The Economics of State Fragmentation: Assessing the Economic Impact of Secession

Abstract

This paper provides empirical evidence that declaring independence significantly lowers per capita GDP based on a large panel of countries covering the period 1950-2013. To do so, we rely on a semi-parametric identification strategy that controls for the confounding effects of past GDP dynamics, anticipation effects, unobserved heterogeneity, model uncertainty and effect heterogeneity.Our baseline results indicate that declaring independence reduces per capita GDP by around 20% in the long run. We subsequently propose a novel triple-difference procedure to demonstrate the stability of these results. Another methodological novelty consists of the development of a two-step estimator to shed some light on the primary channels driving our results. We find robust evidence that the adverse effects of independence increase in the extent of surface area loss, pointing to the presence of economies of scale, but that they are mitigated when newly independent states liberalize their trade regime or use their new-found political autonomy to democratize.

The economics of secession: a review of legal, theoretical, and empirical aspects

“…It is interesting to conclude this section to get insight into the economic impact of independence. Reynaerts and Vanschoonbeek ( 2016 ) compare the economic growth trajectory of newly independent countries to the growth trajectory of a synthetic control group representing what would have happened in the post-independence period, had the secession not occurred. They show that independence generates long-term economic costs as the newly independent countries tend to experience a lower rate of economic growth than they would have experienced had they remained in the union.…”

“…For a region, breaking-up from large polities carries an economic cost which individuals may nevertheless be willing to bear if they value cultural heterogeneity very negatively. Reynaerts and Vanschoonbeek ( 2016 ) also show that the cost of independence increases with the size of the country (likely due to reduction in scale economies) but that this cost can be partly mitigated by heightened openness to trade of the new entity.…”

“…Smaller countries face a steeper cost of providing public goods, and their small internal markets do not allow to reach 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). Indeed, Reynaerts and Vanschoonbeek ( 2016 ) estimate that newly independent countries tend to grow more slowly than other comparable countries. The authors find, on average, that the cost of secession is equivalent to 20% of GDP per capita, and it remains strong in the long run.…”

The Economics of State Fragmentation: Assessing the Economic Impact of Secession - Addendum

“…Based on the literature review discussed in Reynaerts and Vanschoonbeek (2016), we are interested in estimating the following underlying economic model:…”

“…In this addendum, we expound upon Reynaerts and Vanschoonbeek (2016) and follow a parametric approach to identify the independence dividend. After outlining the general economic model, a next section explains the model selection procedure.…”