INDEPENDENCE OF CATALONIA: ECONOMIC VIABILITY

Essay published permanently at http://webs.racocatala.cat/cat1714/d/salamartin2.pdf

 Authors: Xavier Sala-i-Martin, Columbia University and UPF

* THIS SCRIPT WAS PREPARED FOR A CONFERENCE AT THE ÒMNIUM CULTURAL *

<<Once upon a time, there was a country with a population of 6 million, with a territory of 40,000 square kilometres. The country had as next door neighbours, two big European powers, traditionally colonists and their languages were a constant threat to the existence of the local language. The auto-governed population was being forced to speak and use two (or more) languages. The capita growth of this country was high, one of the highest of the world, a complete economic success.

Is this science fiction or reality? When we speak about the independence of Catalonia, the first question that a non-economist person would ask me (being an economist myself) is “if Catalonia could be viable” to sustain itself as an independent state. But if Catalonia would not be viable as an independent economy, the description on the first paragraph would be all science fiction and therefore it would not exist. However, the country that I have described above is in fact a real country, that exists and is independent: I am talking about Switzerland. Switzerland has a 6 million population and approximately 40,000 square kilometres. Switzerland has borders with Germany and France, two European powers, traditionally colonists and the local language, the Swiss-German (which is  different to German) is being threatened by the French and German languages (and Italian as well, which is spoken by a very small minority in the south of the country).

Switzerland is one of the richest countries in the world and is not a UE member

So, before we even start to talk, you can see that  all the arguments given against the viability of Catalonia as an independent state are basically erroneous: if Switzerland is viable (and not only it is viable, but it is also the second richest country of the world) why wouldn’t Catalonia be feasible too when our country is not up in a range of mountains, has key sea ports and it has easier accesses to the rest of the world? In this script, I will try to analyze the arguments that the anti-independents use to say that Catalonia is not economically viable as an independent state.

The most common argument is “Catalonia is too small to be able to become an independent state”. The truth is that no serious economist can agree with this statement. There is no economic theory that says that a country must be of a minimum size to be viable or that bigger countries in size are more viable than small ones. If this theory exists, it would be totally wrong because, in the world we live in, the expenditure per capita or the economic growth rate of a country are not related to the size of its territory (measured, for example, by area and/or population).

It is simply false that larger countries are more economically successful. If not, then why do we such big countries like China, India and Russia generate so much poverty? And how come we find among the richest countries of the world, little states like Belgium, Holland and Switzerland?

Another argument against independence is that “a country can not prosper without natural resources like land, gas or petroleum, and Catalonia doesn’t have any”.  This theory is completely false too. For example, Japan or the “miraculous tigers” from East Asia (Honk Kong, Taiwan, South Korea and Singapore) are not producers of petroleum or  natural gas, and the fertile land to which they have access to, is very limited, (actually, both Honk Kong and Singapore are one city countries!). Saying this, the economic growth achieved by these countries during the last decades has been remarkable. Furthermore, if we apply this argument to our text, it is true that Catalonia, even though it has a great quantity of fertile land, does not produce some of those natural resources… but neither does Spain. So, independence would not bring any loss at this respect.

On the other hand, there are economic arguments that lead to conclude that to possess natural resources can be something bad for a good long-term growth (the economists named this phenomenon “Dutch Disease”). The argument can be summarized this way: when a country has a lot of natural resources (for example, petroleum) it tends to focus a great quantity of its human and technological resources to exploit that particular area of raw materials and it tends to forget other important business scopes. In particular, it tends to forget the innovative and technological scopes, which generate the required technological changes that guarantee long-term growth.  So, these countries can become specialists in the production of petroleum and other raw materials, but they do not focus on educating their population properly or adopting modern technologies; so they finish up by being poorer than they would have been without those natural resources. Typical examples of this type of countries that have suffered from this “Dutch Disease” are Mexico and especially Venezuela, they have become poorer after discovering rich petroleum banks.

