Sep 07 2008

The importance of incentives in achieving poverty alleviation: Venezuela vs. Brazil

Managing Globalization: To reduce poverty, money isn’t everything – International Herald Tribune

Two developing countries: Venezuela and Brazil. Two ideologies underpinning economic growth and development: command in Venezuela versus free market in Brazil. Which system has worked better for the people of these two large South American countries?

How much can governments do to fight poverty? In South America, a couple of answers are emerging in the growing economies of Venezuela and Brazil. Both governments have publicly pledged billions of dollars to raise living standards – but have they succeeded?

Overall income is moving upward in both countries, if for different reasons. Venezuela is riding the black tide of high-priced oil, while Brazil’s relatively firm economic policies have built confidence in its business prospects among both locals and foreigners.

The president of Venezuela, Hugo Chávez, has portrayed himself as an ardent socialist and a disciple of Fidel Castro. Reducing inequality is fundamental to his agenda, whether by dividing up Venezuela’s oil wealth or, as he has obliquely suggested this month, through land reform. His consolidation of executive power has brought Venezuela closer to a centrally planned economy and, as such, has given him the opportunity to invest heavily in social programs.

But identifying the results isn’t easy. The poverty rate in Venezuela was about 50 percent when Chávez’s presidency began in 1999, according to the government’s own figures. Since then, roughly equal numbers of people have fallen into and out of poverty at various times, with a spike to more than 60 percent in 2003 and a drop below 40 percent in 2005…

Rodríguez also questioned whether Chávez’s programs could be completely effective because of the way they were managed. Some of the world’s most successful initiatives for improving the well-being of the poor, he said, linked families’ benefit payments to useful actions like their children’s attendance in school or visits to the doctor. In Venezuela, he said, the link is to political loyalty instead.

“The level of political polarization has become so high that not only is loyalty to the regime the key determinant of your access to benefits, it is also the key determinant of your capacity to be involved in the administration of those benefits to others,” Rodríguez said.

One example of this problem was a program intended to improve literacy. “The government had no system of accountability to monitor performance other than the reports of its own administrators,” Rodríguez said. “When program administrators learned that it was more important to show loyalty to the regime than to effectively run the program, any incentives that they had to administer resources efficiently, from a social point of view, disappeared.”

In Venezuela, president Chavez’s socialist inspired, command policies, paid for by the sale of expensive oil to the rest of the world have led to benefits primarily for those citizens willing to show political loyalty to Chavez and his party. Hard work and productivity is not rewarded as much as loyalty and support for the government. This system of incentives leads to some poor outcomes. The result? Only mediocre improvements in poverty rates, literacy, employment and health of the people.

In Brazil, where free market principles underlie much of the economic development policies, monetary benefits for development workers and the families they serve are linked not to political affiliation but to actual behavior of households and government employees. The result, not surprisingly, has been real improvements in education, health, and poverty levels amongst Brazilians.

Meanwhile, in Brazil, progress appears to have been more widespread. Figures compiled last year by Rômulo Paes de Sousa of the Ministry of Social Development and Fight Against Hunger, covering the period from 1999 through 2004, painted a rosy picture: School attendance was up, while illiteracy was down. Life expectancy was up, but hospital visits were down. Employment was up, and child labor was down.

Again, however, it’s difficult to say with certainty where the credit should go… [perhaps] to the simple fact that Brazil’s monetary benefits for families are indeed linked to actions like attendance in school, prenatal care and childhood vaccinations?

The lesson here? In a command economy like Venezuela’s, in which the government decides how resources are to be allocated, it appears that real improvements in people’s lives are not as important as political loyalty. Because most people involved in economic development work for the government, they focus on making themselves appear more dedicated and loyal to president Chavez, in order to make sure they get paid more and promoted up the ladder.

In Brazil’s free market economy, on the other hand, rewards are based on performance, not political loyalty. Brazilians have enjoyed access to a wider variety of efficiently run development programs than Venezuelans, despite Hugo Chavez’s pledge to alleviate poverty. Correct incentives explain why the market system is more efficient and effective than a command system, and the examples of Venezuela and Brazil illustrate this observation quite nicely

Discussion Questions:

  1. Why do command economies fail efficiently allocate resources to where they are needed the most?
  2. What does Brazil do that Venezuela does not that has led to real improvements in people’s lives?

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About the author:  Jason Welker teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

16 responses so far

16 Responses to “The importance of incentives in achieving poverty alleviation: Venezuela vs. Brazil”

  1. mina.songon 24 Aug 2007 at 10:08 pm

    May be the problem of this is the scarcity??? :P,, Only people who own the specialized products are able to learn money?? ^^

  2. Howard Linon 30 Aug 2007 at 2:06 am

    It's interesting how when politics and economics wed, many things improves. (besides economicly) Things such as attendance in school, prenatal care and childhood vaccinations, improved literacy and so fourth. So many things can happen when the economics improves in an country.

