The second paper in the series is by Professors Michel Boucher and Jean-Luc Migué from École nationale d’administration publique (ENAP) and the Fraser Institute respectively. Their paper uses a public choice framework to analyze empirically the impact of trade liberalization on intergovernmental transfers. Boucher and Migue start from the premise that equalization is politically rather than economically motivated and is used to maintain a cartel of governments maximizing their joint probability of re-election.
The free flow of goods and factors of production, however, is destructive of the political cartel because individuals have the opportunity to move their assets or production to more favourable locations. Further, as regional governments are forced to adapt their policies to compete internationally and regions begin to shift trade from inter-regional to international partners, the internal logic of equalizing transfers is weakened. Boucher and Migue offer econometric evidence that free trade has been associated with smaller governments at both the national and provincial levels and that recipient provinces adjust to the new competitive environment more slowly than provinces that do not receive equalization.