Breakup of Countries: No Economic Disaster- Becker

The largest and some smaller political parties in Catalonia, one of the richest parts of Spain, want to have a referendum in that region on whether they should secede from the rest of Spain. This is despite the fact that during past several decades the central government of Spain has ceded considerable fiscal and other independence to Catalonia and other regional governments. Those supporting a breakup argue, among other things, that Catalonia is being heavily taxed to help support poorer and less hardworking regions of Spain. The opposition to a breakup both within and outside of Catalonia claims that secession would be illegal under the Spanish constitution, and that it would destroy Spain’s culture.

 Spain is not the only country that is experiencing pressure either to breakup, or to become much more decentralized politically. Major parties in Scotland want independence from the rest of the United Kingdom. As a result of this pressure, Scotland and other regions of the UK have received much more autonomy than they had in the past. The independence movement has quieted down in Quebec, but only after Canada established French on an equal footing with English, and after the province of Quebec received other special treatment from the rest of Canada.

 The Western and Russian-influenced part of the small country of Georgia is essentially independent in most respects from the rest of Georgia, while Georgia only became independent after the breakup of the Soviet Union into many independent countries. At the close of the nineteenth Taiwan, which had long been part of China, became a colony of Japan until World War II ended. Taiwan was returned to China at that time, but became an independent republic in 1949. China is pressing hard for Taiwan to once again become a province of China, probably with a large degree of autonomy. However, the great majority of Taiwanese prefer the status quo, in part because per capita incomes are so much higher in Taiwan than in Mainland China.

 Although emotions usually overflow on the subject of secession and forcible integration, I will not try to evaluate the significance of nationalistic feelings in a region or country. I will instead focus on the economic consequences of a country’s breakup into smaller and largely independent countries. Often stressed is that since larger countries have bigger domestic markets, companies in larger countries can utilize economies of scale in production.

 

The movement toward free trade agreements and globalization during the past 60 years has enormously reduced the economic advantages of having a larger domestic market to sell goods ands services. Small countries can sell their goods to other countries, both large and small, almost as easily as large countries can sell in their own domestic markets. For example, during the past 30 years the small country of Chile has had the fastest growing economy of Latin America, larger than Brazil and Mexico, the two largest nations of this region. This would not have been possible without the access of Chilean companies to markets in other countries, both in South America and elsewhere. As a result, Chile now exports around 40% of its GDP, compared to a ratio of exports to GDP in the United States of about 13%.

 To many in Czechoslovakia, the economic future seemed dim when Czechoslovakia voluntarily split in 1993 into the Czech Republic and the Republic of Slovakia. Similarly, emotions were strong after a destructive war forced Yugoslavia to split into six separate countries. Yet these separate nations are generally doing at least as well economically as did Czechoslovakia and Yugoslavia.

 Small countries can do well with small domestic markets by taking advantage of a globalized economy by selling large fractions of its production to consumers and companies in other countries. That is why smaller countries usually export a considerably larger fraction of its production, and import a much bigger share of its consumption, than do larger countries. Size of country was much more important in the past when many countries had high tariffs, and transportation costs were much more important.

 Political interest groups tend to be less able in smaller countries in distorting political decision in their favor. This is partly because smaller countries are more homogeneous, so it is harder for one group to exploit another group since the groups are similar. In addition, since smaller nations have less monopoly power in world markets, it is less efficent for them to subsidize domestic companies in order to give these companies an advantage over imports. The greater profits to domestic companies from these subsidies come at the expense of much larger declines in consumer well being.

 The growth in the competitiveness of small countries on the global market is in good part responsible at a deeper level for the remarkable growth in the number of countries since 1950 from a little over 100 to almost 200 countries now. And the number of independent countries is still growing.

 

 

 

Comments

[Christopher Graves]

I love Professor Becker's analysis of the trend to break-up states containing more than one naturally formed nation. There are also other advantages to smaller, more homogeneous states. One is the amplifying of the principle of subsidiarity, so that decisions are made with more immediate feedback loops and by people who are more highly motivated to act since they are more directly involved in the social, political, and economic web of relations in a community or region. These actors can also take advantage of the implicit information transmitted by custom and habit indigenous to a particular region that structure their decisions.

Greater homogeneity and smaller populations foster greater cooperation within a political entity reducing transaction costs of all types of interactions, especially collective decision-making. Democracy works best with small homogeneous populations as a number of political theorists have observed.

De-centralization also fosters greater diversity that allows a better fit among people, culture, climate, history, geography and other factors so that folkways and their attendant political, legal, economic structures can evolve more spontaneously and effectively.