  3. MarenRackebrandton 08 Sep 2008 at 3:52 am

    The problem in Venezuela is I think that the government uses all the resources where they want them to use and where they need it. But they don't use them where the people would profit from them. I think the government is too fixed on the loyalty from the people. I have a friend who's from Venezuela and he said that the president is not very popular and is not doing what's best for the country.

    On the other hand Brazil gives the 'power' to the people and companys and does not tell them what to do with the resources. Also the people don't have to worry about what they do, in Venezuela everything would fast be seen as an act against the government.

  4. Christian Evertzon 09 Sep 2008 at 4:31 am

    Both countries, Brazil and Venezuela are rich countries which means that they both have good preconditions in order to fight poverty. In my opinion, the wrong allocation of resource money prevents an improvement in poverty alleviation in Venezuela. Since, the whole system is based on political loyalty, the government only gives money to fellow party members, while the bigger part of the population stays poor. For the Venezuelans, political loyalty is the incentive to get paid more and not good performance at the workplace. As opposed to Venezuela, Brazil uses its resource money to really provide education and health care for all people regardless of their political opinion and to enable a wider range of properly run development programs.This has a positive effect on the living standards of the Brazilians as the illiteracy rate and the unemployment rate went down and the life expectancy went up.

  5. Alex Telfordon 09 Sep 2008 at 7:01 pm

    This reminds me of a recent program in Texas in which low income children were given cash incentives for school participation.

    According to this article (http://money.aol.com/news/articles/_a/bbdp/education-next-cash-incentives-for/143259) cash incentives of several hundred dollars are give to students when they get a grade of 3 or above in an AP exam, as a result of this grades have improved – significantly so for poor black and Hispanic students. As a result of the program "…there is about a 12 percent relative increase in white students scoring above 1100 on the SAT or above 24 on the ACT, there is a 50 percent relative increase for Hispanics and an 80 percent relative increase for black students. " and this has lead to an "8 percent increase in the number of students who enroll in a college or university in Texas in APIP schools."

    This kind of incentive program is to my mind one of the best ways to lift a community out of poverty, students are given incentive to work and do well, this gives them an opportunity to attend university and get a well paying job. After receiving decent payment for their new jobs the old students will be able to return money into their old community and afford to send their own children to good schools. This incentive acts as sort of a multiplier effect, in that the original payment lasts for far longer and provides benefits beyond the improved SAT and AP scores. Venezuela should probably consider incentives such as this one if they really want to alleviate poverty, as they provide lasting positive benefits to society as well as increasing the wealth of the recipients.

  6. Aleya Thakur-Weigoldon 10 Sep 2008 at 2:44 am

    I think bot countries have potential to improve the life expectancy of their citizens. In my opinion Brazil will have better results because the wants and needs of the people control the market and therefore ensure that the resources are used most efficiently. I think that loyalty to a political party should not be rewarded with higher life expectancy, especially when hard work and productivity have no influence on a persons life. In my opinion this just shows that comand economies do not work and that free markets are the way to go!

  7. Aleya Thakur-Weigoldon 10 Sep 2008 at 3:03 am

    In my opinion this article once again proves that free market economies are way more efficient than command economies. In order to improve life expectancy the government needs to know what the people need, in a free market economy the economy is controlled by the wants and needs of the people and not by what the government thinks the citizens need. In a free market economy this leads to the right distribution and allocation of resources according to the needs of the people. I do not think it is right that the government should reward loyalty to the political system over productivity and hard work with a better lifetsyle. Both countries Venezuela and Brazil have enough money to make sure that literacy and health is at a standard that can be considered "human". But I think it is good that both countries are trying to improve the life expectancy and lifestyle for the people.

  8. Jabba Gehringon 10 Sep 2008 at 3:30 am

    I agree with Maren and Aleya. Venezuela fails in allocating resources properly because the government does not know where they are needed the most and where they would result in the biggest profit.

    This is probably a fierce example, but we talked about it in class: China was still a command economy and Mao wanted the country to industrialize. So he had all the factories produce steel… way more steel than needed.

  9. Marc Lemannon 12 Sep 2008 at 9:31 pm

    It is very true that Brazilians are compensated for the work they do well, that there is a real drive for doing your job well. This is what Brazil has done, that has made real improvement in peoples lives. The only part of the article that left me a bit puzzled was when the author writes:

    "Figures compiled last year…. painted a rosy picture: School attendance was up, while illiteracy was down. Life expectancy was up, but hospital visits were down. Employment was up, and child labor was down."

    It is said in a way that makes it seen one is good and the other is bad… "but hospital visits were down" …as if that were a bad thing?

