“Geography Matters More: Geographical and Institutional Determinants of Brazilian States´ Income”.

Working Paper 517, Universidade Nova de Lisboa, 2007.

F. Llussá

Brazil displays a geographic and institutional diversity unique in the world. It extends in a north-south direction rather than the east-west of other countries of similar size. Given the current debate on the relative role of geography and institutions in determining income levels, Brazil provides a single testing ground for the direct and indirect effects of geography.

This paper evaluates how much of the income differences across Brazilian regions and states stem from geographic characteristics and institutional characteristics, the latter in turn partly determined by geography. Our results show, first, that the rate of convergence of state income per capita increases substantially once regional effects are taken into account. Second, institutions, when instrumented with regional dummies, are a significant determinant of state income levels. However, when we add additional geographic characteristics, some institutions cease to significantly affect income. The message from Brazilian data seems to be that, tough geography and institutions matter for income, geography matters more.

Keywords: Economic Growth; Geography; Institutions.
JEL Codes: O11; O18; O43