Beyond income transfers: The decline of regional inequality in Brazil

Progress in Development Studies 15, 1 (2015) pp. 6–21

© 2015 Sage Publications 10.1177/1464993414546975

Beyond income transfers: The decline of regional inequality in Brazil during the 2000s

Danilo Limoeiro

Massachusetts Institute of Technology, Cambridge, Ma, USa

Abstract: This article seeks to explain declining regional inequality in Brazil by exploring the economic ‘catch-up’ of Brazil’s poorest region. To that end, the article analyzes income policies as well as supply-side policies aimed at improving the productive capacity of poor regions, and presents data showing that both have proven more important than the current literature suggests. The article also introduces the concept of regional Keynesian effects, and provides preliminary evidence for its relevance, to demonstrate that income policies, such as cash transfers to poor regions, have the potential to foster local output growth.

Key words: income distribution, Brazil’s Northeast region, cash transfer programmes, supply-side policies, regional policies, regional Keynesian effects

I IntroductionThis article seeks to explain the recent decline in regional inequality in Brazil by analyzing federal policies directed at Brazil’s poorest region, the Northeast, and by examining how these policies have impacted the region’s economic performance during the last decade. The received wisdom traces recent income growth in Brazil’s poorest region to federal income transfers that, according to this view, provide only short-term poverty relief, rather than set the stage for long-term development. This view thus overlooks the extent to which income transfers have the potential to enhance the productive capacity of poorer regions by triggering what this article terms ‘regional Keynesian effects’. additionally, the conventional view argues that supply-side

policies, such as subsidized credit programmes and investments by state-owned companies, play only a negligible role in stimulating growth in the Northeast.

This article challenges these accounts and provides an alternative explanation for the Northeast’s economic catch-up. It analyzes regional income and supply-side policies, respectively, and discusses the success of these policies in fostering growth in impoverished regions and in reducing inequality between states. The article further shows that the resources dedicated by the Federal government to supply-side policies in the Northeast have significantly increased in the past few years, contrary to what the current literature claims. More importantly, this article proposes the concept of regional

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Keynesian effects to suggest that cash transfers to poor regions have the potential not only to raise incomes but also to spur local output growth.

The article proceeds as follows: Section 1 presents data on the income gap between the Northeast and the national average, and explores one of the alternative accounts of its decline, explaining why it is unsatisfactory. Section 2 reviews the literature on income and supply-side policies and presents the conceptual discussion of the causal mechanisms expected from supply-side policies. Section 3 offers an alternative measurement of the scope and prevalence of supply-side policies in Brazil, with a particular emphasis on the Northeast. Section 4 discusses the broader potential effects of income policies, by proposing the concept of regional Keynesian effects, and provides preliminary evidence for its existence. The last section summarises the claims made in this article and proposes future questions for research in this field.

1 The recent decline of regional inequality in Brazil – The case of the northeastBrazil is one of the most unequal countries in the world (Barros et al., 2009) and this is reflected in disparities between regions within the country.1 although, Brazil has five macro regions, the traditional focus on the Southeast and the Northeast is justified by the fact that they are the two largest regions of the country and are also respectively the richest and the poorest ones. according to the Brazilian Statistical Bureau (IBge), the Northeast’s population represents 28 per cent of the national population, yet it accounts for only 13.1 per cent of the national gDP. 49 per cent of the Brazilian families live below the poverty line and 59 per cent of those below the extreme poverty live in the region.

Nevertheless, the Northeast has continued to catch up with national economic standards over the last 20 years, as shown in Table 1. The 2000s proved especially prosperous:

during that decade both national and regional income grew faster – an average annual rate of 2.8 per cent and 4.1 per cent, respectively – while during the 1990s the Northeast caught up largely because the national income was stagnant – average annual growth of 0.8 per cent, whereas the Northeast grew at 1.5 per cent a year.

authors such as Silveira Neto and gonçalves (2007) and gomes and Vergolino (2010) point out this trend in regional catch-up. Nonetheless, they analyse economic convergence during the 1990s and 2000s together, thus missing the markedly acceler-ated catching-up process from the early 2000s onwards.

