Oxford Review of Economic Policy, Volume 30, Number 2, 2014, pp.

189207

David N.F.Bell*
Abstract This paper reviews some of the issues consequent on the formation of new states through
secession. While its particular focus relates to the potential withdrawal of Scotland from the United
Kingdom, it discusses preference heterogeneity as a potential cause of the break-up of states, relating
that to recent developments in the economics of identity. It examines some macroeconomic issues,
particularly debt and currency, and reflects on how these might influence secession. It examines alternativesfiscal decentralizationto secession and considers the strategies that those arguing for and
against secession may deploy. It also explains the structure of this issue, explaining how the different
contributions come together.
Key words: secession, preference heterogeneity, identity, fiscal decentralization, debt, currency
JEL classification: H23, H6, H7, H77, R11

I.Introduction
The break-up of states is relatively common. Though the immediate purpose of secession is to change political structures and institutions, it is also likely to have profound
economic consequences. At the macro level, a new set of fiscal and monetary arrangements (possibly including new currency arrangements) will have to be implemented. At
the micro level, market structures and their regulation may change in response to state
break-up.
The issue of secession has been brought to the fore by the forthcoming Scottish referendum on independence. Other secessionist movements, such as those in Catalonia,
Flanders, and Quebec, continue to make their cases for separation. Pressures for the
reconfiguration of states due to ethnic, linguistic, religious, or cultural differences can
result in violent confrontation, with Sudan, Iraq, and Ukraine being among more
recent examples.
Economics plays a central role in the understanding of secession. First, it provides
important insights into the relationships between a central state and the territories
which comprise that state, both from a theoretical perspective and in the light of experience. Second, economics can aid understanding of the issues likely to confront the
seceding and successor states after the decision to separate has takenplace.
* University of Stirling, Centre for Population Change, and IZA, e-mail: d.n.f.bell@stir.ac.uk
doi:10.1093/oxrep/gru018
The Author 2014. Published by Oxford University Press.
For permissions please e-mail: journals.permissions@oup.com

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

Scotland and small country independence:

the assessment

190

David N.F.Bell

II.Secession
Economic theory tends to take the existence of states and their institutions as given.
This premise is fundamental to much of the work of macroeconomics and of public
economics, inter alia. But neither the number, nor the size of states is constant. Between
1950 and 2011, the number of sovereign states increased from 99 to 195.1 Secession and
state dissolution are commonplace. The result of this process is a world where states
vary widely in size, from China and India, both with populations of over one billion,
to many states of less than one million inhabitants. Although the existence and size of
states cannot be regarded as exogenous, the process by which they are formed and dissolve had received relatively little attention within mainstream economics until Alesina
and Spolaore (1997) in their seminal book, The Size of Nations, examined the economic
factors that influence the size of nations. Arguments in favour of larger nations include
economies of scale in the production of public goods and in human capital formation,
the internalization of regional externalities, the spreading of risk, income equalization,
economies of scale in the production of knowledge, and the possibility of stronger
competition in larger markets.
Two arguments are frequently used to counter the arguments for increased scale. First,
smaller nations may avoid diseconomies of scale in the production of public goods.
However, Besley and Coate (2003) suggest that a centralized state must in theory be able
to produce and distribute public goods at least as efficiently as the aggregate of sub-central governments, since it could mimic their production at a sub-central level. However,
political economy considerations concerning the nature of centralized decision-making
1

Source: Wikipedia.

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

The articles which comprise this issue address both of these topics. In relation to the
former, the issue includes a set of articles drawing on the experiences of states that have
experienced break-up, or where there is a strong secessionist movement. In relation to
the latter, it uses the context of the UK and Scotland to exemplify issues that might
arise during the secession process.
This introductory article identifies three issues that are central to the understanding
of secession from an economics perspective. First, it examines the theoretical underpinnings that have been used to analyse the process of secession. This is based on recent
developments in the economics literature both in relation to the number and size of
states, but also to the analysis of groups and of group behaviour. The latter is important in aiding the understanding of preference heterogeneitythe notion that the residents of different territories within a state may have different social welfare functions,
particularly in relation to the provision of public goods. Second, and given that a possible outcome for the referendum is that Scotland remains part of the UK but is subsequently granted enhanced fiscal powers, this article also briefly address issues relating
to fiscal federalismthe notion that states typically allocate taxation and spending
responsibilities to different levels of government. Third, we examine the macro issues
that would become relevant after state break-up, including currency and debt. We take
these issues in turn before addressing the other papers.

