Transcript Slides - Tufts University

The Political Economy of Borders
and
the Future of Catalonia
Enrico Spolaore
Tufts University,
NBER, CESIfo and CAGE
Girona
October 28, 2014
Motivation
• The formation and breakup of sovereign states has
been at the center of history for thousands of years
• In recent decades, a dramatic increase in the number
of independent states and the spreading of demand
for autonomy and independence have renewed
interest in the redrawing of national borders.
• The referendum on Scotland’s independence on
Sept. 18, 2014 was a close call: 55% voted against
and 45% in favor.
• The political debate on Catalonia’s independence is
at a critical juncture.
Number of sovereign states has increased
dramatically in recent decades
• In 1945 there were 74 independent countries
(of which 51 were UN members)
• Today the United Nations has 193 members
(latest addition: South Sudan in 2011).
• More than thirty new member states have
joined the UN over the last thirty years.
• About half of the UN member countries have
less inhabitants than Catalonia (7.5 million).
• The smallest UN member, Tuvalu, has less
than 12,000 inhabitants.
For centuries, number and size of nations
debated by philosophers and political thinkers
• Aristotle: “experience has shown that it is difficult, if
not impossible, for a populous state to be run by
good laws”
• Montesquieu: “in a large republic, the common good
is sacrificed to a thousand considerations and is
subordinated to exceptions; it is vulnerable to whims
and accidents. In a small republic, the public good is
more strongly felt, better known, and closer to each
citizen.”
• David Hume: “Nothing is more favorable to the rise
of politeness and learning than a number of
neighboring and independent states, connected
together by commerce and policy.”
An Italian (Cesare Beccaria)
in the 18th century:
"To the extent that society increases, each
member becomes a smaller part of the whole,
and the republican sentiment becomes
proportionally smaller, if the laws do not take
care to reinforce it. Societies, like human bodies,
have their circumscribed limits, and if they grow
beyond them, their economy is necessarily
disturbed. [...]. A republic that is too vast cannot
save itself from despotism except by subdividing
itself and uniting itself into so many federative
republics."
More recently, size of nations and endogenous
borders addressed by political economists
• Traditionally, economists have studied the economic implications
of national borders (international economics), but have taken
borders themselves as given (exogenous).
• A more recent economic literature has focused on the
endogenous formation and breakup of national states and political
unions.
• The literature on endogenous national borders studies the
interactions of economic and non-economic (political, ethnic,
cultural) variables in the formation and breakup of national states,
using the theoretical and empirical tools of economic analysis
• It is part of a broader trend towards studying the deeper historical
and cultural determinants of economic and political outcomes and
institutions
Goals of this lecture
• Review some key concepts and
results on the political economy of
national borders
• Discuss the implications of the
analysis for Catalonia
Main References
“The Economics of Political Borders”
prepared for the Handbook on the Economics of Public
International Law, Edward Edgar Publishing (Research
Handbooks in Law and Economics series), forthcoming
“What is European Integration Really About? A
Political Guide for Economists”
published in the Journal of Economic Perspectives,
Summer 2013
commercial break
pausa comercial
Rest of this talk
• The Key Trade-off:
Economies of scale vs. heterogeneity costs
• Costs and benefits of heterogeneity
• The political economy of heterogeneous populations:
democratization, voting over borders, and optimal
transfers
• The other side of the trade-off: economies of scale
– defense and security
– economic integration
• The role of international openness
• Implications for Catalonia
A Key Trade-off
• Public goods (legal systems, defense and
security, common currency) come with
economies of scale (benefits from a larger
size)
• but those benefits must be traded against the
costs of heterogeneity (different preferences
for public policies in larger, more diverse
populations)
Costs and Benefits of Heterogeneity
• Key Distinction: Public Goods vs. Rival Goods
- Heterogeneous preferences and traits
negatively affect the provision of public goods which are non-rival in consumption and must be
shared by all within a jurisdiction whether one
likes them or not
- In contrast, diversity across individuals and
groups comes with benefits when considering
interactions about rival goods
Important Implications for the Relation
between Heterogeneity and Conflict
• Conflict over public goods is higher among
individuals and groups which are more
different from each other (higher
heterogeneity associated with more
conflict)
• Conflict over rival goods is higher among
individuals and groups that are more
similar to each other
Empirical Evidence
1) Conflict within borders
associated with more heterogeneity
• More heterogeneous societies more likely to engage in
civil and ethnic conflict (intrastate conflict), which tends
to be over control of public goods (government)
- Montalvo and Reynal-Queirol (2005) and
Esteban, Joan, Mayoral and Ray (2012):
ethnolinguistic polarization and ethnic conflict
- Desmet, Ortuño-Ortín and Wacziarg (2012):
linguistic cleavages and civil conflict
Arbatli, Ashraf and Galor (2013):
genetic diversity and civil conflict
Empirical Evidence
2) Conflict across borders is higher
among more similar societies
• International conflict more likely among states with
populations that are more closely related (at a smaller
genetic, linguistic, and religious distance), even after
controlling for numerous measures of geographic
distance and other factors that affect conflict, including
trade and democracy (Spolaore and Wacziarg, “War and
Relatedness,” 2012)
• Interpretation: interstate conflict mostly over rival and
excludable goods (such as territory and resources), and
hence more likely among states with populations that
share more similar preferences, and inherit such
preferences with variation from their ancestors.
