- .LN3|~I~I3dX~NryICIVNr~r3~H.L IT~Iit61 THE CANADIAN EXPERIMENT 49 growth in the Maritime Provinces with that which would have occurred had population grown at the same rate as it did in Ontario. Bet:ween 1880 and 1940 over 400,000 people left these eastern provinces to seek eml~loynaent elsewhere including many who went on to become leading commercial figures.
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- 6 There are a mtmber of papers in the literature which deal with the problem of :Lssigning jurisdiction over redistribution. See for example: Musgrave (1969), Oatcs (1972) :tnd Wild:ksin (1990).
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- ACHESON, T.W., 1977. Tile Maritimes and Empire Canada in l).J. Bcrcuson (ed.), Canada and the Burden of Unity, Toronto: McGraw-lqill, pp. 87-114.
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- ALEXANDER, D.G., 1978. Ecoilomic Growth in the Atlantic Region, AcadiensL~, 8, pp. 47-76.
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- An attempt to revise tile Constitution in a way which would secure Quebec’s signature failed in 1990. Tile Governmen~ of Quebec, now led by a federalist, Roberl Bourassa, issued an ultimatum: either dramatically revise tile constitution to assure most power is vested with tile provinces or tile Government will join the independence part),, the Parti Quebecois, in support of independence in a referendum scheduled for November 1992. The dependence of the Atlantic Canadian regions on transfers and tile vet’)’ real possibility that these u’ansfers nlay he dranlatically reduced in tile near future highlights another important dimension of the cohesion problem. Small and relativel), poor regions in a union can become very vulnerable if a union which involves significant transfers becomes unsustainable.
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- B I,L,\D LEY, J., et aL 1986. The Economic Consequence~ cfEuropean Union, Policy Research Series, Paper No. 6, Dublin:The Economic and Social Research Institute.
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- B[BLIOGIL.%PHY 91 GORDON COMMISSION, 1957. Royal Commission on Canada’s Economic Prospects Ottawa: Queen’s Printer.
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- BAVOUM[, T. and ER. ~b\SSON, 1992. Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe, mimeo, International Monetary Fund, February.
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- BIBLIOGRA F’H Y ACHESON, T.W.,1971. The National Policy and the Industrialization of the Maritimes, 1880-1910, Acadiensis, Vol. I, pp. 3-28.
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- BOADWAY, R. and D. WILD,’LSIN, 1990. Optimal T~x - Subsidy Policies for Indusn’ial Acljusunent to Uncertain Shocks, Oxford Economic Papers, Vol. 42, pp. 105-13,1.
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BOADWAY, R. and EFLATTERS, 1981. The Efficiency Basis for Regional Employment Policy, Canadian Journal of Economics, Vol. 14, pp. 58-75.
BOADWAY, R. and EFLATTERS, 1982. Efficiency and Equalization in a Federal System of Government: A Synthesis and Extension of Recent Results, CanadianJour~zal of Economics, Vol. 15, pp. 61%633.
- BOU DEVI LLE, J., 1966. The Problems of Regional Economic Planning Edinburgla: University of Edinburgh Press.
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BRETON, A., 1964. The Economics of Nationalism, Journal of Political Economy, Vol. 72, No.4, pp.376-386.
- By 1967, Canada’s centennial ),ear, the national governments policy of stimulating tile development of a national and federal welfare state via intergovernmental u’ansfers had achieved much. Although the citizens of the poorer provinces continued to face low incomes and poor employment prospects disparities in the quality of heahh, education, and welfare services had been reduced significantly. This not only reduced inequalities in comprehensive incomes but it also had a significant impact on equality of opportunity in the national labotLr market. Young adults from Newfoundland coulcl now enter tile labour market with the same general skills anad training ~ts yonng adtdts fi’om Ontario anacl Alberta. While young Newfoundlanders may have had to move to secure employmem tile), at least could compete on equal terms with other job applicants fi’om other parts of tile country. Tile remaining income and employmen~t problems would be addressed in the following decades.
