Does independence make countries wealthier?

Secession is in fashion. After decades of strict enforcement during the cold war of the principle of territorial integrity, the independence of Slovenia from the former Yugoslavia, the collapse of the Soviet Union, the division of the former Czechoslovakia, and the separation of Eritrea from Ethiopia have opened the floodgates. Today, secessionist tensions are more and more evident, with flashpoints on all continents. Official and unofficial independence referenda in 2014 in Scotland, Catalonia, and the Crimea have put secession once again firmly under the spotlight.

Secessionist movements across the world tend to claim that independence comes with significant economic benefits. As argued in the case of the Scottish referendum, “independence is the key to fully unlocking Scotland’s potential and escaping the limitations of the current constitutional framework” (Fiscal Commission Working Group 2013, p. 37). In Catalonia, it has been contended that a Catalan state would manage public resources “in a more transparent and responsible way” (Advisory Council for National Transition 2013, p. 27) than the Spanish state. From this perspective, secession is expected to lead to an ‘independence dividend’, characterised by higher growth and prosperity in newly independent territories.

However, claims by secessionists to leave behind lower growth and bureaucratic dysfunction through independence are generally based on very limited empirical evidence. Whether or not secession generates an independence dividend remains to a large extent unexplored.

In a forthcoming paper in Territory, Politics, Governance, we aim to fill this gap by analysing the economic impact of successive secessions in the case of the former Yugoslavia. By means of a fixed-effects panel data analysis, we trace the economic performance of the eight original constituent territorial units of Yugoslavia between 1956 and 2011 – first as part of a federal whole, then as separate nations – whilst controlling for other variables in order to assess the direction and degree of the impact secession has had on the economic trajectories of the newly independent states.

The disintegration of the former Yugoslavia

The former Yugoslavia was divided into six constituent republics (Croatia, Bosnia and Herzegovina, Montenegro, Macedonia, Slovenia, and Serbia), with the largest republic, Serbia, containing two autonomous provinces, splitting it into Kosovo, Vojvodina, and Serbia Proper. It was a plurinational state formed in the aftermath of World War I, which began to unravel around 1980 and did not survive the collapse of communism. Shortly after the fall of the Berlin Wall, non-communist governments were elected in Croatia, Slovenia, Bosnia-Herzegovina, and Macedonia. Conflict loomed, as Serbia strove to maintain its power as Yugoslavia’s biggest and most influential republic, while the wealthier republics of the north – Slovenia and Croatia – sought outright independence.

Gradually, all the republics gained independence. In some cases – peacefully or with only brief conflicts (e.g. Macedonia, Montenegro and Slovenia); in other cases – after long and bitter wars (e.g. Croatia, Bosnia-Hercegovina, Kosovo). Seven independent republics have emerged out of the original eight territorial units of the former Yugoslavia, and only Serbia and Vojvodina remain together in the Republic of Serbia. Two of these republics (Slovenia in 2004 and Croatia in 2013) have become EU members.

Independence and economic performance

The disintegration of Yugoslavia coincided with deep recessions in its constituent republics. As shown in Figure 1, by 2011 only Slovenia and Macedonia had levels of wealth which clearly exceeded those of the early 1990s. Bosnia-Herzegovina, Serbia Proper, and Vojvodina displayed the worst economic trajectories.

Figure 1. Economic trajectories for the republics and autonomous provinces of former Yugoslavia, 1955-2011 (1955=100).

Source: Own elaboration using data from Yugoslav and national statistical offices.

To what extent has independence shaped the economic trajectory of the former Yugoslav republics? We address this question by means of a multidimensional panel data econometric analysis, controlling for a number of other factors which may have affected the economic performance of the republics individually.

The analysis uses the year-on-year growth in real GDP in the eight territorial units as the dependent variable. The independent variables are presented in Table 1 below, and can be classified into three groups:

• Those depicting the level of development of the territory;
• Socioeconomic and structural controls; and
• Factors linked to the independence process.

