Catalan independence The economic issues Elisenda Paluzie
Outline 1. The economic context: globalization and the creation of new countries 2. The benefits of independence: the fiscal dividend 3. The costs of independence: commercial boycott 4. The current situation 5. Final remarks
1.The economic context: Globalization and the creation of new countries
1.The economic context: Globalization and the creation of new countries Countries are the result of a trade-off between two opposed forces: Centripetal forces favorable to large countries (scale economies in the provision of public goods, market size advantages in the production of private goods) Centrifugal forces favorable to small countries (heterogeneity costs: diverse preferences for public policies in a larger population)
1.The economic context: Globalization and the creation of new countries In a context of protectionism, centripetal forces are stronger (need to benefit from the national market). Trade liberalization: centripetal forces loose importance. Firms can sell to the world market, no need to belong to a larger country. The Catalan case: In the second half of the XIXth century Catalonia became Spain s factory in a context of domestic market integration. Scale economies and the reduction in transport costs (railway) consolidated Catalonia s initial advantage. Since 1986 integration to the EU market, as well as world trade liberalization, have reduced the importance of the Spanish market for Catalonia. Centripetal forces have weakened
Weakening of centripetal forces: The internationalization of Catalan economy-destination of Catalan exports (in %) 70,0 60,0 50,0 40,0 30,0 63,6 61,4 59,1 57,3 59,8 56,9 55,4 53,9 53,7 54,4 52,9 52,0 51,6 50,0 46,1 46,3 45,6 47,1 48,0 48,4 50,0 36,4 38,6 40,9 42,7 40,2 43,1 44,6 51,8 53,8 56,8 59,7 60,5 60,5 48,2 46,2 43,2 40,3 39,5 39,5 20,0 10,0 0,0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Resto Estado Español Resto del mundo
The internationalization of Catalan economy- Sales of goods of Catalan firms, 2014 70000 60000 60291 42% 50000 40000 44497 31% 39351 27% 30000 20000 10000 0 Cataluña Resto Estado Español UE y Resto del Mundo
Reinforcement of centrifugal forces The distance of the median voter in Catalonia from the central government policies has increased Constitutional Court decision on the Statute of Autonomy 2010 Catalan language conflicts Competences conflicts Fiscal relationship perceived as unjust Scarcity of investment in infrastructures
2. The benefits of independence: The fiscal dividend Catalan fiscal balance (difference between taxes collected in Catalonia and spending received) is highly deficitary Causes: Autonomic financing model (LOFCA): equalization formula, needsassessment based. Highly centralized fiscal structure. More than 90% of the taxes collected by the central government. Over-equalization. Spending patterns of the central government, particularly in infrastructures
The fiscal dividend - Catalan fiscal balance Monetary flow Benefit approach Catalan Government estimates (1986-2014) FEDEA (2014) 16 B (8% Cat GDP) 10 B (5% Cat GDP) 9.9 B (5 % Cat GDP) Catalonia contributed to 19.5% of the revenues of the Central Administration and the Social Security. and received 14% of the Central Administration and Social Security expenditures. (Catalan population is 16% of Spanish population; Catalan GDP is 18,9% of Spanish GDP) Excluding Social Security payments (interpersonal redistribution: social contributions; pensions, and unemployment benefits): Catalonia contributed to 19.7% of the Central Administration revenues and received 11.1% of the Central Administration expenditures This means that the return of each euro paid in taxes to the central government is 56 cents. Of each euro paid 44 cents are not spent in Catalonia.
Expenditure on infrastructures Central government investment in Catalonia (% over Spanish total) 1999-2016 18,00% 16,00% 14,00% 12,00% 10,00% 8,00% 6,00% 4,00% 2,00% 0,00% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Regional financial model: regional fiscal capacity before and after equalization, 2015 Before equalization After equalization /cápita Índice /capita Índice 1.Madrid 3,086 140.6 1. Cantabria 3,111 130.3 2.Balearic Islands 2,670 121.7 2. La Rioja 2,936 123.0 3- Catalonia 2,602 118.6 3. Extremadura 2,818 118.0 4.Aragon 2,497 113.8 4. Aragon 2,791 116.9 5.Cantabria 2,427 110.6 5. Castile-León 2,779 116.4 6.Asturias 2,268 103.4 6. Asturias 2,686 112.5 7.La Rioja 2,263 103.2 7. Galicia 2,646 110.9 8.Castile-Leon 2,167 101.5 8. Castile-La Mancha 2,497 104.6 9.Valencia 2,094 93.7 9. Balearic Islands 2,356 98.7 10.Galicia 1,980 90.3 10. Catalonia 2,352 98.5 11.Castile-La Mancha 1,805 82.3 11. Madrid 2,291 96.0 12.Murcia 1,803 82.2 12. Andalusia 2,235 93.6 13.Andalusia 1,707 77.8 13. Murcia 2,220 93.0 14.Extremadura 1,615 73.6 14. Valencia 2,198 92.1 15. Canary Islands 902 41.1 15. Canary Islands 2,186 91.6 Average 2,194 100 Average 2,387 100
3. The costs of independence: The commercial boycott Antràs and Ventura (2012) Excluding multinationals from boycott (40% Catalan exports), Catastrophic scenario: - 50% final goods (1/3 sales to the rest of Spain) - 20% intermediary goods (2/3 sales to the rest of Spain) => -18% sales => -1,3% Catalan GDP
4. The current situation October, 1 st Referendum October, 6th Decree facilitating change in legal headquarters (no need of shareholders approval) October, 27 th Declaration of independence/direct Rule November 2 nd Catalan government in jail In 2 months 2,700 firms moved their legal headquarters Total number of firms with legal headquarters in Catalonia: 265,758 (+ establishments (facilities) in Catalonia: 291,372 Sectors mainly concerned: financial, utilities, food consumer products. No foreign firms. Reasons: - Banks (ECB, uncertainty, deposit s boycott in the rest of Spain) - Regulated firms and public procurement - Commercial boycott Real effects: No effect in Catalan GDP, no effect in Catalan gov. taxes
4. The current situation Catalonia s annual growth rate: 2014 2% 2015 3,5% 2016 3,5% (average Eurozone 1,8% ) 2017 P 3%
5. Final remarks In an internationalized economy, the creation of a new state, from an economic point of view, would not pose particular problems. In the context of the EU, more similar to the creation of a new state inside the US (i.e. Maine) than to a secession from the US. There could be transition solutions for the contribution of Catalonia to less developed Spanish regions (i.e. Varoufakis proposal) But political, judiciary, legal and economic reprisals to prevent it can have economic damaging consequences both for Catalonia and Spain.
John M. Keynes, 1-11 08034 Barcelona +34 93 403 49 76 school.economics@ub.edu ub.edu/school-economics Thanks for your attention!