Introduction

8

Brazil Case Study

ANDRÉ LOUREIRO, LOUISEE CRUZ, AND URSULA MELLO

INTRODUCTION

This chapter describes Brazil’s complex intergovernmental fiscal transfer system, which has improved regional and socioeconomic equity in education spending and outcomes and draws lessons that might be useful for other countries.1 A key element of the Brazilian education financing framework is the Fund for the Development of Basic Education (FUNDEB), which has substantially reduced inequality in education spending across the country. The state of Ceará—a relatively poor state in Brazil—is a good example of how learning and other education outcomes can be substantially improved through increasing efficiency in education expenditures, that is, by increasing value for money. Using a panel data set at the municipal level, we find robust positive relationships between transfers and education spending and education outcomes in Brazil.

The Brazilian Constitution decentralizes preuniversity education provision to states and municipalities. The majority of Brazilian preuniversity students attend public schools. Out of the 48 million students in basic education (comprising the early childhood education (ECE), primary, and secondary levels), 16 million are enrolled in state schools and 24 million in municipal schools, representing 33 percent and 49 percent of total enrollment, respectively, according to the 2018 Brazilian Education Census. The Federal government has an oversight role of preuniversity education and concentrates its focus on tertiary education, with some exceptions.2 Twenty-four percent of students in tertiary education are enrolled in public institutions.

Differences in the populations and economic size of municipalities and states result in substantial discrepancies between tax revenues and education investments, which means that transfers from the federal government are critical for promoting regional equity in spending per student. The level of income in Brazil can vary starkly across the regions and states, with the nine Northeastern states ranked lowest in per capita income. To alleviate regional imbalances in education spending FUNDEB pools municipal and state resources and redistributes the total based on student enrollment rates and education levels. An additional

element of FUNDEB is the federal government’s contribution of an amount that represents 10 percent of the sum of all subnational funds, which is redistributed according to the number of students enrolled in each school network, with the values varying by level of education.3

National financing instruments, particularly FUNDEB, have greatly helped to increase investment in education and reduce regional inequity in per student spending, but there is still room to increase equity and efficiency (Arvate, mattos, and Rocha 2015; Cruz and mereb 2018; menezes-Filho 2007, 2012; World Bank 2017). Brazil allocates 16 percent of total public spending to education, which accounts for 6.2 percent of its gross domestic product (GDP). Over the last 15 years, education’s share of GDP has increased by 2.3 percentage points, a 60 percent increase. FUNDEB is currently the largest source of funds for education and has helped to increase education investment, student enrollment, and teacher salaries, as well as reducing interregional spending inequality. Yet substantial equity gaps remain because, under FUNDEB’s current distribution formula, richer municipalities in poor states receive more resources than poor municipalities in wealthy states.

The greatest challenge of education in Brazil is to increase the efficiency of education spending to achieve better learning outcomes. A constitutional rule mandates that the federal government allocates 18 percent of total tax revenues to education and that states and municipalities spend at least 25 percent of their revenues on the sector. These earmarks and the absence of any performance incentives in FUNDEB and other national financing mechanisms result in a highly inefficient use of resources. For any given level of spending, there is a wide variation in learning outcomes across the country. Educational achievement has increased at a much slower rate than spending, especially in secondary education. At the current rate, it will take Brazil 75 years to reach the average score in math for Organisation for Economic Co-operation and Development (OECD) countries and 263 years to reach the average score in reading (World Bank 2018).

The state of Ceará has implemented a results-based mechanism for intergovernmental transfers that is a role model for increasing efficiency in education spending. Ceará is a poor state with 9 million inhabitants in the northeast of Brazil that has implemented innovative education reforms since 2007. The state has devolved responsibility for all public primary and lower secondary schools to its municipalities and has established a framework of technical support and incentives to achieve learning goals. The state distributes shares of revenue from the Tax on the Circulation of Goods and Services (ICmS), the main source of revenue for Brazilian states, among municipalities based in part on their education performance. The share of the ICmS allocated to each municipality depends on the achievement of specified education, health, and environmental results, but there is no requirement that the municipalities use these transfers to improve education, health, or environmental outcomes. The ICmS transfers received by municipalities represent a substantial part of their total revenues, which gives them a substantial incentive to improve their education outcomes. As a result, the National Index of Education Quality (IDEB)4 in Ceará has improved for both primary and lower secondary education (Lautharte, Oliveira, and Loureiro 2020). In 2017, 10 of the top 20 best-performing municipalities were in Ceará.5