The eastern regions appear to have enjoyed the largest poverty reduction impact from growth in the services sector. In the 3-region classification (columns 5 and 6), Mediterranean regions are included in R1 “rest of the country”, which experienced a boom in hotels and was one of the only regions to weather the financial crisis. By sector, employment growth in the services sector has been the strongest, with positive growth in all years. Additionally, the services sector employs the most people, about half of all workers. Moreover, growth and improvements in infrastructure were catalysts to growth, creating stronger connectivity throughout the country.

Employment in industry shrank during the crisis (2008-2009), and in recent years, employment in agriculture has been declining as well. However, just as in gross value added, there is strong regional variations in sectoral employment.

As a robustness check, when restricting the sample to the same time period in which GVA is available (2007-2011), the impact from growth in employment in services is only present in the West (Table 25). Any poverty reduction impacts from services is not present in the Eastern regions.

# **<u>Fiscal</u>**

Next, fiscal variables are included into the specification. Government expenditures can be poverty reducing when correctly targeted. In the case of Brazil, social spending was found to be the saving grace and primary driver of poverty reduction in the absence of economic growth (Ferreira, Leite, and Ravallion, 2010). Equation (3) extends the specification of equation (2) with the inclusion of average central or local expenditures in log 2005 PPP per capita values.

Fiscal variables are collected from the Ministry of Finance, General Directory of Accounts and are available from 2007 to 2013. Fiscal expenditures are categorized as either expenditures disbursed by the central government or local government. Central and local spending cannot be combined since part of central spending includes transfers to local governments but this amount is not clearly categorized using available data; transfers from central to local governments are a sub-category of Current Transfers. The combination of the two sources would double-count transfers. The impact of fiscal central and local expenditures are examined separately at both total and disaggregated levels.

At both the local and central aggregations of spending, expenditures on personnel comprise the largest proportion of government expenditures. Therefore, fiscal spending per capita is very much a measure of the presence of government and disaggregation of spending will also be important.

Central government expenditures are disaggregated by cities as well as an aggregation at the national level. The national level central expenditures includes transfers to regions as well as other government spending that is of high national importance such as the construction of multi-regional highways. This amount is also very large, about half of total central spending; in other words, about half of central spending is allocated to regions. Central spending at the national level probably includes some funds that are used at the regional level, but these figures are not included in the analysis. The majority of non-regional expenditures are current transfers which include remittances, donations, taxes, and foreign aid.

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