[Neilehat]

When it comes to Scale be it political, economic, social, cultural, there is a phenomenon at work known as Synergism. Or as it is known in the economic world as "Economies of Scale". Do you really believe that the likes of the State of Mississippi could have developed the Space Program, Interstate Highway System, the National Electric Grid, etc., etc. Or managed to stop the Nazi's dead in their tracks of world domination. Or contained the Soviets behind the Iron Curtain, Or etc., etc.

I'll stick with Synergism and Economies of Scale any day...

[Terry Bennett]

The two posts above aptly highlight the tradeoffs between enlarging and reducing the size of countries. In the peculiar case of the U.S. 200 years ago, the idea of a "federation" was precisely an attempt to achieve the available strengths of union without acquiring the inevitable weaknesses. Over time, the state of our union has become stronger and the strengths more apparent, and regional bickering in our time doesn't really amount to much. (Texas isn't holding anything.)

If Jefferson had not stuck his neck out on the Louisiana Purchase, we'd be sitting across a river from another country twice our size. One could speculate that the Mississippi would have ended up more analogous to the St. Lawrence than to the Rio Grande, but I for one am glad Jefferson did not take that risk.

Christopher is right, that if people don't like each other, they probably aren't going to like living together. The real split comes when people don't respect each other. This is why communism doesn't scale. People within the phenotypical communal unit, the family, have strong sympathies for one another, and freely give of their substance when a brother or cousin is in need; a Germanic Pennsylvania steel worker on the other hand might not be so magnanimous about seeing his taxes accrue to the benefit of illegals in the southwest.

In the case of the U.S., the benefits of sheer size have far outweighed the disadvantages. We have enough room that whole enclaves of people who think differently from others can live out their lives without butting heads. A citizen of the south never need visit the northwest and confront the eccentricities of its denizens, nor vice versa. On the whole, I'm with 'hat - we're better off big.

[Christopher Graves]

Well, Terry, I did not intend my comments above to apply strictly to the United States. I see the trend to break apart states that attempt to fuse different nations within them as salutary. I am encouraged by Catalonia's efforts to gain independence as I am independence movements in Scotland and Wales. It is possible that much of the upheaval we are witnessing in the Middle East might sort itself out as new nations are formed that better reflect the natural lay of the land and the peoples there.

Notice that I did not say that people have to dislike or disrespect one another to want to establish and maintain distinctive ways of life and all that goes with those differences. I love the differences and respect those of various cultures. I do dislike very intensely monoculture and its "cooler" cousin, cosmopolitanism.

Historian David Hackett Fischer makes an important distinction between 'liberty' and 'freedom.' Fischer notes that "the words themselves had differing origins: the Latinate 'liberty' implied separation and independence. The root meaning of 'freedom' (akin to 'friend') connoted attachment: the rights of belonging in a community of freepeople." People should have the freedom to form their own communities without regulation from a distant central power. If communities and regions can form loose confederations that leave most decision making at the local or regional level, that is fine with me. The Swiss have such an arrangement as did the U.S. before the Civil War. But there are limits to the size and scope of centralized power that is still consistent with the freedom of communities and regions to maintain their autonomy. Frankly, I do see the Federal government in the United States during the past century as threatening to this freedom.

Colin Woodard has an interesting account of the various nations that make up the United States in his *American Nations: A History of the Eleven Rival Regional Cultures of North America.* These ways of life and the governing philosophy embedded within each are inconsistent with one other even as they suit each nation. If the centralizing and homogenizing trends not only of the Federal government but also of corporations keeps increasing, I see secession as an option. But I am certainly open to returning to a more Jeffersonian approach to government that we saw earlier in our history that emphasizes the freedom to reflect our differences at the community and state level.

[Terry Bennett]

Christopher, thank you for citing Woodard. I had seen a prerelease review of the book and looked forward to reading it but then I couldn't remember the name of it. I've just placed my order and will soon be as informed and erudite as you. As for substance, I do not think we are very far apart (although I will be very surprised if your secessionist movement goes anywhere). Remind me about this in a few months.

[Abrahamus]

This comment may cause some controversy, but it must be pointed out that in 1949 it was mainland China, under communist rule, that broke away from the Republic of China. Strictly speaking, the People's Republic of China government in Beijing is a separatist regime. Beijing's relentless effort to "unite" Taiwan (under Republic of China rule since 1945) with mainland China (under communist rule since 1949) is a masked effort to crush any rival challenging its claim as the sole representative of whole China. Call it paranoia or what, a regime founded on violence and force ought to be paranoid.