Table 1 Monthly average per capita income in the northeast region and in Brazil (R$ real terms)

Year Northeast BrazilNortheast/Brazil

(in %)

1990 264,7 525,6 50,4

1992 241,6 447,6 54,0

1993 256,6 470,9 54,5

1995 308,5 585,0 52,7

1996 312,0 595,2 52,4

1997 312,4 594,5 52,6

1998 325,5 600,6 54,2

1999 314,4 566,7 55,5

2001 313,3 575,2 54,5

2002 318,7 575,2 55,4

2003 297,2 541,5 54,9

2004 319,2 559,5 57,1

2005 336,0 593,7 56,6

2006 381,2 648,9 58,8

2007 393,1 665,8 59,0

2008 422,4 699,6 60,4

2009 444,7 716,2 62,1

2011 468,8 762,8 61,5

Source: author elaboration with data from the National Household Survey (PNaD).

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8 Beyond income transfers


Moreover, it is worth mentioning that the growth in average income during the last decade occurred concomitantly with the sharp decline of inequality within Northeastern states, suggesting that rising income has not been concentrated in the upper echelons, but has also benefited the poor, as shown by Figure 1.

Before proceeding to explain what accounts for these changes, it is important to pose the following question: this article focuses on policies as the driver of regional inequality decline, but could there be an alternative explanation? Brazil has been experiencing a commodity exports boom, for instance, so another tempting hypothesis is that the boom has benefitted the Northeast more than other regions, thus facilitating the income catch-up. Data show this was not the case. Figure 2 makes clear that the Centre-West region, where agriculture and cattle ranching have concentrated in Brazil lately, has profited the most from Brazil’s commodity boom, whereas the Northeast has mirrored the national average.

2 Income policies and supply-side policies – Impact and conceptual discussionTo better explain declining regional inequality in Brazil, this article divides federal policies – the main drivers of recent growth – into two main groups, income policies and supply-side policies. Income policies are direct monetary transfers to individuals. They can take the form of conditioned cash transfers (CCT), like Brazil’s Bolsa Família programme, which seeks to provide short-term poverty alleviation and to break the intergeneration transmission of poverty by supplementing the incomes and building human capital of poor families (adato, and Hoddinott, 2010; Fiszbein et al., 2009; Rawlings, 2004). Income policies can also take the form of ‘unconditional’ cash transfers, like Brazil’s Continued Provision Benefits (BPC),2 which reflects a rights-based approach to poverty reduction (Munro, 2008). Unconditional transfers can also replace CCTs in cases where the latter may not be the right instrument for reducing poverty, such as when one wishes to target elderly, poor, or childless households (Fiszbein et al., 2009).

Figure 1 gini index in Brazil’s Northeast regionSource: author’s elaboration with data from the Brazilian Institute for economic applied Research.

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There is a significant number of academic works finding that income policies help to alleviate poverty and reduce inequality. Barros et al. (2009: 47) and Soares et al. (2010) show that a considerable part of growing equality in Brazil is attributable to income policies. Hoffmann (2006), Fiszbein et al. (2009) and Tavares et al. (2009) find that such policies aid in the fight against poverty. Poverty reduction is clearer in the case of bottom sensitive measures of poverty rather than headcount measures (Zepeda, 2006). as put by Kerstenetzky (2009), this is probably because transfer may not be enough to lift families out of poverty but still represent an important relief for very poor families.

Studies also show that conditional income policies result in increased use of educational and health services, as well as reduce the prevalence of child labour. However, the impact on educational and health outcomes remains mixed, due largely to the lack of quality services available to poor families (adato and Hoddinet, 2010; Fiszbein et al., 2009; Rawlings and Rubio, 2003). Research conducted on

Brazil’s Bolsa Familia programme found very similar evidence for rising uses of services but unclear improvements in health and education. authors propose the same explanation for this apparent puzzle (Oliveira et al., 2007; Paes-Sousa et al., 2011; Soares et al., 2010 ).3