Open questions
• How do deeper historical and cultural
variables affect current preferences over
public goods, policies, and institutions?
• How does heterogeneity of culture and
preferences respond endogenously to
changes in institutions and policies?
• These questions are part of a large and
growing literature on culture and economics
another commercial break
The Political Economy of Heterogeneous
Populations and National Borders
• In general, in political economy what matters
is not just aggregate costs and benefits, but
their distribution – heterogeneity costs are no
exception
• Heterogeneity of preferences has a stronger
effect on the number and size of nations when
voters directly decide national policies and
borders (effects of democratization)
Leviathans and Borders
• Rent-maximizing governments (Leviathans) who can
ignore heterogeneous preferences of some or most
of their subjects – and let “peripheral populations”
bear most of the heterogeneity costs - tend to form
larger, more centralized states.
• Leviathans concerned about centripetal effects of
heterogeneity costs may have an incentive to reduce
heterogeneity with policies of cultural and linguistic
homogenization, “nation-building,” etc. (Alesina and
Spolaore, 2003, chapter 5 – Alesina and Reich, 2013).
Voting Over Borders
• Voters “far from the central government” in
preferences/culture/identity bear the largest
share of heterogeneity costs and, if allowed to
vote, will break up an inefficiently large
country (Alesina and Spolaore, ch. 3)
• Voters may even break up an efficient country
in the absence of optimal tax and transfers
schemes, which can be unfeasible and/or
politically non credible (Alesina and Spolaore,
ch. 4; Spolaore, 2011).
Optimal Taxes and Transfers
to Keep Countries Together?
• Ideally, in order to keep a heterogeneous
country together, optimal taxes and transfers
should be preference-based: regions which
are politically and culturally farther from the
center should pay lower taxes (for given
income) and/or obtain higher transfers
• In reality, most tax-and-transfer schemes are
income-based, and increase the likelihood of a
breakup when the regions at the periphery
(such as Catalonia) are richer than average.
The other side of the trade-off:
Benefits of scale
• Provision of public goods with large
economies of scale - in particular:
defense and security
• Extent of the domestic market
Role of the International Economic
and Political Environment
The benefits of a large size depend on the
international economic and political
environment:
-)They are higher in a world of higher trade
barriers, higher international conflict, and weak
military alliances
-) They are lower in a world of lower trade
barriers (high economic integration), peaceful
international relations, and strong military
alliances
Economic Integration and Political Integration
substitutes or complements?
• The “functionalist” theory of integration is that economic
integration across independent countries should lead to political
integration among them (for a discussion: Spolaore, 2013)
• However, the example of the German customs union (Zollverein)
often mentioned in this respect is misleading, because the main
force behind commercial integration was political integration
pushed by Prussia’s military power (Gilpin, 2001).
• International cooperation among independent countries and
political integration (formation of a political union) can be viewed
as substitute ways to lower barriers to trade.
• If two regions can already agree to reduce their trade barriers
with each other while remaining independent, they are going to
obtain smaller additional gains from trade if they also form a
political union with a unified domestic market.
Size of Nations, International Openness,
and Economic Performance
• In an economically integrated world, countries can
be small and rich: of the six richest countries in the
world (in terms of GDP per capita, PPP-adjusted,
World Bank), the largest is Singapore, with 5.5
million inhabitants (smaller than Catalonia), and the
second largest is Norway, with 5 million people.
• And being large is no guarantee of a very high
income. Of the six largest countries in the world, the
second richest in terms of GDP per capita, after the
United States, is Brazil (a middle-income country).
