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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.

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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.

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