Moreover, it is increasingly common to treat income policies as a branch of regional policy in Brazil and elsewhere (for example, Baer and Milles, 1999; Barros and Magalhães, 2009; Cavalcante and Uderman, 2009; gomes and Vergolino, 2010). This is probably because, despite being a nation-wide policy, income transfers’ effects differ across regions and tend to be stronger in poorer regions like the Northeast, as accurately shown by Silveira Neto and azzoni (2011).

authors that evaluate income transfers as a sort of regional policy are generally sceptical about its impact, as one can see by the works of gomes (2001), araújo and Lima (2009), gomes and Vergolino (2010). gomes (2001) puts forward the concept of ‘economies without production’ to refer to municipalities in the Northeast that receive the bulk of their

Figure 2 evolution of commodities exports in Brazil by region (index number in nominal terms)Source: author’s elaboration with data from Ministry of Development, Industry and Foreign Trade.

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income from federal transfer and, according to him, do not generate much output. He views these economies as unsustainable and government-dependent. Some years later, araújo and Lima (2009) argued that CCTs boosted the growth of the ‘economies without production’ during the 2000s. actually, this concept is the basis of the overall criticism of regional policies in Brazil during the 1990s and 2000s made by gomes and Vergolino (2010). They claim that recent policies are marked by a decline in public investment and an assistentialist approach by the federal government.4 The authors conclude that the public sector has ceased to promote economic development in the Northeast to become an agent that subsidises consumption (gomes and Vergolino, 2010: 62). The general feeling of these critics is accurately summarized by araújo and Lima (2009), who insist that an economy based on income transfers is doomed to be a low-income one, never developing sustainably.

These authors are not against income policies per se. Their argument is that such policies are not sufficient to engender

long-ter m development. T heir v iew is accurately summarized by Cavalcante and Uderman, for whom their impact of is ‘not on capital formation, but rather on local levels of consumption. As a result, such programs can reduce poverty indexes on the short-run, but do not create local production capacity’ (2009: 276). Interestingly, Celso Furtado made a similar point decades before, saying that ‘[t]he transfer of resources to subsidise a region’s consumption capacity, though perfectly justified when undertaken as a mere compensatory action, has limited possibilities’ (Furtado, 1967: 12).

Therefore, it is implicit in their claim that policies which expand local production are necessary for laggard regions to catch up with richer ones. according to these authors, such policies have been absent or insufficient in Brazil’s Northeast. This article calls these kind of policies ‘supply-side policies’ and they are discussed later. Prior to discussing them, it is important to represent the interpretation of the current literature of the role played by income policies and supply-side policies in the Northeast. The diagram in Figure 3 takes this task.

Figure 3 Diagram representing the causal explanation of the current literature

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2.1 Supply-side policies – Further conceptual discussionSupply-side policies aim to expand the aggregate supply of an economy by increasing its productive capacity. The expression ‘supply-side’ is largely associated with supply-side economics, a theoretical paradigm that gained momentum in the late 1970s and challenged the prevailing demand-focused Keynesian economics. Under this theoretical framework, supply-side policies comprised free-market reforms, such as deregulation and tax cuts (Cook and Healey, 2001; Klein, 1978; Lucas, 1990). Despite this association with supply-side economics, the categorization of supply-side policies should not be limited to this neoclassical-based approach in as much as this would exclude interventionist policies that equally aim to expand the productive capacity of an economy. Despite being criticized by some authors (see, for instance, Noland and Pack, 2002; Pack and Saggi, 2006), interventionist supply-side policies, particularly in the form of industrial policy, are considered important, beneficial and desirable by others (for example, Rodrik, 2004; 2007; Schrank and Kurtz, 2005). The concept of supply-side policies employed by this article is the interventionist, industrial policy-related one. The reason is simple: government policies implemented in the Northeast during the 2000s were of the interventionist sort, such as subsidized credit and direct investment. There was no deregulatory or free-market enhancing policy to the Northeast – particularly because these policies are not generally used as a regional development mechanism – and although there have been fiscal incentive programmes, they were not akin to across-the-board tax cuts proposed by supply-side economics.