Empirical evidence
•
•
•
•
For closed countries size matters a lot
For open countries size does not matter
For small countries, openness matters a lot
For large countries, openness matters much
less.
Conditional correlations
• Correlation between Size and Economic
Growth
– for closer countries:
– for open countries:
0.587 large
-0.089 negative
• Correlation between Openness and Economic
Growth
– for smaller countries:
– for larger countries
0.579 large
0.131 small
Economic integration and political
disintegration are mutually reinforcing
• As international economic integration
increases, the economic costs of being small
are reduced, and hence political disintegration
becomes less expensive
• In a world of smaller countries, international
openness is more important
• Economic integration and political
disintegration go hand in hand (Alesina and
Spolaore, 1997, 2003; Alesina, Spolaore and
Wacziarg, 2000, 2005; Spolaore and Wacziarg, 2006)
Figure 4. Scatterplot of the Detrended Number of Countries Plotted Against the Detrended Trade to GDP ratio (With Sub-Saharan
Africa - 1903–1992)
19041905
23
1908
1909
1906
1907
1910
1911
1992
1912
1913
Detrended # of Countries
1914
1931
1922 1921
1972
1918
1969 1971
1967
1970
1968
1926
1966
1928
1927
1965
1929
1930
19631964
1919
1979
1976
1915
1977
1978 1987
1986
19161988
1923
1989
1917
1973 1975
1924
1990
1925
1991
1982
1981
1980
1983
1984
1985
1920
1974
1932
1933
1934
1935
1962 1961
1936
1937
1938
1939
1940
1945
1944
1951
1952
1949
1953
1948
1954
1958
1947 1959
1955
1957
1942
1941
1943
-26
1950
1946
1956
1960
-23.08
18.84
Detrended Trade to GDP ratio
Implications for Catalonia
• Economic Benefits and Costs from Independence
• Political Economy of Secession:
– Voting over borders?
– Alternative: credible preference-based tax-and-transfer
system?
• Role of International Organizations (EU, WTO, NATO)
Key Questions
• Relation with Rest of Spain after
Independence
• Relation with Rest of Europe
• Relation with Rest of the World
Economic Consequences of
a Peaceful and Democratic Breakup
• Low barriers to trade and factor mobility with
rest of Spain after a peaceful breakup.
• Current estimates of “border effect” on trade,
based on historical experiences of longexisting borders (e.g., US/Canada or
UK/Ireland) tend to overestimate costs. In
reality, negative effects of breakup of existing
countries such as UK or Spain on established
trade patterns among their regions are likely
to be significantly smaller.
Defense and Security
• Low benefits from current union in terms of
defense and security, both from Spain’s and
Catalonia’s perspective, given the current
geopolitical situation, and hence small costs
from breakup.
• Important precondition: ability for an
independent Catalonia to engage in military
alliances (e.g., NATO), and to join
international organizations.
The Role of International
Organizations and the EU
• In general, international organizations should
welcome new member states if they result from the
peaceful and democratic breakup of existing
members.
• Existing members should not have veto power.
• This principle is especially important for the
European Union.
• This issue was at the center of the debate about
Scotland’s referendum, and plays a paramount role
when considering Catalonia’s future.
Catalonia, Europe, and the World
• Currently, very low trade barriers with the rest of
Europe and relatively low barriers with the rest of
the world.
• This situation unlikely to change in case of peaceful
breakup, provided that Catalonia is able to
participate in international organizations and
agreements (WTO, EU).
• If anything, an independent Catalonia’s international
openness likely to increase in the long run:
Catalonia’s smaller size and political and cultural
attitudes towards European integration likely to be
associated with stronger incentives to integrate.
Voting over Independence:
Scotland vs. Catalonia
• Key difference between Scotland and Catalonia:
Scotland’s income per capita close to UK average,
Scotland net recipient of income-based transfers.
• Historical differences in the formation of the current
institutional status quo: Scotland joined the UK in
1707 with an Act of Parliament, Catalonia lost its
institutional autonomy at the end of the Spanish war
of Succession in 1714.
• In sum, Rest of Spain has more to lose from
Catalonia’s breakup than UK from Scotland’s
breakup, while the institutional history of Spain is
less conducive to democratic decisions over borders.
In Conclusion
• Borders which are not supported by their
populations are not stable in the long run in a
democratic setting where heterogeneity of
preferences cannot be ignored or suppressed
by force.
• Two possible outcomes in a situation such as
that of Catalonia:
– Voting over borders
– Drastic renegotiation of taxes and transfers
towards a preference-based system