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- CANADA, 1939. Report of the Royal Commission on Dominion Provincial Relations, Ottawa: Kings Printer.
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- CANADA, 1991. Canadian Federalism and Economic Union: Partnership for Prosperity, Ottawa: Supply and Services.
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- CANADA, Del:)artment of Finance, 1991. Quarterly Economic Review: Annual Reference Tables, Ottawa: Supply and Services.
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- Canadians, espceiall), those in the predominantly English speaking parts of tile cotmtry, looked to the central government for solutions to their economic problems. In 1937, the national government responded to the crises by initiating a critical examination of the institutions of Canadian federalism. The Report of the Royal Commission on Dominion Provincial Relations was released in 1939 and the principles advocated in that report had a protbund inlluence on the evolution of the Canaclian federal system over the following 40 ),ears.
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- COMMISSION OF THE EUROPEAN COMMUNITIES, 1986. The Social Dimension of the Internal Market, Commission Working Paper (Marin Report) Brussels: European Commission.
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- COMMISSION OF THE EUROPEAN COMMUNITIES, 1988a. The Social Dimension of the lnternal Market, Brussels: European Commission.
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- COMMISSION OF THE EUROPEAN COMMUNITIES, 1988b. The Economics of 1992, European Economy, No.35, Brussels: European Community.
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- COURCHENE, T.J., 1984. Equalization Payments: Past, Present, and Future, Toronto: Ontario Economic Council.
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- DOERN, B., 1992. Europe Uniting: The EC Model and Canada’s Constitutional Debate, Toronto: C.D. Howe Institute.
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- During the 1960s the inclusive government also continued to expand its programmes in health, education, and welfare. By the late 1960s a unique federal welfare state had evolved to the point where all Canadians, regardless of province of residence, could expect reasonably comparable levels of these public services while paying reasonably comparable levels of tax. This undoubtedly contributed significantly to a feeling of national citizenship. None the less, serious regional disparities and the language problem remained. Table 5 contrasts time Canadian and US experience with regional disparities over the period from 1920 to 1965. Despite the emergence of a national welfare state in Canada with significant regional redistribution, disparities in personal income changed very little. In contrast, in the United States, where there is no truly national welfare state, time reduction in regional disparities was significant.
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EICHENGREEN, B., 1990. One Money for Europe?: Lessons from the US Currenc) Union ’, Economic Policy. A European Forum, Vol. 10, April, pp. 118-187.
- FOLEY, A. and M. MULREANY, 1990. The Single, European Market and the Irish Economy, Dublin: Institute of Public Administration.
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- FRIEDMANN, J. and Y. FOREST, 1989. The Politics of Place: Toward a Territorial Political Economy of Territorial Planning, in B.Higgins and D.J. Savoie (eds.), Regional Economic Development: Essays in Honour of Francois Perroux, Boston: Unwin Hyman, pp. 115-130.
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- g~\RSI-tALL, T.H., 1964. Class, Citizenship, and Social Development, New York: Double Day.
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- HIGGINS, B., 1989. Regional Development and the Efficiency of tile National Econonly, in l?,.Fliggins and D.J.Savoic (eds.), Regional EconomicDevelepment, Boston: Unwin Flyman, pp. 19,’3-224.
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- I I The emphasis on sustainability in this paper reflects the Canadian experience where cohesiOll has Ix:ell It perennial conccI’I1. Etlr~l)eIill unit}’ has not been threatened ill Ihe way Canadian unity has been. However, as Padoa-Schioppa (1987) IlOteS tile threat of scccssiom while Imppily not on the horizon in the COllltnllllily ~tl the present time cannol be dismissed’, 19 Traditional trade theory suggesLs Ihal all tmitlng countries gain I’rom freeing try, de. However. inlernalional economls~ working wilh the tJ~lditlonal Ihcory have prohahly undcrcstitnaled the inlport:ulce of Ihe uncertainly associated ~’ilh the gains I~’om trade. Reeenl theoretical work - which ineorpol~ltes imperl~rct compclition and economies of scale - has showi1 that some cot.lntrics cal’l enlel’ge as tier losers when trade i~ fleed.