governments can and do use supply-side policies as a regional development policy, employing them as tools to expand a region’s productive capacity. While the instruments of interventionist supply-side policies are noticeably varied, some are more commonly

used in regional policy. authors such as Friedman (1975) and Luger (1987), as cited by Cavalcante and Uderman (2009), propose an extensive typology of regional policies, which includes direct control over migration, new towns, land use control and subsidized job training. However, a typology that is more concise, and probably more consistent with current practice, is proposed by Cavalcante and Uderman themselves (2009), for whom regional policies can be (i) fiscal incen-tives, particularly in the form of tax breaks; (ii) financial incentives in the form of more attractive – and generally, subsidized – credit conditions; (iii) direct investment, either in infrastructure or in the productive sector; and (iv) cash allowances, mostly in the form direct money transfers. This last mechanism actually falls under the category of income policies, which were outlined in the previous section and will be discussed again in Section 4. The first three are (interventionist) supply-side policies used as a regional policy and will be further discussed in Section 3.

Before proceeding, it is important to explain what causal mechanisms connect supply-side policies and regional development.5 Following the three-pronged typology of supply-side policies presented earlier – fiscal incentives, financial incentives and direct investments – one can point out three main causal mechanisms, respectively associated with each policy type. First, production subsidies, such as location-based tax breaks, can induce firms to invest in certain regions over others. Therefore, if the government offers a fiscal incentive that more than compensates for the additional cost of investing in that location – such as poor infrastructure or distance from consumer markets – the firm will move its investment project to the subsidized region. This can be called the ‘location-based subsidy effect’. Second, supply-side policies can help local entrepreneurs expand their current business, or start new one, by affording them access to cheaper credit. The decision to engage in

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new investments is a function of, among other things, the cost of capital compared to the expected returns on investment. Therefore, if the government increases the amount of low-cost capital available in a certain region, local firms will be more prone to invest in the local economy. This can be called the ‘low-cost capital effect’. Finally, industrial plants built by state-owned enterprises create in the local economy the inducement mechanisms that Hirschman (1958) called backward linkage, in the form of high demand for inputs, and forward linkages, as they provide their outputs as supplies to other sectors. This can be called the ‘Hirschman effect’.

another important conceptual difference between supply-side policies and income policies is that the effects of the former are predistributive, while the latter is redistributive. Supply-side interventions take place before any kind of tax-and-transfer intervention and their causal mechanism is essentially different from a redistributive policy. They work through a more indirect and complex process, by which labour income of poor families are expected to rise due to growing local demand for labour. In this sense, supply-side and income policies have different causal process and tackle inequality in different timings – one prior to transfers, the other afterwards. Nonetheless, the part of their outcome we are interested in – raising local income – is still similar, therefore comparable.

There are studies showing the historical importance of these three effects to declining regional inequality in Brazil in general and to the Northeast’s industrialization and growth in particular. goodman et al. (1971), goodman and albuquerque (1974) and Bezerra (1990) underline the importance of fiscal incentives to industrial growth in the Northeast in the past. Silva et al. (2009) offer empirical evidence of the effectiveness of subsidized credit to the Northeast in recent times. Finally, Diniz (1995: 7) and Cano (2007: 74) highlight the role of state-owned companies’ investments for economic decentralization.

3 Regional inequality decline in Brazil: The role of supply-side policiesas summarized by the diagram in Figure 3, the works of gomes (2001), araújo and Lima (2009), Cavalcante and Uderman (2009) and gomes and Vergolino (2010) posit that the only policy instruments recently introduced into the Northeast were income policies, which, according to these authors, have only short-term poverty alleviation impacts. The only exception to this predominant view is Barros and Magalhães (2009), who have a positive view of the role played by supply-side policies to the Northeast in during the early 2000s. additionally, the group of sceptical authors recognise, sometimes implicitly, the importance of supply-side policies to engender long-term development, but they claim that, in the Northeast, such policies were inexistent, insufficient or ineffective.

