June 16, 2011 4:39 pm
Language is the most obvious difference between Catalonia and the rest of Spain, but there are many others. When the political temperature rises, these differences lead to calls for secession.
Discussions of the economics of secession mostly focus on Catalonia’s net fiscal transfers to the rest of Spain. But what secessionists tend to ignore are the economic ties that continue to bind Catalonia rather tightly to the rest of the country.
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One such tie is illustrated in the tables to the right, which rank foreign countries and other regions of Spain in proportion to their merchandise trade with Catalonia in 2007. The table of exports indicates that it sells more to the rest of Spain than to the rest of the world.
Catalonia’s largest export market, in fact, is the adjacent Spanish region of Aragón, even though its second largest market, France, also adjacent, has an economy more than 50 times larger than Aragón’s.
The second table shows that its imports tend to travel further than its exports. This pattern reflects Catalonia’s role as an import hub. In 2007, It ran an international trade deficit of €30bn ($43bn), which was largely offset by a €22bn trade surplus with the rest of Spain.
Catalonia imports products from around the world, adds value to them and sells them on to markets across the country.
What might happen to these numbers if the regional border were replaced by a national one? International economics suggests that when two companies are located on opposite sides of a national border, implying a notional physical distance of zero, trade between them falls by about two-thirds.
Analysis of more than 100 independence events since 1900 confirms a two-thirds drop in trade intensity, although how quickly this happens depends greatly on whether separation is hostile or amicable.
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In the “Velvet Divorce” between the Czech Republic and Slovakia, trade intensity dropped by three-quarters within five years of the separation, even though a customs union and a cross-border payment mechanism were put in place.
The two-thirds drop-off is also consistent with how much more intensely German federal states trade with one another than with other European Union countries – and this in the country with the lowest national border effects of any big EU member.
Applying such estimates to Catalonia in 2007, a reduction of a hypothetically independent Catalonia’s trade with the rest of Spain to one-third of its actual level would have caused the trade balance to widen from a deficit of 4 per cent of gross domestic product to a deficit of 13 per cent, and its GDP would have contracted by 7 per cent.
Although this is a very rough calculation that could be refined, for instance by accounting for the impact of reduced inter-regional exports on international imports, the magnitudes suggest that this is an effect that should be taken into account when weighing the pros and cons of secession.
A similar logic also applies to other parts of Europe subject to secessionist sentiments – Spain’s Basque region, northern Italy, Belgium and Scotland, for example.
While secession is most often raised as a solution to artificial postcolonial boundaries in non-European parts of the old world, it is worth adding that secession is likely to be even more of an economic problem where regional integration is not as advanced as in the EU. Subdividing African countries, many of which are already considered too small to be economically efficient, does not seem the best recipe for the development that the continent desperately needs.
The broader point is that despite claims that globalisation has rendered national borders irrelevant, they continue to matter economically as well as politically. Emphasis of this point is not meant to suggest that secession never makes sense, but to make it clear that it comes at a price – with one of the costs being diminished commerce with formerly domestic trade partners.
Aspiring independent nations may conclude this is a price worth paying, but should at least weigh such pros and cons explicitly. They might also want to remember that, over the past few millennia, human progress has been spurred by expanding rather than contracting circles of co-operation.
Pankaj Ghemawat is Anselmo Rubiralta professor of global strategy at Iese Business School and author of World 3.0: Global Prosperity and How to Achieve It (Harvard Business Review Press, 2011)