This one is a very attractive argument and we have shown some examples that support this theory. However, the truth is that is when we analyze all the countries in the world at the same time (instead of just looking to Mexico and Venezuela) we will realize that there is no relationship between having natural resources and producing sustainable economic growth (as on the other side we can find examples of rich African economies, like South Africa and Botswana, both of them rich in natural resources, specifically in gold and diamonds).

Barcelona port at night


Therefore, it is not true that having natural resources would be indispensable for economical growth, though it cannot be said that it could be necessarily bad. The usage of natural resources, obviously, is a necessity if you want to gain economic growth. And, if one doesn’t have them, these can be obtained by other methods. The most logical way to do this is with international trade, and not by obliging a region into political submission. And even more, being a small country is as advantage, because it is an incentive for the government to do business abroad, for generating competition and for improving in general, because nowadays protectionism no longer is an option. Then we could say logically that a Catalan state, that would be open to establish business with all the countries of the world (including Spain) would have never had such problems as Spain has nowadays with the famous “artilleros”, an organization created during the alienated Spain from Franco era.

A third argument against the economic viability of Catalonia is: “Isn’t it enough to generate competition with Paris, London, New York or Hong Kong, that now you also want to compete with Madrid?” And this argument has become stronger with the financial crisis that some (not all) of the countries have been through recently. However, this statement is totally wrong as well. Catalan businesses are already direct competitors to Spanish companies, disregarding we may or may not be the same political unit. The interstate business rivalries within the Iberian Peninsula are as big as with international companies. Which businesses are direct competitors to Costa Brava hotels? (the reader should wonder..) They are competitors with Italian, Moroccan and Greek hotels, but the strongest competitor are Spanish hotels in the south of Spain (Costa del Sol) and even the hotels from the coast of Tarragona (Costa Dorada) which are located within Catalan territory. So, the independence of Catalonia would not bring a very substantial increase in regards to competition to the one we already face. And if, there was such an increase of business rivalries, it would be just even better;  as an economist and as a user, I should always celebrate the increase of business competition, since it usually provides better quality and service levels as well as lower prices.

Wines and Cavas of Catalonia

Another argument against the economic independence of Catalonia is that “to leave Spain would be an economic suicide because Spain is the biggest market for the Catalan businesses”. But the question is: Why? Why would the Spanish people still want to buy our cava and spend their summer holidays at Costa Brava? Because they love Catalonia as a region of Spain? Or because given the price and quality of our products that is the best they can find?

Obviously, economically wise, the latter is the right answer. So if the independence of Catalonia would not affect the prices and quality we are already offering now to the world, it means the Catalan markets would not lose anything by creating an independent state. Nevertheless, it is a fact that the most important abroad market for a country is traditionally its neighbour countries: the most important and biggest market for Mexico is the United States of America; for Taiwan, it is China;  and for France, it is Germany. But could the reader think now because of this that it would be better for Mexico to become the 51st state of the United States of America?

There are some people that claim “the dissolution of countries at the present time is against the current European trend to create one common currency, a unique fiscal system, one military unit and one unique political unit. To speak about separatism and independence at the end of the 20th century is old-fashioned and out of tune”. I think that this quote is not acceptable for several reasons. First, it is not true that there is a trend at the end of the 20th century to create a great super government like the European one.  In fact, in 1946 there were 74 countries in the world and in 1995 there were 192. So, if there is a trend in the world it is not the reduction of the number of countries but it is exactly the opposite; therefore the evidence in which this argument is based is just simply false. Secondly, the theory is based on the assumption that one unique European political and economic unit is beneficial for all the states (and, that to go against the current trend is bad). However,  I personally have serious doubts about the wishful European project, based on the creation of one bureaucratic super-structure that will end up sinking all European economies. And, third,  it is not necessary to venture into economic cooperation with the rest of the European countries as a region from Spain. It can be perfectly done from Catalonia as an independent state.