Scotland and small country independence: the assessment

191

It may well be that the reduction in global barriers to trade and in threat of
conquest has reduced the cost of being a small country, but Idont think its
increased the benefits, and the benefits are large only where the country is composed of groups that simply cannot getalong with each other, so that if force is
withdrawn the country breaks up. (Posner, 2012)
Easterly and Levine (1997) argue that The borders of African nations were determined
through a tragicomic series of negotiations between European powers in the nineteenth
century that split up ethnic groups and exacerbated pre-existing high levels of ethnic and linguistic diversity (p.1213). They go on to suggest that ethnic and linguistic
differences within African states have played a substantial role in holding back their
economic development. The implication is that more homogeneous states fare better
economically. Or perhaps that states that are able to accommodate differences, perhaps
by establishing strong sub-central authorities can also thrive.
So what is a minimum feasible set of powers for a central state? Provision of some
public goods may be thought of as necessary for the functioning of a central government. These might include monetary policy, broadcasting, defence, the legal system, foreign policy, etc. Preference heterogeneity may lead to spatially differentiated
demands for other public goods. Some communities may wish the central government
to provide a free museum service, while others may not: central government must decide
whether to provide the service or not, or to grant the communities that want free museums the right to decide on their provision.
In the economics literature, preference heterogeneity tends to be treated as exogenous: language or ethnic distinctions are generally treated as given. But preference heterogeneity does not necessarily imply dysfunctional central government and recurring
demands for greater autonomy or secession. The territorial integrity of both the USA
and of India is not significantly threatened by the range of languages used within their
boundaries or by the ethnic diversity of their inhabitants.
Those characteristics that underlie preference heterogeneityethnic background,
language, gender, etc.are also categories used by individuals to define their identity.
Individuals will align themselves with the aims and objectives of the central government if they feel that its aims and objectives do not conflict with their identity. Thus, for
example, a central government that protects minority rights will be less likely to alienate the interest of smaller ethnic groups. If individuals believe that the actions of the

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

may result in sub-optimal allocation of public goods at the sub-central level, implying that it is possible that decentralized decision-making may be welfare-enhancing. If
a national-level coalition blocks potentially welfare-improving policy actions in some
part of its territory, the incentive for secession in this region is increased.
The second, and perhaps more important, argument against increased scale is the
costs associated with preference heterogeneity. This term is shorthand for the linguistic, social, ethnic, cultural, or historical differences that may exist between groups of
citizens within a sovereign state. If group members are spatially concentrated, then these
differences may result in spatially differentiated demands for public goods. Spolaore
(2008) argues that the costs of heterogeneity provide a centripetal force that may induce
secession. Posner (2012) includes possible hostilities between groups as another form of
preference heterogeneity:

192

David N.F.Bell

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

central government do not significantly conflict with their identity, the more likely the
central government is to be stable. The long-term stability of Canada will be influenced
by whether citizens of Quebec feel that their identity is consistent with their perceptions of Canadian citizenship as a whole. It will also reflect what they perceive to be the
potential for an independent Quebec, given its size and location, to manage a successful
economic policy and to develop appropriate institutions.
Akerlof and Kranton (2000) argue that individuals think of themselves not only as
consumers, but also as belonging to a set of social categories. These categories and how
they are interpreted by the individual define his/her identity. They argue that identity
should be included in the individual utility function in addition to its usual arguments.
Identity is determined not only by those categories that could be used to objectively
classify the individual, but also by the interpretation that the individual puts on them
and the value he/she places on how others perceive their identity. Individuals may be
prepared to incur costs to influence how their identity is perceived. Mountaineering is
an activity which, though dangerous, may be a utility-maximizing form of establishing
ones identity.
Akerlof and Kranton also suggest that some aspects of identity can be self-selected.
Immigrants, for example, can choose to self-identify as belonging to their origin or
destination location. However, states may take an interest in how migrants identify
themselves. The stability of the state is likely to be strengthened by having as homogeneous a population as possible in respect of beliefs and preferences. Tilly (1975) argues
that historically almost all European governments took steps which homogenized their
populations: the adoption of state religion, expulsion of minorities, institution of a
national language, eventually the organization of mass public instruction. Alesina and
Reich (2013) develop a model in which central governments invest to reduce the social
distance between their citizens or to align their preferences more closely with those of
central government. Many states currently make immigration conditional on familiarity with local history and customs, but homogenization can take many forms. In a different context, Akerlof and Kranton (2005) describe how workers may be encouraged
to identify with the organizations to which they are attached. For example, many Nike
employees sport the familiar swoosh as a tattoo. By reinforcing identification with
company values, principalagent costs are reduced. Firms as well as nations seek to
influence identity.
Identity influences group allegiance. Some individuals may describe themselves as
bakers, or anglers, or Scots. One person can also hold multiple identities: there
is no contradiction in simultaneously holding allegiance to all three of these groups.
Identification with a group can influence action. Chen and Li (2009) describe a laboratory experiment in which individuals were assigned to groups solely on the basis of their
preference for different types of art. Individuals were told privately to which groups
they belonged. In subsequent allocation games, group membership had a significant
effect on outcomes. Even if membership is allocated arbitrarily, group members are
more likely to reward own-group members and to sanction members of other groups.
Thus, even in the absence of meaningful allocations to groups, group membership still
has a measurable effect on behaviour.
The finding that group identity is meaningful, even when assigned in a seemingly arbitrary way, touches on a literature which originated with Anderson (1991) who described
nations as imagined communities, different from normal communities where members