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- In comparison with today, the role of government in Canadian society in the 1867-1939 period was relatively limited. As illustrated in Figure 8 total expenditure of the inclusive government was generally 5 or 6 per cent of GNE Although slightly higher in some years, low GNP rather than high government expenditure explains time size of tile ratio in these periods.26 Provincial and mtmicipal governments were more significant in time every day lives of Canadians during this period than the national government. Consequently, when citizens began to demand more and more government services time provincial governments, who were also 26 Canada ~Tts at war between 1914 and 1918, :~ severe n’eccssion occurred in 1920. and the depression of t l~e 1930s ~as espcciall)’ scvcrc in Canada (outpul fell by ovcr 25 per cent bctwceJl 1929 and 1933). Figure 8: Inclusive Government Expenditure as a Share of GDP 0.45 a. 0.4 ~0.35 -_ 0.3 0.2 O 0.15 0.1 ~ 0.05 0
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- It is difl]cuh to understand why this important concern is neglected. Perhaps economists ar~ IOO wedded to their individtlalistic concept of society, and their partictdar model of individual t~, tionali~. There is little room in the standard model for ethnic nationalism. Indeed, most economis~ find ethnic nationalisln incomprehensible (and often irrational).See Breton (1964) for one of the few economic studies of nationalisnl. Yet ethnic nationalism exist.s and pcol)le sacrifice their lives to preset’re it.
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- It is especially important to (mote that, despite the existence of a su’ong democratically elected inclusive government with access to a significant tax base and a feeling of solidarity established during the war of 1914-1918 little action was undertaken to secure cohesion or balanced regional development. Indeed, the national government Commissions studying regional problems in the 1920s and 30s unanimously agreed that national government policies, on balance, harmed rather than helped the lagging Maritime Provinces. This experience should give rise to second thoughts among those who believe that a union will necessarily generate convergence, that political homogeneity and solidarity will increase sufficiently over time to motivate action on regional disparities, or that time existence of a strong democratically elected inclusive government will necessarily result in policies favouring lagging regions.
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- KEIRSTEAD, B.S., 1948. A Theory of Economic Change, Toronto: Macmillan.
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- KRUGMAN, P., 1987. Economic Integration in Europe: Conceptual Issues, in Efficiency, Stability, and Equity: A Strategy for the Evohttion of the Economic System of the European Community in T. Padoao,Schioppa(ed.), Oxford: Oxford University Press.
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- KRUGNb\N, P., 1990. Increasing Retnrns and Economic Geography, Journal of Political I~conomy, Vol. 99, No.3, pp.483--499.
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- LESLIE, P.M., 1991. The European Community: A Political Model for Canada? Ottawa: Supply and Services.
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- MacDOUGALL, DONALD, 1977. Report of the Study Group on the Role. of Public Finance in Eu’ropea’n hztegration, 2 Voh~mes, Bcussels: European Commission.
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- MADISON, J., A. HAM 1LTON, and J. JAY, 1770. The Federalist Papers, New York: Bantam Books, 1982 edition.
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- MUSGRA\rE, R.H., 1969. Theories of Fiscal Federalism, Public Finance / Finances PiLblique~’, Vol. 24, No.4, pp.521-532.
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- NATIONAL ECONOMIC AND SOCIAL COUNCIL (NESC), 1989. helzz~zd in the European Community: Pecformance, Prospects and Strategy, Dnl)lin: National Economic and Social Council.
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- NORRIE, K., R. BOADWAY, and L. OSBERG, 1991. The Constitution and the Social Contract, mimeographed paper.
