Monday, September 28, 2015

Catalonia’s Independence as seen by Economists

 Spain’s economy was supposed to be improving on its way to a successful recovery from the depth of the southern European crisis. Now the results of the regional election in Catalonia testify to a deep malaise still pervades the country. And many people wonder what happens and what Catalans want. 

A few economists provide some serious answers to that question.

Economic historian Joachim Voth has a public finance story that is purported to explain the claim for secession in Catalonia in “Want to know why Catalans want to leave the loving embrace of Spain?”

On his blog Vothspeak here.

Xavier Sala-i-Martin, at Columbia University, has also an interesting story and mentions other work by fellow economists on the question of potential viability of an independent Catalonia, here.

He concludes that:

“It has been argued that, as time goes by, the desirability of having smaller nations increases. And the economists who say so are not (I repeat, NOT) some crazy Catalan nationalists. They are Harvard University professors Alberto Alesina, and Robert Barro and Stanford University professor Romain Wacziarg. These economists have demonstrated that the 20th century trends of increasing trade and globalization explain empirically the increase in the number of countries that we have witnessed during the second half of the century. The reason? The growth in international trade and globalization makes it less desirable to belong to a larger political union like Spain. As globalization progresses, the need of one's industry to depend on a large local market is reduced. The gains from being small, on the other hand, remain the same. Hence, the optimal size of a country is reduced. Again, the scientists that say that are not radical catalan independentists, they are Italian, American, and French professors from Harvard and Stanford.”

A question of optimal organization.

I agree with all the above. But the main argument explaining the new independence movements gaining momentum in the past few years is that the information revolution that has swept the world since the mid 70s brought about an organizational revolution making smaller hierarchies more efficient than larger ones.

This is because market exchanges, an alternative to within-hierarchies exchanges, require a huge quantity of information while hierarchies economize of information, as Ronald Coase explained a long time ago (Coase, “The Nature of the Firm”, 1937).  It follows, as I demonstrated in my book “The Second Twentieth Century: The Decline of Hierarchies and the Future of Nations” (Grasset 2000, and Hoover Press 2006), that smaller firms and smaller nations are now more efficient than larger ones (the “Coase-Rybczinski” theorem). 
Globalization itself is an instance of expanding markets that results from cheaper information costs. Transport costs did diminish too, but not as much as information costs, so that the fall of the latter has been of an order of magnitude larger than the fall of the former.

By this argument, one can better understand the implications of the change for the relationship between regions, nations, and the European Union. A standard argument in favor of a Federal Europe has been that it would constitute a move towards a more decentralized political and economic structure than the current national economies and polities on the continent. Not so, because the building of a federal superstructure on top of the current national ones would amount to an increase in centralization.

And the same factor that boosts regionalist movements within existing nation-states, i.e. the growing abundance of information, plays against the building of a larger, continental, hierarchical structure such as the European Union. A federal, integrated Europe, would thus contradict the decentralization trend at work in the early XXIst century, and would contradict at the same time the secession and independence trend that affects several European nation-states, visible in Italy (the Northern League) and Belgium (between Flemish and Wallon regions) as well in Great Britain (the movement in favor of Scottish independence, and the Brexit movement as well).

Indeed we observe both that the European integrative process has been stalling in the last decades, while regionalist and secessionist movements have been on the rise. The recent economic crisis still evolving after seven years (2008-2015) has boosted criticism of established parties and existing national political-economic structures in various European nation-states as well as in the centralized and would-be hierarchical European Union, because they are now obsolete and inefficient in organizational terms.  

The bottom line is that fundamental economic and organizational factors underlie the Catalonian independence movement and it will intensify rather than disappear in the near future. A new democratic fragmentation of the European space now appears likely.