Table 1. Key variables and expected signs of the coefficients

Overall, the results of the analysis suggest that the economic benefits of secession – and hence of dividing countries into smaller units – are nowhere to be seen.

The emergence of small countries out of a bigger unit in the case of Yugoslavia did not lead to any sort of economic dividend for the emerging countries. All of the former Yugoslav republics suffered a significant loss of wealth at the moment of independence. The severity of this loss and the speed of the subsequent recovery have, however, predominantly been determined by the process, more than by the mere fact, of independence. War and the intensity of war represented a major blow to the economies of Bosnia-Herzegovina and Kosovo. Sanctions and years of diplomatic conflict have further limited the economic prospects of Serbia, while strong disruption to trade following independence has been a serious barrier for economic growth everywhere in the former Yugoslavia. The relatively smooth transitions to independence in Slovenia, Montenegro, and Macedonia have contributed to their having the best post-independence performance, despite their very different starting points.

Hence, although “a small state should not be confused with a weak state” (Gligorov et al. 1999, p. 2), our analysis shows limited evidence of a direct independence dividend to breakaway republics of the former Yugoslavia. Indeed, secession does not seem to have any bearing on their subsequent economic performance. According to our analysis, Slovenia did not perform better than, say, Bosnia-Herzegovina or Kosovo because it separated from Yugoslavia earlier, but rather because it had the luck of fighting a ten-day war which left 62 dead and caused little material destruction. Bosnia endured a three-year long war which caused, depending on sources, between 25,000 and 329,000 fatalities and massive material destruction, while the war on Kosovo lasted officially almost one year and a half and left around 14,000 dead. Slovenia also performed better than Serbia, not because it achieved independence earlier, but because it fought in fewer wars and did not experience economic sanctions. Slovenia has finally performed better than most other former Yugoslav republics because it has consistently been the most open country to trade and conflict did not suddenly alter its trade patterns with the rest of the world, as was the case for Bosnia-Herzegovina, Serbia, and Croatia.

Concluding remarks

Our research highlights that better economic trajectories are not linked to the mere fact of seceding but by how the process of secession took place.

In cases where secession happened without real conflict and without significant alteration of previous socioeconomic links to the rest of the world, secession has not had any noticeable impact on the resulting economic performance.
When secession is achieved by conflict, destruction and disruption of pre-existing trade patterns, all those involved in the process suffer.

This underlines that, at least in terms of economic impact, secession is not an event but a process. How the process takes place – and largely whether there is agreement between the host and the seceding country – determines the subsequent economic performance for both. It also emphasises that the politics involved in any process of secession will almost certainly determine ensuing economic trajectories.

Hence, in the current atmosphere of secessionist movements in different parts of the world, more attention needs to be paid to how any potential divorce between countries can be achieved, rather than to the simple act of independence as such. Based on the case of former Yugoslavia, an amicable divorce will deliver no independence dividend but likewise not significantly damage the future development prospects of all parties involved. A bitter divorce, by contrast, is likely to have long-lasting, negative economic consequences. Unfortunately, so far the focus has been mainly on the implications of secession, rather than on how any secessionist process is managed.

References

Advisory Council for National Transition (2013) L’Administració tributària de Catalunya. Rapport no. 2, 20 December 2013. Generalitat de Catalunya, Barcelona.

Fiscal Commission Working Group (2013) First Report – Macroeconomic Framework, The Scottish Government, Edinburgh.

Gligorov, V, M Kaldor, and L Tsoukalis, (1999) Balkan Reconstruction and European Integration, London School of Economics, the European Institute, London.

Published in collaboration with VoxEU

Author: Andrés Rodríguez Pose is a Professor of Economic Geography at the London School of Economics and a current holder of a European Research Council Advanced Grant. Marko Stermšek is an economic researcher currently employed by LSE Enterprise – the London School of Economics’ consulting arm – and carrying out a number of projects for the International Labour Organization. 

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