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- OECD 1989. National Accounts: Main Agg~’egates, Vol I, 1960-1987, Paris: Organisation for Economic Co-operation and Development.
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- OSTRUM, V., 1978. The Intellectual CT~sis in American Public Administration, Birmingham: University of Alabama Press.
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- PADOA-SCHIOPPA, T., 1987. Efficie~Tcy, Stabilit); and Equity: A Strategb, for the Evolution of the Economic System of the European Community, Oxford: Oxford University Press.
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- PERROUX, F., 1950. Economic Spaces: Theory and Applications, Quarttn-lyJournal of Economical’, Vol. 64, No. 1, pp.90-97.
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- PHIDD, R.W. and G.B. DOERN, 1978. The Politics and Managemenl of Canadial~. Economic Policy, Toronto: Macmillan.
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- Regional Disparities, Regional Discontent, and Cohesion in Canada: 1968-Present In 1968 Pierre Elliot Trudeau ~,’as elected as Canadian Prime Minister.
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- SACHS, J.D. and X. SALAd-MARTIN, 1991. Fiscal Federalism and Optimal Currency M’eas: Evidence for Europe fi’om the United States, National Bureau of Economic Reseamh Working IJrtpe~; No. 3855,October.
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- SAVOIE, D.J., 1976. Regional Economic DmJelopment: Canada’s Search for SohttioT~,s’, Toronto:University of Toronto Press.
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- STATISTICS CANADA, 1988. Provincial Economic Accounts, Historical Issue 1961-1986, Cat. No. 13-213S, Ottawa: Minister of Supply and Services.
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- STATISTICS CANADA, 1989. Historical Labour Force Statistical, Cat. No. 71 -201, Ottawa: Minister of Supply and Services.
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- Summa~qsi’ng the Canadia’n Expe~ence Three features of tile constitutional arrangement which established tile Canadian union in 1867 have dominated the history of that country. First, the constitution created a federal system of government with autol]OlllOl.lS inclusive government institutions. Second, the Constitution established a division of expenditure responsibilities which left responsibilit), for most of the important functions of tile modern state in the hands of the provincial level of government. Third, the Constitution gave tile inclusive government unlimited powers of t~xation. This constitutional fi’amework is particularly advantageous to small and relatively poor states since it simuhaneousl), enables tile inchtsive level of government to use its tax power to redistribute resources from rich to poor regions while protecting local sovereignty.
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- Table 8: Pel~onal hlcome Per Capita at Market Price.t, by Prca;ince. Selected )’em~ 1961-1986: Relationship to National Average (Czlnada - I00) Province 1961 1966 1971 1976 1981 1986 Ncwf~undland 58.2 59.9 63.8 68. I 64.9 69.6 Prince Edward Is. 58.8 60.1 6b.7 68.2 67.4 74.6 Nova Scotia 77.8 74.8 77.5 78.’t 77.9 83.6 New Brun~a~’ick 68.0 68.9 72.3 75.3 71.3 77.5 Quebec 90. I 89.2 88.7 93.2 93.3 93.6 Ontario 118.4 116.4 117.0 109.6 107.7 110.4 Manitoba 94.3 91.9 94.1 93.2 93.0 90.3 Saskatchewan 71.0 93. I 80.3 98.8 99.5 89. I Alberta 100.3 100.1 99.0 102.4 110.2 105.3 British Colombi:l 11’t.9 I I 1.6 109.0 108.8 101.7 100.3 Disparity Gap ( Highcst/ Lowcsl ) 2.0.’4 1.94 1.83 1.60 1.69 1.58 Cocffcicnt o f V;wi;~ti~.ln 0.274 0.249 ()3.22. 0.195 0.193 0.15 Source. Savoic (1986), Sl:tlistics Canada, Prm;incial F.conomic A ccou nts.
