_Brazilian spatial labor dynamics Page 2_

# **Issues in Brazilian growth**

Brazil is a country with large disparities in income between individuals and at all geographical scales. Much though not all of this inequality stems from inequalities between regions. In particular, the Northeast of the country has historically lagged behind the South and Southeast, where much of the Brazilian economy is concentrated. The income per capita ratio of the richest State and the poorest one was 8.9 in 1960 and 6.2 in 1996. (Azzoni _et al_ ., 2000). The 2000 figure was 7.7. This analysis can be extended also to social indicators such as the human development index (HDI). Out of the 10 cities with the worst HDI in Brazil, seven were in the Northeast in 1991 and eight in 2000.<sup>2</sup> Within regions, there are substantial inequalities between states and among municípios. And even within municípios there are substantial inequalities, with many indigent people living in the municipíos with the highest mean income.

Particular attention has been focused on longstanding regional inequalities, especially between the Northeast and the rest of the country. There is some evidence of convergence in incomes between states over the periods 1939-1985 (Azzoni 2001) and 1970-1985 (Ferreira and Diniz 1995). However, several papers find evidence that this convergence process stalled after 1985, with one or two groups of poor states tending towards a lower-income equilibrium than the richer part of Brazil. (Azzoni 2001; Ferreira 1998; Pontual e Porto Júnior 2000). Azzoni _et. al._ (2000) estimated traditional regressions of growth with microdata for 19 Brazilians states. They divided their dataset in cohorts and used a large list of variables as determinants of growth, including microdata from PNAD – National Household Survey. The results suggest that per capita incomes of the Brazilian states have already converged to their steady-state level and that they will remain unaltered due to huge educational and geographic differences between the states.

What accounts for these disparities? The North and Northeast of the country lag far behind other regions in quantity and quality of education, and these differentials are strongly correlated with differences in labor income, as human capital theory would suggest (Fiess and Werner 2004). However, education and other observable individual characteristics do not fully explain interregional wage and income differentials. Azzoni e Santos (2002) compared the differences in salary in the 10 largest Brazilian metropolitan areas in 1992, 1995 and 1997. Those salary differences remained significant even after controlling for cost of living measures, the traits of the workers (education, age, sex, race and family position) and the traits of their jobs (occupational position, sector and experience). Fiess and Werner (2004) estimated mover/stayer models of wage and migration. They found that low-education Northeasterners could boost their wages by 80% through migration; the differential declined with higher levels of education. Evidently, judging from the evidence cited above, the substantial degree of interregional migration is not sufficient to induce convergence between the regions.

Brazilian policy has been concerned with reducing interregional inequalities. Best known, perhaps, are the national programs of tax and fiscal incentives, including the Constitutional Funds, subsidized loans from development banks including BNDES and BNB, the Zona Franca of Manaus, and FINOR. Some programs were explicitly targeted on poor regions. For instance, Projeto Alvorada sought to provide education and other services to states (and later microregions) with below-median HDI. Individual states use fiscal incentives to influence intrastate location of industrial firms, but the scope and impact of these programs is not comprehensively known. Other programs 2 The others were in the North Region.