This view has two main limitations: (a) although it is correct to stress the importance of supply-side policies, it tends to overlook the fact that supply-side regional distribution has been favouring significantly the Northeast from the early 2000s onward; (b) this view does not consider potential long-term economic effects of income policies. This section addresses the first limitation and builds on the pioneering attempt to measure the three types of supply-side policies made by Cavalcante and Uderman (2009). Despite the importance of their work, this article reaches different conclusions. The next section addresses the second limitation.

3.1 Credit policies – The low-cost capital effectCavalcante and Uderman (2009) evaluate whether federal credit has benefited poorer regions of the country. They do so by comparing each region’s share of the disbursement of federal credit and their respective share of national gDP. The idea here is that, if a region’s credit share is higher than its gDP share, the federal government is favouring it. The authors conclude that federal credit policies have not privileged the Northeast

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because the proportion of credit received is, at best, roughly equal the region’s share in national gDP (Cavalcante and Uderman, 2009: 274).

The authors’ measurement deserves further scrutiny. While computing the total of federal credit, they consider only the disbursement of the National Development Bank (BNDeS, Brazil’s major funding agency) and the three regional development funds – the Constitutional Funds for the Northeast (FNe), for the Centre-West (FCO) and for the North (FNO). Nonetheless, both the North and the Northeast regions have two additional federal banks responsible for providing credit specifically to these regions: the Bank of the amazon (BaSa) and Bank of the Northeast (BNB). There is no such specific federal institution for the Centre-West, in which case the nation-wide Bank of Brazil operates FCO. These banks obtain funds from various financial sources, such as other federal development funds, saving and deposit accounts, returns from previous loans and their own profits. Therefore, an accurate evaluation should take into account the total disbursements made by BNDeS and regional banks and not

only by BNDeS and the constitutional funds. Hence, by looking only at constitutional funds disbursement, Cavalcante and Uderman tend to underestimate the amount of federal credit directed to the Northeast.

Figure 4 shows Bank of the Northeast’s credit contracts in R$ billions (real terms) from 1995 to 2011. The figure depicts a significant growth since 2003. Indeed, from 1995 to 2002, the average annual real growth was -5.6 per cent, whereas from 2003 until 2011 the annual average growth was 27.5 per cent.

Cavalcante and Uderman claim that the relative distribution of federal subsidized credit did not privilege the poorest regions. However, if one adopts the method explained earlier, a different result emerges. In fact, the Northeast was the second most privileged region. Figure 5 shows the percentage relation- ship between the share of federal credit, defined as the summation of disbursements made by BNDeS, FCO, Banco do Nordeste and Banco da amazônia, and gDP share. The dashed line illustrates the threshold of 100 per cent. If the region’s bar is above the line, it means that its credit share is higher than its gDP share. accordingly, the higher

Figure 4 Bank of the Northeast’s credit contracts (real terms)Source: author’s elaboration with data requested through Public Transparency act.Note: This and all the real term values in this article are calculated by using Brazilian Institute for geography and Statistics (IBge) gDP deflator series, for which the base year is 2000.

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the bar, the more favoured by credit policies is the region.

3.2 Direct investment of state-owned companies – The Hirschman effectCavalcante and Uderman (2009) claim that direct investments to the Northeast are relatively small, but the authors do not present the whole data for regionalized investment made by federal state-owned companies (SOCs). additionally, they suggest that these investments should not be counted as a regional policy, as their allocation is likely to have followed technical and market-oriented criteria. This is a contentious claim. even hybrid SOCs, such as Petrobras and eletrobras – Brazil’s oil and energy federal companies – have the federal government as its main shareholder. government-controlled companies can take decisions considering public policy criteria, in spite of market or

technical standards, and it is common for the Brazilian federal government to use SOCs as tools for implementing public policies. Public banks – Banco do Brasil and Caixa econômica – or the public mail service operate major social policies in Brazil, such as the national housing system, family agriculture financing and even Bolsa Familia. One can also find in the literature arguments about how direct investments of SOCs had positive effects on regional economic decentralization (Cano, 2007; Diniz, 1995). Therefore, SOC investments should be considered in any analysis of supply-side policies.

