Dutch disease, factor mobility costs, and the ‘Alberta Effect’ – The case of Federations

Do reduced costs of factor mobility mitigate ‘Dutch Disease’ symptoms, to the extent that they are reversed? The case of federations provides an indication they do. By investigating 'Resource Curse' effects in all federations with available state-level data, it is observed that within federations resource abundance is a blessing, while between federations it is a curse, similar to results observed in previous cross-country studies. A theory is then presented in an attempt to explain the opposite results of the intra and cross federal (and previous cross-country) analyses. It is argued that the reduced costs of factor mobility within federations trigger an ‘Alberta Effect’ –where resource abundant regions exploit the fiscal advantage, provided by resource rents, to compete more aggressively in the inter-regional competition over capital, and as a result attract vast amounts of capital– which in turn mitigates, and even reverses, ‘Dutch Disease’ symptoms, so that ‘Resource Curse’ effects do not apply. Thus, this paper emphasizes the significance of the mitigating role of factor mobility in 'Dutch Disease' theory, and presents a novel mechanism (the ‘Alberta Effect’) through which this mitigation, and possible reversion, process occurs. The paper concludes with empirical evidence for the main implications of the model, taking the United States as a case study.