Can Endowments Explain Regional Inequality? State Governments and the Provision of Public Goods in Brazil, 1889-1930
Abstract: There is a large literature arguing that the endowments of a country determine institutions in the long run and may even explain regional inequality within countries. We show that endowments do not seem to explain today’s regional inequality in Brazil if we do not take into account the changes in expenditures on public goods per capita during the first republican period (1890-1930), when the Brazilian government adopted an extreme form of fiscal federalism. Since states got the right to tax exports, we show that state endowments led to differences in the level of exports per state and in revenues per capita, which ended up determining differences in expenditures in public goods, such as education, police, and public works. For our empirical analysis we use a newly created database of state level fiscal and trade data. We find a positive and significant relation between export revenues per capita at the state level and expenditures on public goods (per capita). To avoid possible endogeneity we instrument for exports per capita using a price index of commodity exports by state. Our results are confirmed when used IVs.
