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REGIONAL SOCIO-ECONOMIC TRANSFORMATION IN BRAZIL A thesis submitted in fulfilment of the requirements for the degree of Doctor of Philosophy in Economics at The University of Waikato by VALENTE JOSÉ MATLABA 2012 © 2012 Valente José MATLABA All rights reserved. Apart from fair dealing for the purpose of private study, research, criticism or review as permitted under the Copyright Act, no part of this thesis may be reproduced, stored in retrieved system or transmitted, in any form or by any means, without the prior permission in writing of the author. ii Abstract The regional income disparities in Brazil are well-known. Since the 1930s, such income disparities have declined only slightly. This thesis combines traditional economic theory with insights from regional science and economic geography to explain the development pattern in Brazil throughout the 20th century, using a wide range of data sets. It contributes to the consolidation of the field of New Economic Geography because some tools employed in this thesis have not yet had widespread use in the literature. The thesis also brings new insights for the understanding of Brazil‘s development process. The key finding of the thesis is that there has been almost time-invariant spatial autocorrelation in Brazil‘s growth process that impedes the lagging regions from catching up. The reason for this is that there is a clear cluster of contiguous rich regions (Southeast and South) – i.e. the core - characterised not only by high real income levels and high market potential, but also by the fact that they have the largest markets and are the platform of the global economy in Brazil. In contrast, there is another cluster of contiguous poor regions (North and Northeast) – the periphery - that has low real income levels, low market potential and low market access. The agglomeration of population and economic activity explains the observed concentration pattern. Although there were some efforts made through regional development policy to narrow the gaps amongst the regions, the agglomeration forces are very strong in Brazil. The creation of Brasília did not offset these agglomeration forces, partially because place-based policies matter. The creation of Brasilia obviously had major implications for Brasilia itself, but did not offset the agglomeration forces that led to the dominance of São Paulo. Similarly, investment in other lagging regions may not offset the advantages of São Paulo and Rio de Janeiro, but they may improve economic conditions in the lagging regions themselves if income transfers or subsidies are done for efficient industries. iii Note on Publications Working and conference papers have been published from this thesis as follows. Working Paper: Matlaba, V. J., Holmes, M., McCann, P., & Poot, J. (2011). A century of the evolution of the urban system in Brazil. Working Paper #12/11, Department of Economics, Waikato Management School, University of Waikato, Hamilton, New Zealand. Available at: http://econpapers.repec.org/paper/waieconwp/ Conference Papers: Matlaba, V. J., Holmes, M., McCann, P., & Poot, J. (2011). Classic and spatial shift-share analysis of state-level employment change in Brazil. Paper presented at the Young Researchers in Economic Geography Workshop (28 October), Faculty of Spatial Sciences, University of Groningen, The Netherlands, 42pgs. Matlaba, V. J., Holmes, M., McCann, P., & Poot, J. (2010). A century of the evolution of the urban system in Brazil. Paper presented at the 57th Annual North American Meetings of the Regional Science Association International (10-13, November), Denver, Colorado, the United States, 32pgs. Matlaba, V. J., Holmes, M., McCann, P., & Poot, J. (2010). Agglomeration externalities and 1981-2006 regional growth in Brazil. Paper presented at the 57th Annual North American Meetings of the Regional Science Association International (10-13 November), Denver, Colorado, the United States, 32pgs. Matlaba, V. J., Holmes, M., McCann, P., & Poot, J. (2010). A century of the evolution of the urban system in Brazil. Paper presented at the 14th Annual Waikato Management School Student Research Conference (18 October), University of Waikato, Hamilton, New Zealand, 25pgs. Matlaba, V. J., Holmes, M., McCann, P., & Poot, J. (2010). Employment growth in Brazil (1981-2006): A Glaeser et al.'s model approach. Paper presented at the 6th Australasian Development Economics Workshop (10-11 June), University of Western Sydney, Parramatta, Australia, 36pgs. iv Acknowledgements To reach this stage I worked hard, but also I received crucial support from some people and institutions. I thank my parents, Lisete and José, for their care and encouragement throughout the process of my education. I also thank my sisters, Inês, Adélia, and Orpa; my brothers, Viriato and Vicente; my sister-in-law, Suzy; and all of my nieces and nephews, especially Dayana, Denise, and Rosma for their cheers. Thanks a million to my PhD supervisors, Professor Mark Holmes, Professor Philip McCann, Professor Jacques Poot, and Professor Arthur Grimes, for their encouragement and outstanding supervision and for their timeless trust that I should reach this stage. I am sure that other students would like to have had the privilege that I had of being supervised by such a great supervisory panel. I will always be indebted to them for everything that they have done for me while living and studying in New Zealand, for their unconditional support, assistance and guidance that went beyond PhD supervision. They are amongst the greatest human beings I ever met. I thank my examiners, Professor Viv B Hall and Professor Carlos Roberto Azzoni, for their very helpful comments on my thesis. I thank Waikato Management School at the University of Waikato for financial support for part of my PhD studies and for all the facilities they provided. I was hugely fortunate to study at this institution given the excellent studying environment. To have my own office and computer available for me 24/7 to carry out my PhD research was crucial for my successful studies. The quality of life that Hamilton city offers is also acknowledged. I also thank WMS Department of Economics staff, especially Chairperson Dr Dan Marsh, and the department administrators, Ms Maria Fitzgerald and Ms Leonie Pope, for their quick responses to my student needs. I thank my former professors at the University of São Paulo, especially Professor Maria Cristina Cacciamali, Professor Basília Aguirre, and Professor Gilberto Tadeu Lima for all their support. I thank my friends and colleagues, especially Tinh Thanh Doan and Peck Leong Tan for the great time we had together in Sydney and, alongside Bentry Mkwara, for all their support and discussions at WMS and their invaluable comments on v my work. I also thank Alessandra Faggian for her encouragement; Cláudio Dimande for our discussions on various subjects (I remember the great time we had together in São Paulo city and our decision at that time in undergraduate education that we had to study until PhD!); Steven Bond-Smith for our discussions and the great time we had together in Groningen; Rodrigo Alves Teixeira and Nadiejda Watanabe Deane Sá for our various discussions and their support since when we were undergraduate colleagues at University of São Paulo. I thank Bill Cochrane, Glen Stichbury, Yi An, Ernesto Mandlate, Wladimir Teixeira, Anderson Stanciole, Rodrigo Moreno Serra, and Pedro Pota for their support. I thank all University of Waikato Library staff for their attention to library-related student needs. I thank the staff and students at the Faculty of Spatial Sciences at the University of Groningen in the Netherlands for their hospitality while I was a visiting PhD student for two months in 2011. The opportunity to participate in two excellent excursions within the Netherlands was also appreciated. I thank the staff of the School of Public Policy at the George Mason University in the United States, especially Professor Kingsley E. Haynes for their hospitality while I was a visiting PhD student in November 2010. Finally, I am very grateful to Motu Economic and Social Policy Research for funding assistance (Foundation for Research, Science and Technology Grant MOTU-0601 Infrastructure). vi Table of Contents Abstract………………………………………………………………………… iii Note on Publications…………………………………………………………… iv Acknowledgements…………………………………………………………….. v Table of Contents………………………………………………………………. vii List of Tables…………………………………………………………………... x List of Figures………………………………………………………………….. xi CHAPTER 1 – INTRODUCTION…………………………………………... 1 1.1. Problem statement……………………………………………………… 1 1.2. Background and Research Objectives………………………………….. 3 1.3. Thesis Relevance……………………………………………………….. 6 1.4. Thesis Hypotheses and Research Questions……………………………. 7 1.5.