Geography Matters More: Geographical and Institutional Determinants of Income in Brazilian States

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 e¤ects of ge-ography. This paper evaluates how much of the income di¤erences across Brazilian regions and states stem from geographic characteristics and in-stitutional characteristics, the latter in turn partly determined by geogra-phy. Our results show, \u85 rst, that the rate of convergence of state income per capita increases substantially once regional e¤ects are taken into ac-count. Second, institutions, when instrumented with regional dummies, are a signi\u85cant determinant of state income levels. However, when we add additional geographic characteristics, some institutions cease to signif-icantly a¤ect income. The message from Brazilian data seems to be that, tough geography and institutions matter for income, geography matters more