Spain, Split and Talk: Quantifying Regional Independence

Abstract:

The Spanish central and regional Catalan governments recently started a dialogue negotiating Catalan independence. A potential independence of Catalonia from Spain would impose a new border on Catalonia, which would have implications for its international trade. Traded goods between Catalonia and Spain would cross national borders. Catalan trade with EU countries might need to cross thicker non-EU borders, depending on whether or not Catalonia would become an EU member state. Within an international trade framework, this study quantifies the economic impact of a potential secession of Catalonia from Spain, taking into account the associated political uncertainty, for example regarding EU or WTO membership.

First, we investigate the border effect of international trade, that is, the observed difference in international trade compared to domestic trade within a country. We construct a novel dataset including trade flows between all 17 Spanish Autonomous Communities and 142 countries worldwide from 2001 to 2017. The data structure allows us to dissect trade borders into different levels (regional, national, EU). Estimating the different border effects using state-of-the-art gravity estimation methods reveals substantial heterogeneity in trade borders. Our results suggest that Catalonia has intensified its trade integration with the rest of the world to the detriment of trade with the other Spanish regions in the past years.

Second, we quantify the potential economic impact of a hypothetical Catalan secession using a general equilibrium analysis. Specifically, we use the structural gravity model of inter- and intra-national trade to investigate how Catalan secession and the implied change in its trade border would affect trade flows, consumer prices, producer prices, and welfare for Catalonia, for the remaining Spanish regions, as well as for the countries worldwide. In several counterfactual scenarios, we study the trade and welfare effects for the various political possibilities regarding, for instance, Catalan EU and WTO membership. Our findings suggest, on the one hand, increasing losses for Catalonia in scenarios of declining integration. On the other hand, the results indicate a decrease over time in Catalonia’s welfare loss associated with independence due to weaker integration with the remaining Spanish regions. The losses associated with Catalan independence for the remaining Spanish Autonomous Communities are lower and very similar in all scenarios, as well as over time. The other countries worldwide only face minimal welfare changes following Catalan independence.

A prevailing view among Catalan independence supporters is that the economically vibrant Catalonia contributes more to the Spanish state than it receives in return. To account for fiscal contributions, we add fiscal transfers between the Spanish Autonomous Communities into our model. This allows us to quantify the effects of Catalan independence net of the transfers in our counterfactual scenarios. In further extensions, we add social connectedness between the Spanish Autonomous Communities and countries worldwide to assess to what extent social ties affect trade flows. Further counterfactual scenarios quantify the impact of changes in these social ties following a hypothetical Catalan secession, in addition to changes in the Catalan border.