Location and Growth in the Brazilian Northeast

Abstract Clustering of economic performance across jurisdictions has generated considerable research on the spillovers and linkages among geographical neighbors. Much of this work, however, has been aspatial, implying that the influence of location attributes on growth has been largely ignored. In this paper, we examine the contribution of location to regional economic growth using municipio‐level data for the Brazilian Northeast—a historically lagging region of the country. We test if productivity among northeastern municipios is converging to a steady state and whether spatial externalities are linked to productivity growth in individual municipios. We find that, conditional on structural characteristics, productivity among municipios is converging at about 3 percent per year. Further, productivity in individual municipios is positively associated with own‐structural characteristics but negatively associated with productivity growth in neighboring municipios. This means that there are negative spatial externalities coming from productivity improvements in neighboring regions.