Municipal expenditure and rural credit in agricultural productivity

Abstract

This article examines the influence of municipal agricultural expenditure and rural credit on land productivity in Brazil, based on 2017 data. The analysis is guided by the hypothesis that, in a country marked by regional inequalities and limited federal policy reach, municipal-level expenditure plays a relevant role in fostering agricultural output. A Cobb-Douglas production function is estimated using Two-Stage Least Squares (2SLS), with instrumental variables to address the endogeneity of credit. The empirical base combines data from the Agricultural Census (IBGE), Finanças do Brasil – Finbra (National Treasury Secretariat), and rural credit records from the Central Bank of Brazil. Results show that productive inputs, particularly technology-related expenditure, significantly impact land productivity. Rural credit also shows a positive effect, though with reduced magnitude, possibly due to its geographic concentration. The effects of municipal expenditure vary across regions: only in the Northeast were the coefficients statistically significant, especially in the states of Ceará, Rio Grande do Norte, Paraíba, Sergipe, and Bahia. This finding suggests that in areas with limited access to formal credit, municipal governments – through direct investment, rural extension, and public procurement – can play a compensatory role. The study underscores the importance of coordinated public policies across government levels and highlights that the effectiveness of expenditure depends on regional conditions, institutional design, and integration with broader development strategies.