Efficiency and Stability of National Borders Enrico Spolaore Tufts University NBER and CESIfo

1
Efficiency and Stabilityof National
BordersEnrico SpolaoreTufts UniversityNBER
and CESIfo

• Lecture prepared for the opening of a new
• Center for Regional Economic Studies
• Katholieke Universiteit Leuven
• October 15, 2008

2
Introduction

• Since 1990 over twenty new sovereign states have
  been created through secessions and break up of
  countries
• Today there are 193 internationally recognized
  sovereign states in the world, up from 74 in 1945
  
• (latest UN member Montenegro in 2006)
• Between 1985 and 1999 secessionist movements were
  present in at least 52 countries (Gurr, 2000)
• At the same time, decentralization has become
  increasingly popular for example, 63 out of 75
  developing countries with pop. greater than 5
  million claimed to be transferring fiscal
  authority from central to local governments
  during the 1990s (Dillinger, 1994)

3
(No Transcript)
4
Questions

• What explains existing national borders and their
  changes? (stability of national borders)
• Are national borders and their changes optimal
  or suboptimal? (efficiency of national borders)
• How are the efficiency and stability of
  borders related to economic and political
  variables such as
• international integration
• inter-regional redistribution
• decentralization and federalism

5
Rest of this talk

• An overview of the political economy of national
  borders
• Costs and benefits of political integration the
  basic trade-off between heterogeneity and
  economies of scale
• Stability and optimality of borders in different
  political and economic regimes
• How to measure cultural/historical diversity
  across populations and its implications
• Inter-regional redistribution as a double-edged
  sword
• Inter-regional transfers as a way to keep
  countries together
• Inter-regional redistribution as a reason for
  breakup
• Does decentralization of political power to
  sub-national governments promote country
  stability?
• Arguments for and against stability
• What do the data say?

6
Size of nations addressed by political
philosophers

• Philosophers interested in a normative question
  (what is the optimal size of nations?)
• Plato calculated the optimal size of a polity
  5,040 heads of family
• Aristotle experience has shown that it is
  difficult, if not impossible, for a populous
  state to be run by good laws
• Montesquieu In a large republic, the common
  good is sacrificed to a thousand considerations
  and is subordinated to exceptions it is
  vulnerable to whims and accidents.  In a small
  republic, the public good is more strongly felt,
  better known, and closer to each citizen
• Madison (Federalist 10) benefits of a large size
  (with constraints to avoid tyranny)

7
Political Economy of National Borders

• Traditionally economists have taken national
  borders themselves as given (exogenous)
• However, borders are not part of the geographical
  landscape, but endogenous human-made
  institutions, and can be addressed with the tools
  of modern political economics (costs and
  benefits, trade-offs,, efficient and inefficient
  equilibria, etc.)

8
commercial break
9
Selective references

• Alesina, A. and Spolaore, E. 1997. On the number
  and size of nations .Quarterly Journal of
  Economics, 112, 102756.
• Alesina, A. and Spolaore, E. 2005. War, peace,
  and the size of countries. Journal of Public
  Economics, 89, 1333-54.
• Alesina, A. and Spolaore, E. 2006. Conflict,
  defense spending, and the number of nations.
  European Economic Review,
• Alesina, A., Spolaore, E. and Wacziarg, R. 2000.
  Economic integration and political
  disintegration. American Economic Review 90,
  127696.
• Bolton, P. and Roland, G. 1997. The breakups of
  nations a political economy analysis. Quarterly
  Journal of Economics 112, 105789.
• Bordignon, M. and Brusco, S. 2001. Optimal
  secession rules. European Economic Review 45,
  181134.
• Goyal, S. and Staal, K. 2003. The political
  economy of regionalism. European Economic Review,
  48, 563-93.
• Le Breton, M. and Weber, S. 2003. The art of
  making everybody happy how to prevent a
  secession? IMF Staff Papers 50, 403-35.
• Spolaore, E. 2004. Economic integration,
  international conflict and political unions.
  Rivista di Politica Economica, 94, 3-41.
• Spolaore, E. 2005. The political economy of
  national borders. in Oxford Handbook of Political
  Economy, ed. B. Weingast and D. Wittman. Oxford
  Oxford University Press.