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- Tables 3 and 4 present some very general information about time Canadian economy. Table 3 shows that the Canadian union has generated time second highest standard of living in the world (1990, whether measured by GDP per capita or by the United Nations Human Development Index). Canadians also enjoy access to a well developed social welfare system which includes a fl’ee and universal health care system, a fi’ee and universal primary and secondary education system and comprehensive and relatively generous social security programmes.
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- The almost exclusive reliance upon a division of legislative powers to secure cohesion in Canada prior to 1939 was about to change. Three factors were especially important: (1) time growth of government which occurred with time emergence of Keynsian economic ideas and the philosophy of the welfare state; (2) troubles with the Canadian t,-Lx system; and (3) political changes in time province of Quebec. The last of these factors is considered in the following section. The first two, which are closely linked, are considered here since tile problems first arose in the 1920s and 1930s.
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- THE C~\NADIAN EXPERIMENT 51 constitutionally responsible for welfare state policies, were forced to turn to new Fevenl_le SOUl’Ces. l?,ecause the), were limited to direct taxation the income tax became the base o1 choice. The national government did not enter the income tax field until 1919 ( it claimed that this was a temporary measure to finance debt nccumulated during the war). The national government quickly became the major player. Unfortunatel),, the coexistence of I 1 different tax s),stems (10 provineial/I central) generated a tax jungle which impeded the operation of the Canadian internal market.
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- THE C~%NAI)IAN EXPI.RIMENT 45 Although tile ~’normal oper;ition of market forces in an econonly v,,ith increasing returns to scale and an unevenly distributed population pla),ed an extremely important role in tile process of ecotaomic decline it must be noted that the policies of the inclusive government undoubtedly exacerbated tile problems. On balance inclusive government commercial policy was less favourable to these provinces than to tile central provinces, the eastern provinces did not enjoy any significant return on their share of investlnellt to open up the west of the COtllltl’y, and Ihese pl’ovinces were relatively disadvantaged when land given to the inclusive governmcnl by the British Crown was transferred to Quebec, Ontario, and the new western provinces of Manitoba, Saskatchewan, Alberta, and British CohHllbia (Alexander, 1978).
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- The emerging welfare state policies and the tax jungle created a political crisis in Canada during the 1930s. In part, this crisis was due to tile fact that the depression (lid not have an equal impact on all provinces and the governments in the provinces hardest hit faced bankruptc),. In part, it was due to the distribution of tax bases and the legacy of the war of 19141918.
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- The first 75 years of tile Canadian federation illustrate that poor regions do not necessarily gain fi’om even this potentially favourable THE CANADIMN EXPERhMENT 69 constitutional sl.rttcttH’e. Indeed, the inclusive government ot’Uy began to use its potential power to redistril)ute income in the post 1945 period as a response to a unique combination of factors: the depression of the 1930s and the bankruptcy of some state governments; the Second World War which increased the importance of the inclusive government in the everyday lives of Canadians, increased the national consciousness of national government politicians, and increased solidarity among English speaking Canadians; the maturing of Keynsian and welfare state i)hilosophies and the consequent belief that governments can solve social problems; anti real threats to national cohesion. The threat to cohesion played a particularly important role in sustaining regional redistribution in Canada over the post 1945 period.
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- The outcomes of Canadian policy in t.he post 1968 period fall far short of what one naight expect. The regional development and redistributive programmes undoul>tedly played an important vole when the people of Quebec rejected the indepcndelace option in a referendum in 1980. Thus, in one sense, the policies did COt3tribute to cohesion. Howevez, the threat of Quebec independence remains the dominant isstle in Canadian politics and another indel3endence referendum is planned for the fall of 1992. The policies have also resulted in some convergence in living statldards, especially if incomes are delined comprehensively Io include Ihe benefits flowing from pttbliely provided goods and services. None the less, as ilhtslrated in Tables 6, 7, 8, mad 9 traditional disparities, whether measurecl in terms of GDP per person, personal income, earned income, or unemph3yment rates proved to be remarkably persisl.ent.
