Micro‐impacts of the Brazilian Regional Development Funds: Does lending size matter?

• Published date: 01 February 2019
• Date: 01 February 2019
• Author: Guilherme Resende Oliveira,Caio Nogueira Gonçalves,Guilherme Mendes Resende,Diego Firmino Costa da Silva
• DOI: http://doi.org/10.1111/rode.12539

REGULAR ARTICLE

Micro‐impacts of the Brazilian Regional

Development Funds: Does lending size matter?

Guilherme Resende Oliveira

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Guilherme Mendes Resende

2

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Diego

Firmino Costa da Silva

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Caio Nogueira Gonçalves

4

1

Manager of Territorial Intelligence

(Emater) of Government of Goias State,

ALFA University, Brazil

2

Administrative Council for Economic

Defense (CADE)/Brazilian Government,

Brazil

3

Universidade Federal Rural de

Pernambuco, Department of Economics,

Brazil

4

Instituto de Pesquisa Econômica

Aplicada, Brazil

Correspondence

Diego Firmino Costa da Silva,

Universidade Federal Rural de

Pernambuco, Department of Economics,

Rua Dom Manoel de Medeiros, S/N Dois

Irmãos Recife, Pernambuco, BR 52171-

900, Brazil.

Email: diego.firmino@ufrpe.br

Abstract

This paper evaluates the micro‐impacts of regional devel-

opment funds in Brazil—the Constitutional Financing

Funds (CFF)—using fixed effects panel data models and

generalized propensity score between 2000 and 2012.

Assessing the industrial and commerce/services sectors

using fixed effects models, the results provide weak evi-

dence of a positive and statistically significant impact of

the CFF on job creation and no statistically significant

impact on labor productivity growth at the firm level.

Regarding dose‐response estimates, the results present

evidence of nonlinear effects after three years of financ-

ing, suggesting that the amount of subsidized credit plays

an important role in creating jobs and improving firm

productivity.

KEYWORDS

Brazilian Regional Development Funds, generalized propensity score,

micro-impact evaluation, regional policy

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INTRODUCTION

Historically in Brazil, there has been polarization between regions that are rich (the South and

Southeast) and those that are poor (the North, Northeast, and Centre‐West). Reducing this inequal-

ity is the main goal of regional public policies. For this reason, the Brazilian Federal Constitution

of 1988 established the Constitutional Financing Funds (CFF, also known as Brazilian Regional

Development Funds) for the Northeast (FNE), the North (FNO) and the Centre‐West (FCO), which

aim to promote a credit market that fosters economic dynamism in the most disadvantaged regions.

The rationale for the policy is to raise and distribute the financial resources among various eco-

nomic actors. Loans at subsidized interest rates aim to develop local economies and thereby

DOI: 10.1111/rode.12539

Rev Dev Econ. 2019;23:293–313. wileyonlinelibrary.com/journal/rode © 2018 John Wiley & Sons Ltd

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generate employment and income in the lagging regions. The Brazilian Regional Development

Funds are the main financing instruments for development and reduction of inequalities in their

respective regions, covering an area of 7 million square kilometers, which are home to some 81

million people. The resources come from 3% of two federal taxes—the income taxes (from indi-

viduals and firms, ‘IR’) and the tax on industrialized goods (‘IPI’)—and from the repayment of

the loans (principal plus interest).

The funding provided for the productive sector is expected to give rise to a visible increase in

employment and income levels in the North, Northeast and Centre‐West regions. While the num-

ber of formal jobs in these regions increased by 67.5%, 57.2%, and 48.5%, respectively, between

2004 and 2011, the South and Southeast saw an increase of 40.3% and 44.6%, respectively. Like-

wise, the average real wage, a proxy for labor productivity,

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increased to 82.3%, 91.3%, and

77.2%, in the North, Northeast, and Centre‐West, respectively, while in the South and Southeast, it

increased to 70.7% and 68.5%, respectively. The poorest regions thus grew more than the wealthi-

est regions of Brazil.

Several studies have analyzed the repercussions that this financing policy may have on eco-

nomic indicators. The available literature sometimes presents divergent theoretical arguments

regarding the relationship between economic development and the financial system leading to eco-

nomic growth through capital accumulation and increased productivity. Stiglitz (1994) emphasized

the government's role in creating new financial institutions to fill the gap in the private financial

sector and allowing relaxation of credit constraints on companies, especially those in more disad-

vantaged regions. On the other hand, Levine (2005) highlighted the discussion on whether funding

actually causes growth, or merely responds to “real sector”demand. Relevant evidence from devel-

oped countries has also been presented in the literature on this topic. Most studies focus on assess-

ing macro (aggregated) effects of EU structural funds on regional disparities, income growth and

employment (Rodriguez‐Pose & Fratesi, 2004; Puigcerver‐Peñalver, 2007; Dall'erba and Le Gallo,

2008; Mohl & Hagen, 2010; Becker, Peter, & Ehrlich, 2012). Accetturo and De Blasio (2012)

evaluated the Patti Territoriali (Italian regional development program), comparing the economic

performance in terms of jobs creation and number of firms and municipalities that participated with

those that did not benefit from the policy.

Evaluations regarding place‐based policies in the USA have also been also made. Kline and

Moretti (2013) evaluated the effects of the economic development policy of the Tennessee Val-

ley Authority (TVA) using a panel of counties between 1930 and 2000. The authors presented

an evidence favoring positive effects on both agricultural and manufacturing employment dur-

ing the period in which federal transfers were greatest (1930–1960) and when manufacturing

employment in the region was still growing at a significantly faster pace than the comparison

group during the following period (1960–2000). Busso, Gregory, and Kline (2013) found evi-

dence for job creation and income growth without generating large population growth or

increasing rent prices in targeted communities of the federal urban Empowerment Zone (EZ)

program.

According to previous Brazilian studies, at the aggregate level, the FNE has played a positive

role in increasing per capita gross domestic product (GDP), although these results are more striking

in developed municipalities, where there is a greater flow of resources from the fund (Mace do &

Matos, 2008; Resende, 2012, 2014; and Resende, da Silva, & da Silva Filho, 2015). For the FNO

and FCO, the results at aggregate level do not provide conclusive evidence, and indicate that loans

are concentrated in municipalities with the best socioeconomic indicators (Oliveira & Domingues,

2005; da Silva, Resende, & Silveira Neto, 2009; Resende et al., 2015; Resende, da Silva, & da

Silva Filho, 2018). Most of the studies have used geographically aggregated observation units,

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