10
An Important Trade-Off

• The equilibrium size of nations and the
  stability of political borders depend on the
  trade off between the benefits from a larger size
  (economies of scale) and the political costs of
  heterogeneity (diverse preferences for public
  policies in a larger population)

11
Benefits of Scale

• Economies of scale in the provision of public
  goods
• Defense and security
• Market size (when there are barriers to
  international trade)
• Insurance against economic shocks or natural
  calamities
• Internalization of externalities(e.g.,
  pollution)

12
Heterogeneity Costs

• The costs of heterogeneity emerge because, as
  size increases, more and more individuals have to
  share common policies and common public goods.
• Average distance from public policy increases
  with size and diversity.

13
How to measure heterogeneity?

• Language
• Religion
• Cultural/historical distance
• Recent research
• Spolaore and Wacziarg, The Diffusion of
  Development, forthcoming, Quarterly Journal of
  Economics, May 2009
• Desmet, Le Breton, Ortuño Ortín , Weber, Nation
  Formation and Genetic Diversity, CEPR Working
  paper

14
Equilibrium Borders

• Three types of equilibria
• 1) Nations ruled by Leviathans (rent-maximizing
  governments)
• 2) Democratic equilibria (people vote over
  policies and borders)
• 3) Borders determined by explicit civil and/or
  international conflicts (wars)

15
The Leviathan EquilibriumLeviathans prefer
large nations because they want to maximize the
rents (taxes) extracted by their populations,
with the minimum amount of public good
provision.In a non-democratic world of
Leviathans, countries are larger than
optimalLeviathans interested in eliminating
regional autonomy.
16
Democratic EquilibriumOne person one vote
borders decided by majority voting and by
unilateral secessions.Domestic policy decided
by majority rule.Democratization leads to
secessions
17
Optimality of EquilibriumDoes the democratic
equilibrium reproduce the optimal configuration
of borders?Efficient up to a point, when
compared to Leviathan equilibrium (breaking up
large dictatorial empires is efficient). But
voting on borders - in the absence of efficient
side-payments - can lead to inefficient
fragmentation that is, voters may reject
efficient political unions.
18

• In actual referenda over European integration,
  majorities of voters have often rejected
  proposals for further political unification.
• Examples recent (2008) vote in Ireland, votes in
  France, the Netherlands, Denmark, Norway (twice),
  etc.

19
Even in the U.S. issues about efficiency and
stability

• The United States is almost certainly too big to
  be a meaningful democracy Sooner or later a
  profound decentralization of the federal system
  may be all but inevitable. A recent study by
  economists Alberto Alesina of Harvard and Enrico
  Spolaore of Tufts demonstrates that the bigger
  the nation, the harder it becomes for the
  government to meet the needs of its dispersed
  populations. Regions that dont feel well served
  by the governments distribution of goods and
  services then have an incentive to take
  independent action
• Gar Alperovitz, California Split, The New York
  Times, February 10, 2007

20
International economic integration and country
breakup

• As international economic integration increases,
  the economic costs of being small are reduced,
  and hence political disintegration becomes less
  expensive
• In a world of smaller countries, openness is more
  important
• Economic integration and political disintegration
  go hand in hand

21
(No Transcript)
22
(No Transcript)
23
Conflict and Defense

• National size is more important in a world of
  high international conflict and weak
  international alliances
• With reduction of international conflict,
  countries can afford to be smaller
• Less conflict, more trade two reinforcing
  reasons to be small
• However, reduction in global conflict may bring
  about an increase in local conflict including
  more civil conflict

24
In summary, according to recent research on the
political economy of national borders

• Large national unions come with substantial costs
  as well as benefits
• Democratization, globalization and reduction in
  international conflict are associated with the
  formation of smaller countries
• Up to a point, the breakup of countries can be
  efficient and welfare-improving
• However, it may also lead to inefficient
  fragmentation and costly civil conflict

25
Key questions

• Can the inter-regional transfer of resources
  and/or the decentralization of power provide a
  solution to inefficient political breakups?
• ..or would such transfers and decentralization
  make countries even less stable?

