Dutch Disease, Factor Mobility Costs, and the ‘Alberta Effect’ – The Case of Federations

Abstract

Do reduced costs of factor mobility mitigate ‘Dutch Disease’ symptoms? The case of federations provides an indication for this. By investigating ‘Resource Curse’ effects in all federations for which complete data is available at the regional level it is observed that within federations resource abundance is more of a blessing than a curse (while between them the curse remains). In addition, it is also shown that federations with relatively worse institutional quality experience amplified reversed ‘Resource Curse’ effects within them, so that results are not driven by good institutions. A theory is then presented in an attempt to explain the difference between the cross-federal (and previous cross-country) results of the ‘Resource Curse’, and the intra-federal ones presented initially. It is argued that the reduced factor mobility costs within federations (compared to the costs of cross-country mobility) trigger an ‘Alberta Effect’ which mitigates ‘Dutch Disease’ symptoms, so that ‘Resource Curse’ effects do not apply within federations, and are even reversed. Thus, this paper demonstrates and emphasizes the significance of the mitigating role of factor mobility; also, it highlights the relative importance of ‘Dutch Disease’ theory (compared to the ‘institutions’ perspective) in explaining the ‘Resource Curse’ phenomenon. The paper concludes with empirical evidence for the main implications of the model, taking the United States and Canada as case studies