The economics of secession

Secession movements and their supporters often claim that separation will create an economic bonanza for the newly independent region. By contrast, opponents routinely predict that secession will lead to economic disaster. In this helpful article [HT: Alberto Mingardi] reviewing the relevant empirical evidence, Tim Sablik of the Federal Reserve Bank of Richmond concludes that the record is mixed:

Do seceding countries enjoy faster economic growth once untethered from the weight of their parents? There is limited evidence, in large part due to the rarity of these events. But according to the 2014 study by Rodríguez-Pose and Stermšek, there doesn't appear to be an "independence dividend." Even when regions in the former Yugoslavia were able to transition to independence fairly quickly and amicably, the authors found that those countries largely continued along the same growth path they had before becoming independent. Moreover, they still suffered significant economic losses immediately following their independence.

Likewise, it is unclear that downsizing necessarily boosts growth chances. In a 2006 National Bureau of Economic Research working paper, Andrew Rose of the University of California, Berkeley studied a panel of more than 200 countries over 40 years. He found no strong evidence of size affecting economic well-being. And while there are plenty of examples of successful small countries, such as Luxembourg, Norway, and Singapore, many economists argue that institutions matter more than size.

"It all depends," says [economist Angel] Ubide, "on what you do with your economy once you are out."

There are examples of highly successful secessions, such as the breakup of Czechoslovakia, the departure of the Baltic States from the Soviet Union, and Norway's separation from Sweden. But there are plenty of counterexamples, as well. Whether secession leads to prosperity depends greatly on the economic policies adopted by the new nation. Estonia and Slovakia are good examples of nations that prospered after secession by adopting vastly better economic policies than they had before. But improved economic policy is far from being an inevitable result of secession.

Moreover, as Sablik emphasizes, secession often has significant transition costs, as setting up a new government and dismantling the old regime is often an expensive process. The costs are likely to be particularly high if the preexisting state and its rulers try to resist the secession, especially if they do so by force. The worst potential consequence of an attempt at secession is not poor economic policy, but a bloody civil war like that which occurred in Nigeria. In addition to the obvious direct harm it causes, large-scale killing and destruction isn't exactly good for economic growth.

The mixed evidence on the economic effects of secession reinforces my view that secession movements should be judged on a case-by-case basis. It is a mistake to have a strong general predisposition in favor of secession, as some of my fellow libertarians do. But it is also a mistake to take a strong general stance against it, as do some Americans whose view of modern secession movements is heavily influenced by our own Civil War.

While the Confederacy was indeed horrendous, it does not follow that modern secession movements are the same way. Seceding for the purpose of perpetuating and expanding the evil institution of slavery is not the same thing as seceding for the purpose of promoting greater freedom, prosperity, and respect for human rights. While Confederate secession was a notorious example of the former, the American Revolution was an equally significant example of the latter. Ultimately, secession movements should be judged by their likely effects, both economic and political.