26
Interregional redistributionan important
distinction

• preference-based transfers
• side payments to regions that are distant
  from the central government in terms of
  preferences over public policies
• versus
• income-based transfers
• transfers from richer regions to poorer regions,
  based on income differences.

27
Preference-based transfers

• In theory, these transfers of resources can be
  used to compensate regions that would otherwise
  secede, and could therefore ensure efficiency and
  stability (Alesina and Spolaore, 1997 2003,
  chapter 4 LeBreton and Weber, 2001 Haimanko,
  LeBreton and Weber and others).

28
Do preference-based transfers work in practice?

• Three limitations
• 1) feasibility (high administrative costs,
  lack of resources)
• 2) political credibility (time-consistency)
  -
• since changing borders is more costly than
  changing tax/transfer policies, preference-based
  transfers may not be credible, unless there
  exists some commitment technology (say,
  enforceable international treaties with third
  parties)
• 3) incompatibility with other social goals
• (for example, with interpersonal equity)

29
Income-based Transfers

• Empirically, most interregional redistribution is
  based on income taxation of individuals and
  firms, and henceforth it transfers resources from
  richer regions to poorer regions
• Under some conditions, such transfers can keep
  poorer regions (with heterogeneous preferences)
  in
• That is, a poorer region that would prefer
  separation without transfers, may decide to stay
  in a political union because of the transfers

30
Income-based Transfers Centrifugal Effects

• However, income-based redistribution may also
  induce richer regions to separate
• In some cases, even a poorer region may prefer a
  political breakup if its preferred tax policy is
  very different from the one implemented by the
  central government (Bolton and Roland, 1997)
• In general, income-based transfers in
  economically unequal countries tend to play a
  centrifugal role, by adding to the political
  costs of heterogeneity

31
In summary, interregional redistribution is a
double-edged sword

• Well-designed interregional transfers can ensure
  country stability, by compensating regions with
  higher heterogeneity costs that is, regions
  that are far (politically, culturally,
  linguistically, religiously etc.) from the
  national majority, and might otherwise break up.
• But these preference-based compensations are
  difficult to implement both economically and
  politically.
• In contrast, interregional redistribution based
  on income, while easier to implement, is likely
  to play a centrifugal role when there is economic
  inequality across regions as well as political
  heterogeneity.

32
Interregional redistribution and political
decentralization

• The effects of interregional redistribution on
  country stability depend on how centralized
  political power is within the country
• The higher the degree of political
  centralization, the higher the heterogeneity
  costs for the periphery, and therefore the higher
  the pressure to compensate regions with diverse
  preferences
• Is country stability enhanced or hampered when
  power itself is transferred from the center to
  sub-national governments?

33
Two opposite effects of power decentralization

• More power to the periphery reduces the
  peripherys heterogeneity costs from staying in
  a union, and hence the net benefits from
  secession (centripetal effects of
  decentralization more country stability)
• But more power to the periphery may also
  increases the peripherys ability to secede
  (centrifugal effects of decentralization less
  country stability)

34
Political decentralization as a stabilizing force

• The idea of federalism as a way to preserve
  diversity in a democracy has a long pedigree. For
  example, in 1764 Cesare Beccaria wrote
• A republic that is too vast cannot save itself
  from despotism except by subdividing itself and
  uniting itself into so many federative
  republics.
• Similar ideas in debate over American
  constitution in 18th century, etc.
• More recently, some political scientists have
  emphasized the positive effects of federalism on
  country stability and related outcomes for
  example, Lijphart (benefits of a power-sharing
  approach), Weingast, Lake and Rothchild, and
  many others.
• Historical examples Switzerland, India?, Canada?
  etc.

