>Independence would not be so harmful after all

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Financial Times

Professor Pankaj Ghemawat presents a rather bleak vision of what might happen to the Catalan economy after a secession from Spain (“The ties that bind Catalonia”, June 17th, 2011). A 7 per cent reduction of GDP is not a minor bruise after all. Nevertheless, he is not giving the whole picture because, although he mentions Catalonia’s net fiscal transfers to the rest of Spain, he fails to provide the most relevant detail about them: they stand somewhere between 8,7 and 9,8 per cent of Catalan GDP (these are the latest estimates for 2005, coming from the Spanish and the Catalan government respectively). Apart from this first consideration, we would like to make three different additional points that might show a rather less pessimistic picture of the economy of an independent Catalonia.

First, Professor Ghemawat makes the hypothesis that secession would cause a two thirds drop in trade intensity between Catalonia and the rest of Spain. This figure is based, as far as we know, on results coming from research on the effects of independence on post-colonial trade. However, the data used in this research comes mainly from the dismantling of European colonial empires throughout the XXth century and the dissolution of the Soviet Union in 1991. It is hard to draw any parallels between the economic, political, and social landscape in Catalonia today and that of African and Asian colonies fifty or sixty years ago or former Soviet republics in the 90’s, so this figure risks being a misrepresentation of the true reduction in trade intensity and should be taken with great caution.

Second, our own research on the economic consequences of secession focuses on the impact of a hypothetical trade boycott in the Spanish markets against Catalan products (and vice versa). We argue that this would be the main potential cause of a reduction of trade between Catalonia and the rest of Spain. Our conclusions indicate that the level of boycott needed to cause a drop of GDP close to 7 per cent is much higher than what could be reasonably expected, given previous similar episodes of boycotts due to political reasons both in Catalonia and elsewhere.

Third, and most important, the potential negative consequences of the reduction of Catalonia’s trade with Spain on Catalan GDP should be considered at worst an upper bound of what would occur if the Catalan economy were so inflexible that did not allow for any degree of trade diversion after the secession (by the way, this point is also applicable to our own research). Any reasonable macroeconomic model will tell you that output is determined in the medium run by factors such as the availability of labour, human and physical capital and public infrastructures, innovation potential of firms, entrepreneurial spirit, etc. Thus, it seems much more important for a secessionist country to make sure these growth factors will continue in place, rather than keeping the commercial ties with its former partners. Given the relationship between some of these factors and the level of public expenditures (e.g. public infrastructures and human capital), there is little doubt that the elimination of a net fiscal transfer to the rest of Spain of more or less 9 per cent of GDP would increase not only Catalonia’s income in the short run, but its growth prospects in the medium run.

Xavier Cuadras-Morató and Modest Guinjoan are Associate Professor and Lecturer at Universitat Pompeu Fabra (Barcelona) and authors of the book “Sense Espanya. Balanç econòmic de la independència”, 2011 (Ed. Pòrtic).Pòrtic).

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