A non trivial amount of empirical evidence has shown that in
The evidence we present below try to provide a plausible and much stylised explanation to an observed phenomenon where provinces that receive the highest per capita transfers show the worst behaviour in terms of footloose activities, i.e. manufactures. This result could be, to some extent, due to a Dutch disease like phenomenon that is negatively affecting the growth opportunities of provinces that are most benefited by fiscal transfers. Our hypothesis is that fiscal transfers, through an increasing purchasing power, may be producing a negative effect on the incentive of manufacturing producers to locate on those provinces which receive the largest transfers. Additionally, a non-benevolent behaviour by State governments may be also contributing to this negative effect.
The rest of the paper is organised as follow. In section 1 we discuss briefly the literature on the effects of capital flows, foreign aid and the Dutch disease. Section 2 presents a stylised
description of the recent evolution of