The economics of secession

Brexit, the Scottish referendum and the Catalan referendum have all raised questions over the motivations behind secession and the processes of achieving it. To explore these questions from an economic perspective, an article published today in the Swiss Journal of Economics and Statistics reviews the legal, theoretical, and empirical aspects of secessions. Here the lead author of the study, Thierry Madiès, tells us more.

Neither the binding secession referendum in Scotland held on 18 September 2014, nor the unilateral declaration of independence in Catalonia on 27 October 2017 created a new state. The former gave victory to the ‘No’; the latter led to the destitution of the Catalan government and to a legal and political imbroglio after the regional elections held on 21 December 2017.

Despite their differences, both events remind us that states are not immutable. Separatist forces are still present in certain EU member states and beyond. Secessionism is obviously not only a threat to European states, but is also a concern in a great number of developing and ethnically fragmented countries, where it takes often a violent form.

Legally speaking, the international law promotes two seemingly contradicting rights regarding secession.

Legally speaking, the international law promotes two seemingly contradicting rights regarding secession: A right of self-determination and a principle of states’ territorial integrity. In some occasions, the international community considered that the first principle dominated the second and accepted separations as a legitimate outcome. A history of discriminations and free and fair binding self-determination referendums seem to be a necessary – but not sufficient – condition for the international community to recognize newly created states.

The cost of secession

Widespread secessionism exists even in the face of high uncertainty about the economic impact of secessions. In fact, secessions may well be economically costly. Smaller countries face a steeper cost of providing public goods and their small internal markets do not allow reaching maximum efficiency in the production of private goods except if they enjoy the proximity to a large integrated market such as the European single market.

A recent study by Reynaerts and Vanschoonbeek estimates that newly independent countries tend to grow more slowly than other comparable countries. The authors also find that, on average, the cost of secession is equivalent to 20% of GDP per capita, and it remains strong in the long-run.

However, the fact that so many regions seek independence despite the economic costs associated with secession suggests that there are strong non-economic benefits of secession. Economic theory assumes that the greater homogeneity (geographically, culturally, linguistically and otherwise) that characterizes smaller countries explains the importance of non-economic benefits. Regions that are geographically and culturally distant from the center may not receive much public goods. They may also have sharply distinct preferences on the type of public goods they want.

Economists predict secessions when economies of scale in the provision of public goods are relatively unimportant and the cost of population heterogeneity is high. Small economies of scale mean that newly formed countries will not suffer much from their smaller size when providing public goods. High costs of population heterogeneity mean that newly independent countries will benefit from a greater social cohesion. Secessionist claims are also predicted to be more likely from richer-than-average regions, which subsidize the rest of the country.

Regions that have the least to lose from breaking-up from a union, and which are most likely to succeed economically on their own, are the most likely to express secessionist tendencies.

The patterns of secessionist demands analyzed in the empirical literature seem largely consistent with this economic reasoning. Regions that have the least to lose from breaking-up from a union, and which are most likely to succeed economically on their own, are the most likely to express secessionist tendencies. However, the desire of self-rule cannot be explained solely by a narrow economic calculus. In fact, self-rule may offer intrinsic value to individuals, especially for members of culturally distinct groups.

Decentralization

Both political and fiscal decentralization have been widely used by central governments as a means to accommodate the claim of geographically concentrated groups and minorities for self-determination, with mixed results. This may be explained by three main reasons: The first one is that decentralization tends to be used by central governments to appease separatists, hence a seemingly positive relationship between centrifugal forces and decentralization. The second one is that sub-national groups or entities that are granted greater autonomy might use the available resources in their hands to foster separatist tendencies. The third reason is that decentralization may have different meanings for central (federal) governments and subnational jurisdictions.

The aim of this paper is to present a survey on secessions covering both legal issues and the main contributions of the economic literature, with a particular focus on the question as to whether decentralization fosters or hinders the desire to secede. More specifically, the paper is organized as following. The first part deals with both international and EU law regarding the secession phenomenon. The second part presents the main contributions of the economic theory of secessions. The third part presents empirical evidence that confirms the main determinants of secessions identified by the theory. A more specific focus is put on ethnic conflicts and decentralization.

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