The economic impact of secession

The economic consequences of secession – when one region breaks away from another to form an independent state – has gained significant attention in recent years, especially with the rise of pro-independence movements in various parts of the world. Secession debates often focus on the economic consequences for the seceding region (e.g. Brexit, Scotland or Catalonia). But much less attention is given to how secession impacts the successor state. In our recent work published in Regional Studies and entitled "Trading borders: the importance of interregional integration and economy size for the impact of secession", we use an economic model to simulate and assess the economic impact of secession on both seceding and successor regions of independence debates. We focus on international trade. This means that in our framework secession is modelled as an increase in the cost of trade between two newly formed countries that (pre-secession) were part of the same country and single market.

One of our central findings is that secession generally leads to negative economic outcomes for both the seceding and successor regions. Whilst the literature shows that it may be difficult to place an exact number on the trade cost of secession, our work shows that the severity of these impacts, is influenced by two main factors: the degree of trade integration between the regions pre secession and their relative economic sizes.

Intuitively, regions that are highly integrated before secession experience more significant disruptions when one region leaves. This is because the creation of new trade barriers increases trade costs and reduces economic activity in both regions. For instance, if two regions have been trading extensively with each other, the sudden imposition of tariffs and other trade barriers can severely hamper their economic interactions, leading to a decline in overall economic performance. The relative size of the seceding region also matters. Smaller regions tend to suffer more severe economic consequences compared to larger ones. This is because smaller regions are often more dependent on trade with the larger successor region, and the disruption of the trade relationship can have larger impacts on their economies. Larger seceding regions can also create greater spillovers, with negative impacts for both regions.

To illustrate these points, we examine three European case studies: Scotland and the rest of the UK, Catalonia and the rest of Spain, and Northern Italy and the rest of Italy. The cases are selected to demonstrate how impacts may vary depending on relative size and trade integration. We note that the Italian secessionist movement is no longer that active and that the case is used for illustrative purposes.

For the UK case, we find that secession would lead to economic losses for both Scotland and the rest of the UK. However, Scotland would be more adversely affected due to its smaller size and high level of trade integration with the UK. This means that while both regions would suffer, the ‘economic pain’ would be more acute for Scotland. Using a Monte Carlo simulation approach which randomly selects trade costs between 1% and 30% (which is suggested by Huang et al. (2021) for a high border cost) our model shows a reduction in global value added (GVA) of 8.8% and 0.7% for Scotland and the rest of the UK respectively on average.

The Spanish situation is somewhat similar. If Catalonia were to secede from Spain, both regions would experience negative economic impacts. However, because Catalonia is larger and less integrated than Scotland, the effects would be somewhat mitigated (an average of -6.5% reduction in GVA). Nevertheless, the high level of trade integration between Catalonia and the rest of Spain means that both regions would still face significant economic challenges.

The case of Italy is particularly interesting because the economic size of the two regions is very similar. This means that the economic impacts of secession would be substantial for both regions. Using the same assumptions used above for Scotland, the successor region (the rest of Italy) could face an average reduction in GVA of 8.3%, against 7.2% for Northern Italy, highlighting that secession is not just a problem for the seceding region but also for the remaining part of the country.

Our results speak directly to the policy strategies that countries can adopt pre-secession and post-secession. Pre-secession – for example, prior to any referendum on independence – one strategy for successor regions might be to increase trade integration with the seceding region to raise the costs of secession, making it less attractive to voters. However, this approach comes with its own risks, as higher trade integration also means higher economic costs if secession does occur. Additionally, understanding the economic impacts can help both seceding and successor regions negotiate better post-secession trade agreements to minimise economic disruptions.

It is important to note that secessionist movements are often driven by a variety of factors, including cultural identity, historical grievances, and political aspirations. As seen in cases like Brexit, or the decision of the United States to secede from multilateral trade agreements, economic arguments alone may not sway public opinion or political decisions. The socio-political narratives surrounding secession can be compelling and resonate more deeply with people's values and identities than economic data.

Policymakers could adopt a more nuanced approach when addressing secessionist movements which involve not only an understanding the economic trade-offs but also acknowledging and engaging with the broader socio-political context. Strategies to mitigate the economic impacts of secession should be complemented by efforts to address the underlying social and political drivers of these movements.