Wood Mackenzie <a href="https://br.reuters.com/article/idBRKBN21423C-OBRTP">predicts</a> a drop of up to 30 percent in investments in Brazil&#8217;s oil industry.</p> <hr class="wp-block-separator"/> <h3>What else you need to know today</h3> <ul><li><strong>Fintech. </strong>JPMorgan has reportedly invested in Brazilian fintech Fitbank, its first move into the payments industry in Latin America. The amount of the investment, however, has not been disclosed. Founded in 2015, Fitbank has developed a &#8220;white label&#8221; platform for payment management — which several financial institutions can offer to their own customers using their brand, not Fitbank&#8217;s. So far, the service has reached 96 clients and 180,000 accounts, dealing with around BRL 1 billion per month.</li><li><strong>Pensions.</strong> According to the Economy Ministry, only 13 of 27 Brazilian states have passed a pension reform of their own. Back in 2019, the government unsuccessfully tried to include state- and municipal-level servants to the <a href="https://brazilian.report/newsletters/brazil-daily/2019/07/05/pension-reform-moves-forward-rio-cheat-olympics/">federal reform</a>, but lawmakers blocked the move. Pensions and benefits are gobbling up major chunks of local administration&#8217;s budgets but altering these rules is a popularity risk for governors. The Economy Ministry rated each state&#8217;s pension situation from A to D — and 20 states got the bottom scores.</li><li><strong>Tech.</strong> During a webcast on Monday, Central Bank director João Manoel Pinho de Mello said the country must adapt banking regulations for the entrance of big tech companies to ensure competition. In June, the bank issued a ruling saying it could require players to receive prior approval to operate in payments — and <a href="https://brazilian.report/newsletters/brazil-daily/2020/06/24/whatsapp-payment-system-blocked-by-brazils-central-bank/">blocked newly-launched WhatsApp Pay</a>. Mr. Mello says tech giants already start big as they have millions of users, which could create an imbalance in their relationship with merchants.</li><li><strong>Environment.</strong> The government has <a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/07/13/government-official-fired-after-alert-record-breaking-amazon-deforestation/">dismissed</a> the head of earth observation at the National Institute of Space Research (Inpe). On Friday, official data showed that deforestation has increased for the 14th straight month in Brazil, up 25 percent in the first half of 2020 when compared to 2019 levels. The move is reminiscent of last year&#8217;s firing of Inpe&#8217;s top official following the release of data showing worsening deforestation — which angered President Jair Bolsonaro and led the government itself to challenge the quality of the data.&nbsp;</li><li><strong>Military v. Supreme Court. </strong>The tension between the branches of power in Brazil was taken to a new level after Supreme Court Justice Gilmar Mendes criticized the Armed Forces for its role in the Health Ministry&nbsp;—&nbsp;<a href="https://brazilian.report/coronavirus-brazil-live-blog/2020/07/13/military-officers-increasingly-exasperated-with-interim-health-minister/">controlled by military officers</a> for the past two months. &#8220;The Army is associating itself with this genocide,&#8221; said Justice Mendes, about the sheer number of Covid-19 deaths in Brazil (72,833 so far). Defense Minister Fernando Azevedo e Silva promised to sue.

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