In light of the importance of SOC invest-ments, this article presents their complete regionalized data. Figure 6 shows invest-ments made by federal companies in the Northeast from 2000 to 2010. as the steep upward curve indicates, the amount invested increased 266 per cent in real terms during this

Figure 5 Relation between regional credit share and regional gDP share – average between 2002 and 2011Source: authors’ elaboration using data from Ministry of obtained through a formal request under the Public Transparency act.Note: In the Figure 4 the measure for subsidized credit used was credit contracts, whereas in Figure 5 was credit disbursement. Credit disbursement is a more accurate measure of subsidized credit, as it shows exactly the amount that leaves the bank and goes to the beneficiary, whereas a contract is just an expectation of future disbursement. Credit contracts were used, though, because they were the only available data covering the Northeast prior to 2002.

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period – although this growth occurred mostly after 2007. In fact, only the Southeast dis-played a steeper increase, but this is probably due to the fact that most of Brazil’s oil reserves, which are explored by SOCs, are situated in that region.

The Northeast still enjoyed more SOC investments than the Southeast if one compares regional investment share to regional gDP share. These data are shown in Figure 7. The red line indicates the threshold of 100 per cent, and if the region’s bar is above

Figure 6 Investments made by federal state-owned companies in Brazil’s Northeast from 2000 to 2011 (real terms)Source: author’s elaboration with data from Ministry of Planning requested through the Public Transparency act.

Figure 7 Relation between regional investment share and regional gDP share – average from 2000 to 2011Source: author’s elaboration with data from Ministry of Planning requested through the Public Transparency act.

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the red line, it was favoured by investments. accordingly, the higher bar, the more the region benefited. In this case, the Northeast is the second most-favoured region, very close to the top performer, and the Southeast share is roughly equivalent to its gDP.

3.3 Fiscal incentives – The location-based subsidy effectCavalcante and Uderman rightly point out that federal fiscal incentives favoured the North and Centre-West region more than the Northeast. The reason could be that tax-free zones, stronger in Brazil’s North, receive more benefits than traditional development agencies in the Northeast, such as SUDeNe Superintendencia de Desenvolvimento do Nordeste (Cavalcante and Uderman, 2009). Nonetheless, their conclusion should be qualified in the sense that, after the 1988 Constitution, important fiscal incentive mechanisms in Brazil were delegated from the central government to state-level govern-ments. academic work shows that state-level governments have been making significant use of tax breaks in order to attract new investments under the so-called ‘fiscal war’ (Dulci , 2002; Lima and Lima, 2010; Nascimento, 2008; Rodriguez-Pose and arbix, 2001). Therefore, the regionalized volume of fiscal incentives should also take into account fiscal incentives programmes implemented by state-level governments and not just federal tax breaks, as measured by Cavalcante and Uderman (2009). Otherwise, the measure of regional distribution is distorted. However, there is a fundamental difficulty in comparing the amount of tax breaks among states: these data are handled with some degree of secrecy by local authorities, as they may reveal how aggressive they are while competing with other states for new investments.

In the absence of comparable data on state-level tax benefits, it is hard to achieve a definitive conclusion about the overall regional distribution of fiscal incentive mechanisms. Nevertheless, Cavalcante and Uderman

conclusion is still incomplete, as it covers only federal government tax-break programmes.

4 Regional keynesian effects – The interaction between income and supply-side policiesOver the last years, the Northeast has benefitted the most from income policies, such as Bolsa Familia and rural pensions, as shown by Silveira Neto and azzoni (2011). This is a result of the Northeast having the highest concentration of poor people, the target population of these policies, in the country, as illustrated by Table 2.

