Fears are widespread that Mercosur integration leads to further concentration of economic activity in Brazil's industrial centres, while the periphery of Brazil, including the Northeast, will find it more difficult to catch up economically. We evaluate such fears in several steps: - First, we portray relevant structural characteristics of the Northeastern region. - Second, we assess past trends in regional disparities with regard to per-capita income and the degree of industrialization, and the (limited) effectiveness of Brazil's regional policy in overcoming such disparities. - Third, we raise the question whether the Northeast has become more closely involved in the international division of labour with proceeding Mercosur integration. - Fourth, we discuss various factors which may shape the future economic prospects of the Northeast. We conclude that catching-up of the Northeast would be most difficult if regional integration were regarded by Brazil as an alternative to global sourcing and marketing. We also show that policymakers have various instruments at their disposal to help enhancing the comparative advantages of the Northeast. Sustained macroeconomic stabilization, productivity-enhancing regional, industrial and agricultural policies, investments in infrastructure and human capital formation appear to be critically important for Brazil's periphery to achieve income gains and attract foreign capital.