The Economics of State Fragmentation - Assessing the Economic Impact of Secession

Reynaerts, Jo and Vanschoonbeek, Jakob (2016): The Economics of State Fragmentation - Assessing the Economic Impact of Secession.

Abstract

This paper provides empirical evidence that declaring independence significantly lowers per capita GDP based on a large panel of countries covering the period 1950-2016. To do so, we rely on a semi-parametric identification strategy that controls for the confounding effects of past GDP dynamics, anticipation effects, unobserved heterogeneity, model uncertainty and effect heterogeneity. In a difference-in-difference setting, we demonstrate that 30 years after newly formed states declared independence, their inhabitants typically experience per capita GDP levels which lie 23% below those of countries which in all relevant aspects most closely resembled their own country's economic situation just prior to independence. We subsequently propose a novel quadruple-difference bias correction procedure to demonstrate the robustness of these findings. Finally, we develop a two-step estimator to shed some light on the primary channels driving our results. We find tentative evidence that the adverse effects of independence decrease in population size, pointing to the presence of economies of scale, and that they are also mitigated when newly independent states avoid violent secession, liberalize their trade regime or use their new-found political autonomy to democratize. We fail to find clear-cut evidence of the relevance of macroeconomic uncertainty or the economic desirability of declaring independence by referendum.

• Item Type: MPRA Paper
• Language: English
• Keywords: Independence dividend; panel data; dynamic model; synthetic control method; difference-in-difference; triple-difference; quadruple-difference; control function approach
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General > C14 - Semiparametric and Nonparametric Methods: General; C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables > C32 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes ; State Space Models; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O47 - Empirical Studies of Economic Growth ; Aggregate Productivity ; Cross-Country Output Convergence

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