It is important to underline that these transfers increased from the early 2000s onwards, especially after 2003, as Figure 8 makes clear.

as shown in Section 2, the existing litera-ture criticizes income transfers as a regional policy on the ground that their only effect is, according to their view, short-term poverty alleviation. This section argues that income policies have broader potential effects that should be properly accounted for. In particular, these policies potentially boost local production capacity through what can be called regional Keynesian effects.

according to Keynesian economics, income is determined by aggregate demand. Kaldor (1989) makes a compelling argument for this approach. In a nutshell, he asserts

Table 2 Population, cash transfers and poverty in Brazil and in the Northeast

Population (million)a

Cash transfers per year

(R$ billion)b

Households below the poverty

lineb

Northeast 53.07 8.17 4.8

Brazil 190.73 4.34 10.8

Northeast/Brazil

27% 53% 44%

Source: author’s elaboration using IBge and Ministry of Social Development data.Notes: a2010; baverage from 2004 until 2009.

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that when firms decide the amount of goods and services they will produce, they consider (a) the expected demand for the goods and (b) the opportunity cost of capital. If firms expect growing demand for their goods, they increase their investment – as long as the expected return is higher than the capital cost (Kaldor, 1989; Oreiro et al., 2012).

The Keynesian tradition also proposes the principle of decreasing marginal propensity to consume. according to this principle, the lower the income of a household, the more prone it is to spend, instead of save, an additional unit of income. This is equally true of transfer income: as Fiszbein et al. assert, ‘(…) the marginal propensity to consume out of transfer income is high’ (2009: 125). Rawlings and Rubio (2003) and Rawlings (2004) report evidence of increased consumption in households benefitting from CCTs in Latin america. Thus, it seems reasonable to expect that one consequence of transferring income to an impoverished region, such as the Northeast,

is to strengthen the local consumption market and to drive up local aggregate demand.

as firms realise that local aggregate demand is growing, they become more prone to invest in that region. The proclivity to invest is enhanced by the fact that the federal government has decreased the cost of capital in the Northeast through the provision of additional subsidized credit, as demonstrated in the previous section. This results in a virtuous cycle in which income policies and supply-side policies reinforce each other. Hence, the term ‘regional Keynesian effects’ refers (a) to the fact that income policies drive up aggregate demand, signalling to firms that consumption will increase and (b) to the fact that this effect is stronger in a specific region, the Northeast, as it is the largest recipient of income transfers.

That income policies have the potential to boast aggregate demand is not ignored by the literature. gomes (forthcoming) asserts that transfers and rising wages promote increased consumption of popular goods. However, he

Figure 8 Total of income transfers and transfer per capita to Brazil’s Northeast (Real Terms)Source: author’s elaboration using data from Ministry of Social Development and IBge.

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states that the bulk of these stimuli ‘leaks out’ to other region (gomes, forthcoming: 297). He provides no empirical evidence to support this claim, though.

4.1 Preliminary evidence of regional Keynesian effectsHave the benefits of these income trans-fers ‘leaked out’ to regions other than the Northeast? This article offers preliminary qualitative evidence to the contrary. There is evidence, for instance, that companies are investing in the Northeast precisely in order to match the increasing demand for goods, such as food and beverage, among poor Brazilians. Valor Economico, a leading busi-ness periodical in Brazil, publishes a special report on the growth of investments in the state of Pernambuco, in the Northeast. One of the articles documents how income growth in the Northeast is driving new investments by the food and beverage industries in the region. The article includes interviews with managers of large companies in which they make clear that one of the main reasons for investing in Pernambuco is the rise of con-sumption due to income growth. One such company is Coca-Cola, which has doubled the size of its productive capacity in the region in the previous six years, and was expecting to invest more than R$ 250 million in 2010. according to its manager:

The potential consumption in the region made our plants the showcase of our group, which chose them to become one of the five centres on operation excellence in the world. (Santiago, 2010: 64. My underlining, trans-lated from the original in Portuguese)

The article also makes reference to new investments by Sadia, a holding of the Brazilian multinational Brasil Foods. Referring to a statement made by the local manager about the new investments of the company, the article notes:

(T)he enterprise is part of an old project of the company to install a unit in the Northeast, because of the high consumption potential in

the region, which has been boosted in the last years by the increase of income in the popula-tion. (Santiago, 2010: 64. My underlining, translated from the original in Portuguese)

Coca-Cola and Sadia are only two of the cases described. The article, citing the state’s manufacturing association, reports that there are 67 new investment projects in the food and beverage sectors. These projects total R$ 1.49 billion and are expected to create eleven thousand new jobs. Some investments are already under way, and the food and beverage sectors are currently responsible for 36 per cent of the state gDP and 48 per cent of its employment (Santiago, 2010).

