Resource-Based Regions, the Dutch Disease and City Development

Abstract

This paper examines the relationship between resource development and industrialization. When transport costs are high, the region with a more valuable natural resource offers a higher welfare than the other region. However, when transport costs decrease, firms begin to move out of the region, resulting in the Dutch disease, initially in terms of firm shares, but eventually in terms of welfare too when transportation is sufficiently free. If resource goods are also used as manufacturing inputs as well as final goods, they can substitute for labor when wages rise, which tends to alleviate the Dutch disease by keeping production cost down. The model thus provides helpful insight for cities trying to efficiently develop their limited resources.

Keywords: Resource-based regions, Dutch disease, Resource goods, Industrialization, Transport costs

JEL Classification: F1, Q2, R1