    In Venezuela's case, I'm very curious to see what Chavez will do to stay in his term much longer. A while ago the Venezuelans voted to decide if he would stay his whole life and he lost, making 2010 the year he has to leave office… Lets see…

  10. Helene Gleitzon 15 Sep 2008 at 2:09 am

    I have to agree with Aleya, Maren and Marc. Venezuela has failed to create incentives for its workers, while Brazil has grown economically over the past few years. This is another example that illustrates why command economies are inefficient compared to free market economies. Both countries have potential to improve the lives of their citizens, but so far only Brazil has allocated its resources to profit its people. The fact that the Venezuelan government is on the verge of corruption does not help the nation, economists are simply trying to get paid more. In order to help its nation, Chavez must take in consideration what the people need, or want. Brazil's labor force has incentives to work more, and "there is a real drive to do your work well" as Marc said. I am also very curious to see what will happen to Venezuela and Hugo Chavez and if, in the future, they will switch to a free market instead of a command economy.

  11. Chris Hoferon 16 Sep 2008 at 3:07 am

    The problem with a command economy, as with communism, is that it has the tendency to look good on paper, however when put into practice it usually fails. A command economy is an economy where supply and price are completely regulated by government as appose to market forces. This form of an economy has several flaws that resultantly leads to failure. As most people have previously stated Venezuela’s command economy fails to generate incentives for workers. Why should someone work as hard as someone else when the pay is equal and regulated? Without competition, or other incentives how does an organization expect to receive maximum effort from its workers? Brazil, like Venezuela, struggles with poverty yet due to the use of the free market system it has grown economically in recent years. Freedom of choice, self-interest, competition and specialization are just a few of the factors that enable the market system to function. Economical efficiency has allowed Brazil to allocate its resources to benefit its people. "Benefit its people" is crucial when attempting to raise the standard of living in a nation. While the Venezuelan government claims to be helping its people, this seemingly corrupt organization appears to only better themselves and their supporters. Greed and political power struggles do nothing but undermine Venezuela’s goals of improving the standard of living in their nation.

  12. Rohan Rajivon 16 Sep 2008 at 4:24 am

    I agree with Christian. Brazilians are following the good old way of education and infrastructure this in turn will help them build a sucessfull economy, unlike venezuela where they are following the corrupt way and this will get them to a certain high point but will eventually lead to their downfall like the USSR. this is an example of how command economies fail in economics

  13. Armaan Malhotraon 16 Sep 2008 at 7:14 am

    I think the reason that command economies fail at efficiently allocating resources well, is because the people behind them as so concerned with staying in power that they do not stop to think who they should be supporting. I think the attitude is more "maybe if we provide them with services for claiming to support us, they actually will support us" while hoping that these people value these services over their political and economic standpoints. This obviously doesn't seem to ring true most often, but maybe those in control see the alternative as arming people with the education and resources needed to overthrow them, whereas if they have propaganda and incentives to be loyal to those in power, they may support the control.

    Brazil rewards those who actually do something worthy of rewards than those who simply support the government. People are rewarded for school attendance, for seeking pre-natal care, getting children vaccinated and the like. They are rewarded for using the services made available to them, not for having the same political views as the current leader. The reason that this increases peoples lives is because it really is universal support, not just claiming to be it. People are rewarded for using the services that the government has put in place, for using their resources.

  14. Zac Queryon 17 Sep 2008 at 2:53 am

    Lack of incentives has been a major problem in centrally-planned economies throughout history. In those economies, business/factory owners ignore the fundamental economic principle of supply and demand, and instead focus on achieving the goals/quotas set by the centralized committee. Using an example from our textbook, if the committee set a quota for 1,000,000 nails to be produced, then a factory would shift their production to only produce small nails. But if the quota was expressed as 10,000 kg of nails, a factory would produce only large nails. The factory would completely ignore the demand of large nails vs. small nails in the market, and instead focus only on their assigned quotas. After all, their incentive is to please the government, because that's who writes their checks.

    That is one reason why Venezuela will not be able to improve at its current rate for very long. Once developed countries are no longer dependent on oil, Venezuela will surely follow the footsteps of the Soviet Union and Communist China.

  15. Christian Clausenon 17 Sep 2008 at 5:13 am

    Since a small group of people simply can't control a country and all it's ressources, it's better off to just give that job to the people who knows what they want, as well as where and when. And the thing that Brazil does right is to let its people choose whether they want to work for it or not, and political loyalty does not benefit the country at all, and it's pointless to pay a suck up more than a good worker, meaning that the money is also allocated ineffeciently.

  16. Alex Boedtkeron 13 Mar 2009 at 6:51 pm

    The problem in Venezuela is very simple. NOTHING WORKS. I'm Venezuelan and I go there once a year an it is always the biggest hassle. Hugo Chavez has based Venezuela on his loyalty anybod that goes against him will follow severe consequences. He has been known to send out the military to demonstrations that are against him just to see how many people the military can harm in the process. Poverty is never going to get better if the only people Chavez helps are the ones that are for his political views because NOBODY LIKES HIM. So much could be done with all the money Venezuela gets from oil but the country just does not function. If in the main airport in Caracas runs out of immigration papers or ink for the entrance stamps or the computers shut down regularly which are simple things that shouldn't happen then how do you think the whole country works?

    Not so great.