Between 1975 and 2000, annual per-capita GDP in Chile grew at 5%. Yet, regions did not benefit equally: poverty declined significantly in all regions but regional income inequality remained stagnant. We found that convergence in per-capita income and productivity levels is too slow to become a significant force in equalizing regional income. Lack of convergence is mostly associated with low levels of internal migration. This, in turn, is found to be largely the result of government policies, in particular, public housing. The efficient targeting of subsidies coupled with the prohibition to sell houses, tied families to their geographical location, inhibiting migration.