Interregional trade, structural changes and regional inequality

This paper investigates the drivers of structural change resulting from the reallocation of economic activity across sectors and regions in Brazil. Using an interregional input-output analysis, we decompose structural change into contributions from technology, domestic and foreign trade, and consumption. We find that final expenditure is the dominant force driving structural transformation and reducing regional inequality. However, domestic trade reinforces regional disparities by shifting growth gains toward more developed areas. Interregional linkages act as shock absorbers, dampening regional convergence and amplifying income leakages from poorer regions. Shifts in technical and preference coefficients toward value-added-intensive sectors supported growth in lagging regions. Foreign trade also contributed to reducing regional inequality. Our findings underscore the critical role of input-output linkages and domestic trade patterns in shaping structural change and regional disparities, highlighting the often-overlooked importance of interregional trade.