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- The transfers introduced to placate the people in the slow growing regions did not have a significam impact on the emerging disparities. The eastern provinces, which enjoyed incomes marginally below those in Ontario in 1867, I~:11 t’urtlaer and forther I:)ehind. 17~), the 1890s the economies of the Maritime Provinces of Nova Scotia, New Brttnswick, and Prince Edward Island were in serious trouble. Many manufacturing industries which emerged in the period after 1850 went out of bttsiness leading to deindustrialisation, . Immigration virtually ceased. Emigration rose to unprecedented levels. In many areas population declined significantly. This experience, so familiar to the Irish, was unique in North America.
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- There is no simple explanation for time differences in the experience of these o.vo large North American federations. The United States federation did generate significant redistribution across regions. Indeed, Bayoumi and Masson (1992) estimate that time US federal fiscal system reduces differentials by 22 cents out of every dollar even though redisu’ibntive effort was only half that of Canada. It is possible that heavier reliance on market adjustment accounts for the greater success in the US. Bul, time THE CANADIAN EXPERIMENT 57 obvious alternative hyl}othesis, that tile poor Canadian regions are more peripheral with respect to North American markets than any US region and thus face severe handicaps in a competitive market environment, is equally plausible. At present, there is no empirical research available to use in [111 ;.issCSSlillZill of these alternative positions.
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- Tile potential for this insurance role arises from tile fact that regional business cycles are likely to differ. For example, a shift in the terms of trade in favour Of primary products will stimulate resource based economies and dampen manufacturing based econonlles that use raw materials as inputs. Left alone, markets will react to this disturbance by altering the volume and composition of trade flows, and by inducing capital and labour to relocate fi’om lower to higher renumeration areas. If the shift in relative prices is transitory, this adjustnlent may be socially inefficient; the process will be repeated in reverse once the terms of trade shift hack. A revenue equalisation scheme can prevent this inefficiency by transferring funds fi’om tile primary product producing region to the manufacturing region.sl 30 See: Boadway and Flatters (1982) fear a full tl’eatmenl ofthis position.
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- US DEPARTMENT OF COMMERCE, 1976. Historical StatL~tics of the United States, Washington, DC: US 13ureau of the Census.
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- VAN DER PLOEG, 1991. Macroeconomic Policy Co-ordination Issues durirtg Various Phases of Economic and Mortetary Integration in Etu-ope, The E**rol)e/r~l Eco~omy, Special Edition No. I.
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- VAN ROMPUY, P., F. ABRAHAM, and D. HEREMANS, 1991. Fiscal Federalism and Ihe EM U 771e Europr;rt~z l[conomy, Special Edition, No. I.
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- W~q’LOSZ, C., 1991. Monetary Union and Fiscal Policy Discipline, The E’u’ro])ea’~z Fconomy, Special Edition, No. I.
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- When is union sustainable? If all individuals entering the union ahoays perceive that they are hetter off as members of the union than tile}, are when they are outside the union then tile union is sustainable. I?,ul, if the unioll does resuh in losers or if sonle nlenlbers perceive they are losers 10 Indeed, as Krugman (1987) notes the new trade theory with its emphasis on scale economies ~lnd nlarkel power suggests that free trade probably involves less conllic[ within countries and more conllict between cotmtries than conventional II=tcle based s~lcly on cotnpatvttive ad~’antage. Thus, the problem of sustainahility is likely to be more st2l-iotls given the nature of ttxtde ill the Ctll’rent el;i.
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WILDASIN, D.E., 1990. Budgetary Pressures in the EEC: A Fiscal Federalism Perspective American Economic Review, Papers and P~vceedings, Vol. 80, No. 2, pp.69-7,1.
- YEAR Note: Urquhatl and Buckley (1965) o~ O .r [-r q 0 Z -q Z > >
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