 

Finally, the most feared argument is “to obtain the independence, we need a war and this would be more expensive than any other economic benefit that you could get out of becoming independent. Cannot you see what happened in Bosnia with the disintegration of the old Yugoslavia?”.  This is half true and half false. It’s true that the independence is not wanted if the price we have to pay to obtain it is a war and the loss of human lives. But what it is not true is that the only way of obtaining independence would be through war. Historically there has been two ways about drawing borders: war and monarchy marriages. The latter has not fully disappeared yet, but monarchy marriages are not used with a political goal. The war, on the contrary, is still being practiced. But we find ourselves in the 21st century and we should need to have faith in the freedom of a civilized democracy. Furthermore, the history of the 20th century can bring some optimism in giving us many examples of countries like Slovakia, Estonia, Lithuania and many more old Soviet Union Republics that have obtained their independence with a very peaceful and democratic process.

 Economic progress is gained by a creative population willing to work; a legal system that guarantees investors property rights, incentives to companies to innovate and adopt new technologies; an educational system which helps the population to be more  productive; and a good government who encourages internal and external trade and sustains fiscal and monetary stability, never sinking a productive economy with excessive taxes, bureaucracy or intolerable corruption.

From this point of view, becoming independent could be positive if the supposed independent Catalan government and institutions would proof their capability to fulfil the above mentioned points; or negative if these could actually perform worse than nowadays with the conditions provided from the Spanish administration to Catalonia as an autonomous community of Spain. Today we still do not know how an independent Catalan government would perform. What we know for certain is what has been done up to now and how the Spanish government is currently performing economically. And the truth is that if we put the cards on the table, the Spanish people are not doing good at all.

Iceland became independent during the 20th Century


The history of other nations that obtained their sovereignty and gained economical growth recently shows that the independence of Catalonia absolutely viable. Even some late studies show that the increase of international trade is linked to economic viability of new countries. Thus international trade is a good substitute as tool for enlarging business abroad;  and as the international trade keeps growing, it is less necessary to have a large country capable to absorb the exceeding products, as international trade would absorb it and create even more demand. In an article written at Harvard University by professors Alesina and Wackier have confirmed this is a real trend during the 2nd halft of the 20th century; which means that, the independence of Catalonia is not only viable but is positively possible and feasible.>>

Notes from the author:

  1. With what I have written, I have tried to leave aside the nationalism and cultural arguments to exclusively focus in the economic viability of a Catalan state. I am not saying that the independence would be a wish come true (this would be a different topic) or that there are non-economic arguments that need to be discussed as well. What I am saying is that there should not be any doubts about the independence being completely achievable and feasible from an economic point of view.
  2. An important economic argument that needs to be used when you weigh the costs and benefits of the independence of Catalonia is the fiscal deficit. A recent study from “Institut d’Estudis Autonomics” estimates that the Catalan fiscal deficit in respect to Spain during the 90’s has been of approximately 900,000 millions of pesetas-equivalent to 5.400 million Euros- (even though this has decreased a little nowadays, the amount continues to be shocking). What does this mean? Well, Catalans pay certain taxes to Madrid. From these taxes, a small percentage is returned to Catalonia for public expenses, social benefits, etc. Another quantity, though, stays in Madrid and never comes back. This the main cause of the Catalan fiscal deficit; and if we add up all this money for a decade -during the 90’s-, it gets to the 5.400 million Euros. To understand how much 5.400 million Euros means to the Catalan population, you must divide this amount by the 6 million people living in Catalonia and the total would be around 900 million Euros per person for a decade of taxes. This means that a typical Catalan family with 4 members (father, mother and 2 children) paid every year during the 90’s 3.600 Euros taxes to Madrid, which were never returned to Catalan territory at all. Can the readers please ask themselves what would they do with 3600 extra Euros every year? : Go to Disney World (the one in Florida, not the one in Paris) all the family every summer? Buy a bigger house (3600 Euros every year are 300 Euros extra every month that can be used to ask for a bigger loan for a bigger house)? Or to buy a car worth 7200 Euros every two years? Or to buy a BMW every five years? A lot of things can be done with 3600 Euros every year, can’t they? Well, forget it because this money is never coming back to Catalonia… and this is a very important economic cost Catalans pay every year for being under the Spanish administration. The main benefit is of all this sham, or so they tell us, is the inter-regional solidarity. But one thing is solidarity and another is to steal your wallet from your pocket.

				

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