Inequality and the Equalization Fund in Brazil: Redefining Strategies

Abstract

This article examines Brazilian states’ per capita income convergence from 1990 to 2020. A reduction in state inequalities was observed, attributed to the redistribution of resources through the State Participation Fund (FPE) and Constitutional Funds and the Municipal Participation Fund and transfers for health and education, benefiting federative entities with lower per capita incomes. However, a significant volume of resources aimed at income redistribution was characterized by overlapping actions, whose results were not evaluated in isolation. Moreover, while historically, less economically advantaged states strive to reach the national average, more economically advantaged states tend to maintain or enhance their relative positions. Barro’s analysis (2001) suggests that equalization funds, by benefiting entities with lower GDP per capita, discourage governors from promoting the state’s economic development, as this would imply a loss of FPE resources. This situation would be a government failure commonly pointed out by authors of the Public Choice School. In light of this, this study proposes a revision of the FPE distribution criteria, reducing the emphasis on the inverse of per capita income and including variables such as population, collection effort, and state size, aiming to promote a more effective and equitable convergence of per capita income in the Brazilian federation.