Portugalization and Independence

In a series of recent appearances in various media, Professor José Vicente Rodríguez Mora announced with great fanfare that a careful study led him to the inexorable conclusion that Catalan independence would strangle Catalonian trade flows and would necessarily lead to “a net welfare loss with any reasonable hypothesis about the savings in net transfers implied by independence.” The economic model underlying his calculations predicted, namely, that Catalan trade with the rest of Spain would plummet almost 80%, while Catalan trade with the rest of the world would only increase by 10%. The net effect of such a collapse would be equivalent to a decline of 9% in Catalan GDP, a figure that indeed exceeds Catalan net transfers to Spain, estimated at between 5.8% and 8.4% of GDP.

Is it plausible that trade between Spain and Catalonia could become depressed up to 80% after independence? Professor Rodríguez Mora inferred that figure from the volume of bilateral trade between Portugal and Spain. In his opinion, the independence of Catalonia would lead to a "Portugalization" (perhaps similar to the "Hispanization" desired by Spanish minister Wert) that would subject bilateral trade between an independent Catalonia and the rest of Spain to the same frictions that currently hinder trade between Portugal and Spain. As he himself admits, what he has in mind is a long term process in which Catalans would stop talking and gradually cease to understand Castilian Spanish, the cultural distance between Catalonia and Spain would gradually increase, and as a result, links between producers in both regions would gradually erode over time.

One can debate whether the figures yielded by the model of Professor Rodríguez Mora are unrealistically high or not. Some will argue that his analysis does not consider the possible negative effect of short-term boycotts or even the exclusion of an independent Catalonia from the EU. His analysis indicates, however, that the rest of Spain would suffer a very significant cost from such exclusion, so it is not clear that the current threats coming from Madrid are credible.

In my view, the prediction that trade flows between Catalonia and Spain could decrease up to 80% as a result of independence seems far-fetched. On one hand, it is highly implausible that the links built during more than 500 years of common history would become irrelevant to the point of equating the “distance” between Catalonia and Spain to the distance between Portugal and Spain. Furthermore, there exists no convincing empirical evidence that indicates a causal and systematic relationship between political disintegration and commercial collapse. The case of the Czech-Slovak separation is often mentioned, but during the five years following their separation, the fall in the volume of bilateral trade between these two countries was a mere 6.2% (and not 75%, as some economists claim). Finally, one cannot ignore the effect that independence would have on the ability of the Catalan government to promote growth of the Catalan export sector and to attract foreign direct investment through greater control over the funding and regulation of their infrastructures.

Beyond these somewhat subjective considerations, the main shortcoming of the analysis of Professor Rodríguez Mora is that even if one were to give him the benefit of the doubt and assume that his estimates of the long-term effects of independence on trade and GDP Catalan are correct, his calculations based on these numbers are flawed. As is well known, it is nonsense to compare a cost (9% of GDP) which by his own admission would only be realized in a few decades or even centuries, with a benefit (net transfer savings of somewhere between 5.8% and 8.4% of GDP) that would be immediately realized after independence.

To give an example, suppose that the ‘Portugalization’ described by Professor Rodríguez Mora were to be completed within 50 years and assume that it occurred at a steady pace, with gradual reductions of GDP reaching a maximum of 9% in 50 years. Assuming a modest discount rate of 2%, the implied trade contraction in terms of the permanent equivalent change would only be equal to 5.8% (not 9%) of GDP, a figure that matches the most conservative estimates of net transfer savings for Catalonia. In order to offset the effect of net transfer savings of up to 8.4%, the full Portugalización of Catalonia would have to be completed in just nine years.

Estimating a single number that summarizes the net benefit (or cost) of Catalan independence is an extremely complex exercise, and in my opinion, a useless one. Our responsibility as economists is to offer a wide range of projections about the costs and benefits associated with different economic effects of Catalan independence and leave it to the citizens to value these different scenarios in the manner that they deem most reasonable. This responsibility entails an important obligation: that the figures and estimates that we offer to citizens be easily understandable and comparable.