To sum up, income transfers have the potential to go beyond sheer poverty alle-viation. Data presented foregoing show preliminary evidence that firms are moving to the Northeast due to growing incomes in the region. Despite the evidence being admittedly exploratory, it is an indication that regional Keynesian effects may be taking place. Considering that some authors dismiss these effects without presenting data or exclude them in their explanatory models, such a tentative evidence can be considered a contribution to the current debate.

II ConclusionThe existing literature claims that the recent economic growth in Brazil’s Northeast region is the result of income policies, and further insists that the only effect of these policies is short-term poverty alleviation. This literature explicitly or implicitly assumes that supply-side policies would assist in the region’s long-term development, but it argues that these policies have not favoured the Northeast during the period under evaluation. Figure 2 in Section 2 illustrates this explanatory model.

In addition to changing the dependent variable under study – which is regional economic catch-up, instead of local poverty alleviation – this article (a) disputed the limitations assumed by the current litera-ture apropos income policies, arguing that

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they produce regional Keynesian effects in addition to reducing poverty; (b) presented an alternative measurement of the distribu-tion of supply-side policies between Brazil’s region and (c) offered a conceptual discus-sion on how to define income and supply-side policies as tools of regional policies and which effects one could expect from each. Figure 9 summarises this last point. It details the inde-pendent and dependent variables, the policy instrument involved and its respective causal mechanism for each type of policy.

The evidence of regional Keynesian effects produced by this article is admittedly preliminary, although promising. Data produced for supply-side policies are related to their national distribution, they do not claim to be a ‘proof ’ of their effects. Supply-side policies’ impacts are either assumed from a conceptual discussion based on the literature or from previous studies indicating of their positive effects in other circumstances. By clearly pointing out these gaps, this article also attempts to contribute to the field by indicating questions that should be addressed by future

researches on regional policies and cash transfers programmes in Brazil and elsewhere. They are: (a) can cash transfer programmes spur output growth of its recipient region? In other words: do regional Keynesian effects exist? (b) What are the impacts of increasing SOC’s investments and subsidized credit on economic growth of Brazil’s poorest region?

AcknowledgementsI am very indebted to Diego Sanchez-ancochea, alfredo Cabral, Peter Cole, Timothy Power, Joe Foweraker and anony-mous referees for their comments on an earlier version of this article. The usual disclaimer applies.

Notes1. Some of the most relevant studies about regional

inequality in Brazil from its early history until the beginning of industrialization in the 1930s are: Prado Junior (1945), Simonsen, (1962), Furtado (1963, 1989) and Cano (1998). For the post-1930s period, see particularly Baer (1965, 2008), Diniz (1993) and Cano (2007).

2. Bolsa Familia is Brazil’s conditioned cash transfer (CCT) programme that targets families under the poverty line. The Continued Provision Benefit is

Figure 9 Summary of causal explanation proposed by this article

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the monthly transfer of one minimum wage to elderly or disabled citizens living in poor households.

3. It is worth noticing that income transfers had also important political implications in Brazil. For example, there is an ongoing debate about the impact of Bolsa Familia in recent presidential election in the country. See Hunter and Power (2007), Zucco (2013) and Montero (2010).

4. In the Brazilian literature, the expression ‘assisten- cialismo’ is commonly used to negatively denote income transfer policies which, supposedly, do not develop in its beneficiaries the ability to find their own way out of poverty. They would result, therefore, in generating citizens that are too dependent on state benefits.

5. The concept of causal mechanism used here is inspired by the methodological discussion proposed by Bennett and george (1997), for whom causal mechanism are defined as ‘the causal processes and intervening variables through which causal or explanatory variables produce causal effects’ (1997: 2). In other words, a causal mechanism can be understood as the chain of events that connects independent and dependent variables.

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Beyond income transfers: The decline of regional inequality in Brazil

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