35
Power decentralization as a destabilizing force

• Power decentralization may provide resources and
  institutions that can be used in actual conflicts
  between center and periphery
• Historical evidence
• The Civil War in the United States
• Breakup of Soviet Union and Czechoslovakia, and,
  much more violently, of Yugoslavia and (see
  Roeder, Suny, and others)
• Failure of decentralization in Colombia in the
  1990s.
• Decentralization in Nigeria (e.g., the case of
  Warri)

36
How to assess the historical/empirical evidence?

• Problems
• How to define and measure decentralization?
• (decentralization seems often to mean whatever
  the person using the term wants it to mean,
  Bird, 1993)
• How to measure country stability and other
  relevant outcomes?
• How to identify causality?

37
Causality

• Correlation does not mean causation.
• On average, less healthy people may use more
  medicines and doctors, but thats not because
  medicine and doctors cause diseases!
• By the same token, decentralization could be
  empirically associated with more instability and
  civil conflict NOT because decentralization per
  se causes instability, but because
  decentralization may be an (imperfect) cure for
  instability
• countries that are inherently less stable may
  face more pressure to decentralize.
• Did the former Soviet Union or Yugoslavia break
  up because they had a federal system, or in spite
  of having a federal system?

38
Economic and political effects of federalism

• In a recent study, Robert Inman (Federalisms
  Values and the Value of Federalism, 2008),
  compares 73 federal and non-federal countries,
  and finds positive economic and political effects
  of federalism in democracies (but not in
  dictatorships).
• Positive effects include more orderly transfer
  of executive power, better protection of civil
  and political rights, and less corruption (see
  also Fisman and Gatti, 2002)
• Are these effects causal? Inman attempts to
  address this issue by using instrumental
  variables country land area, number of
  provinces, and provincial representation to the
  central government, and by limiting the sample
  to countries whose current constitutions were
  established before 1950.

39
Decentralization and ethnic conflict within
federations

• Bakke and Wibbels (Diversity, Disparity and
  Civil Conflict in Federal States, World
  Politics, 2006) focus on differences across
  federal states
• They find that fiscal decentralization increases
  the likelihood of ethnic conflict when there are
  wide disparities in income across regions.
• However, the issue of causality remains open.

40
Conclusions I

• The literature on the political economy of
  national borders studies efficiency and stability
  of borders as a function of different economic
  and political regimes and environments
• In a world of non-democratic Leviathans countries
  tend to be inefficiently large, while
  democratization and international economic
  integration lead to secessions and formation of
  smaller, more homogeneous countries
• However, country breakup itself may lead to
  inefficiency (i.e., excessive or costly
  fragmentation) if not accompanied by appropriate
  political-economic mechanisms and institutions.

41
Conclusions II

• This literature points to a potentially positive
  role for both interregional redistribution and
  fiscal decentralization.
• However, we should be skeptical about the extent
  to which interregional transfers, by themselves,
  can reduce regional conflict and potential
  separatism when there are large heterogeneity
  costs across regions, because of cultural,
  linguistic and/or economic differences.
• Actual incomebased regional redistribution,
  especially when interacting with ethnic and
  cultural diversity, is likely to increase
  inter-regional conflict.

42
Conclusion III

• Federalism and decentralization raise the
  peripherys benefits from political union, but
  also its ability to secede, with ambiguous
  effects on country stability
• The empirical evidence shows that
  decentralization in federal states may be
  associated with more ethnic conflict when
  economic inequality is high across regions.
• But the evidence also shows overall positive
  effects of federalism, both politically and
  economically, when accompanied by strong
  democratic institutions.