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Catalonia and the perils of fiscal redistribution

POPULISM is the weapon not just of the downtrodden. As the crisis in Catalonia demonstrates, the rich have economic anxieties of their own. Catalonia has an identity distinct, in important ways, from that of the rest of Spain. But the recent drive for independence has been energised by anger over the flow of fiscal redistribution from rich Catalans to their countrymen: people seen, in parts of the restless north-east, as thankless and lazy as well as alien. Paradoxically, globalisation has inflamed separatism around the world by raising the question Catalans now confront: to whom, exactly, do we owe a sense of social responsibility?

Every country or restive region has its own idiosyncratic history. Yet over the long run national borders are surprisingly malleable. Some circumstances offer better prospects for the small and newly independent than others. The smaller the country, the more easily its government can satisfy its people’s political preferences. A broadly satisfying compromise is easier among 300,000 people than 300m. But as Alberto Alesina and Enrico Spolaore note in their book, “The Size of Nations”, smaller countries also face hardships. They sacrifice economies of scale—they need, for example, to operate their own state agencies, rather than spread the expense of government across a larger population. Borders are bound to add to trading costs, leaving countries with smaller internal markets at an economic disadvantage. At times of foreign-policy tension, smaller countries, with correspondingly constrained armies and defence budgets, are easier to bully.

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So the world is more likely to sprout new countries when it is relatively peaceful, and when technology and global co-operation reduce international barriers to trade. Although moves towards independence in East Timor, Kosovo and South Sudan were accompanied by appalling bloodshed, it is no coincidence that over the past half-century the number of sovereign states has increased in tandem with a decline in global violence and an increase in trade. For Catalonia’s residents, membership of the Kingdom of Spain brings sacrifices, like the need to share decision-making on some matters with millions of other Spaniards. Were Catalonia able to secede from Spain yet keep its existing trade relationships, leaving would look quite attractive.

Smaller regions’ motives for seeking independence are not always high-minded. In rich economies, the better-off subsidise the poor through an array of welfare programmes. That means richer regions support poorer ones financially. Geographical redistribution is not always a source of tension. Residents of Massachusetts rarely moan about the flow of their federal-tax dollars to Mississippi. Wealth divisions that coincide with stark cultural differences, however, can be more contentious. The financial crisis and its aftermath, by swelling the ranks of the unemployed (and thus of those dependent on government help), was ammunition for politicians in regions keen to cut ties with their national economies. Catalans bridle at the fiscal drag placed on them by the rest of Spain, but they are not alone; just last month, Italians in the richer north also voted to demand greater autonomy.

Fearing dismemberment, national governments often use fiscal decentralisation to reduce separatist pressures. Nationalist sentiment lies along a spectrum, and giving unhappy regions more say over their taxing and spending can deflect moderates from a pro-secession stance. Decentralisation has been a part of Britain’s (so far successful) strategy for managing Scottish separatism, for example.

Delegating greater authority to regions, however, brings risks. As the capacity of regional governments grows, citizens might become more confident in their prospects as truly independent countries. So governments will sometimes instead tighten the screws on the disgruntled region in order to limit its ability to govern itself. Madrid has used such tactics at times, most recently in 2010, when Spain’s right-leaning Popular Party succeeded in rolling back rights previously granted to Catalonia. Similarly, the EU has said that seceding regions will have to reapply for membership—implying a damaging period of economic impairment.

Decentralisation is not a costless concession by the national government. In the short run, it clearly exacerbates inequality within the affected country, since fewer resources flow to poorer people and places. Some economists, like Jason Sorens of Dartmouth College, argue that, over longer periods, by encouraging regional competition for mobile people and capital, decentralisation leads to better economic performance. But if rich places tend to stay rich, because productive firms and people benefit from proximity to other such firms and people, then decentralisation can create lasting hardship for poorer places. Rich regions can support high-quality public goods at low cost because a larger tax base can be tapped to manage fewer of the social ills associated with poverty. In poorer ones the reverse is true, as more health, education and other needs must be met from a smaller tax base. It is just that the alternative—the abrupt, possibly extra-legal secession of the unhappy region—often looks worse.

Closer and closer

For liberals, it is hard to know how to view separatism. Democratic self-determination seems a laudable principle. The threat of secession may even act as a check on the temptation among a poorer majority to saddle a richer minority with economically stifling levels of taxation. But cultural identity is a fuzzy, mutable thing. When it becomes an excuse for dodging responsibilities while enjoying the benefits of open markets, it endangers both social harmony and openness. The geographical scope of redistribution will inevitably be limited by popular ideas about who truly belongs within the national fold. But it is better for everyone if that circle expands over time, rather than shrinks.

Source: economist
Catalonia and the perils of fiscal redistribution

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