Scotland and small country independence: the assessment

193

III. Fiscal decentralization as a response to threats of

secession
Sub-central governments tend to face a horizontal fiscal imbalance in that their capacity
to raise revenue differs due to conditions in product and factor markets. Differences in
revenues will lead to variations in the provision of public services across the state. If central
government is committed to equality of service provision in all parts of the state, there
has to be some form of fiscal transfer or equalization payment if that objective is to be
2See, for example, http://whatscotlandthinks.org/questions/which-issue-is-most-important-to-you-indeciding-how-to-vote-in-the-referendum

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

have the possibility of normal interactions. Imagined communities exist where individuals think of themselves as holding some common identity. Thus, someone who
describes herself as Scottish self-defines herself as belonging to a group, even though
she could not feasibly interact with all members of this group: it is an imagined community. The Chen and Li argument suggests that nevertheless this identification may
influence her behaviour in relation to members and non-members of thisgroup.
It is worth noting that the Scottish case for secession is unusual in that ethnic, cultural, religious, or language differences have not formed any part of the case for separation. When asked which issue is most likely to determine voting intention, the modal
answers among Scottish voters are the economy and employment.2 The campaign does
not appear to be founded on preference heterogeneity. However, Scots have a very
strong sense of identity, with only around 15 per cent describing themselves as more
British than Scottish. Even if differences in preferences between Scots and non-Scots
are relatively minor, the arguments of Chen and Li suggest that group identification
could play an important role in determining how Scots may vote in a referendum on
independence.
Our arguments thus far suggest the following: first, preference heterogeneitythe
usual argument used to explain why there is a limit to the growth of statesis closely
linked to the notion of identity; second, the extent to which individuals identify with a
central government as opposed to a territory within that state may influence the probability of secession; third, to minimize costs, institutions (nations, firms) have an interest in promoting a shared identity and may take active steps to foster such an outcome;
fourth, experimental evidence shows that group identification can be a powerful determinant of how individuals interact, with group members tending to behave more generously towards fellow group members than to others; finally, this pattern of interaction
occurs even though assignment to groups is based on relatively small differences. This
suggests that while preference heterogeneity based on observed characteristics, such as
language or cultural heritage, may be relatively stable, the forces promoting or undermining the cohesion of a state may be weak if attachment to groups that promote or
resist secession is volatile. Identity rather than preference heterogeneity provides a more
plausible explanation of volatility in the support for self-determination. The recent
example of Crimea, where support for secession from Ukraine rose dramatically within
a matter of weeks, shows how volatile such support can be.

194

David N.F.Bell

Well-functioning intergovernmental frameworks can lead to better economic

and fiscal outcomes. Appropriate decentralisation of the public sector, and
bringing the state closer to the people, can also help restore trust in public policies and create consensus required for the hard decisions facing most governments. (OECD, 2014)3
A key element in this argument is that decentralization can help restore trust in public
policy. But does this mean it can offset demands for secession? A number of governments have accepted this argument. Canada, Belgium, Spain, and the UK have
extended powers to sub-central governments following threats to secede. The additional
3

http://www.oecd.org/tax/federalism/making-fiscal-decentralisation-work.htm

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

realized. It is also true that sub-central governments typically spend more than they raise
in taxes. According to the Organization for Economic Cooperation and Development
(OECD), about one-third of government spending and two-thirds of public investment
is carried out by sub-central governments while less than 15 per cent of tax revenues are
allocated to the sub-central level. Only 4.8 per cent of UK tax revenue is raised at the
sub-central level. In contrast, Canada and Switzerland raise 48 per cent and 40 per cent
of total tax revenues respectively, at the sub-central level. One explanation is that there are
economies of scale in tax collection but not in public spending. Taxes therefore tend to
be raised at a national level, but a large share of public spending is under the control of
sub-central governments. This is known as a vertical fiscal imbalance. It creates a moral
hazard problem in the sense that sub-central authorities have no incentive to boost tax
revenues from which they will not directly benefit. Asimilar problem occurs if central government explicitly or implicitly guarantees sub-central debt. This is analogous to the situation within the eurozone where the lack of any credible central mechanism to guarantee
state debt contributed to the instability of countries such as Greece and Spain where the
markets took a sceptical view of their capability to repay debt without external support.
Methods for adjusting vertical and horizontal fiscal imbalances are many and varied.
Their design is often a function of constitutional and political structures. For instance,
in the case of Germany, the constitutional relationship between national and sub-central authorities dictates permissible tax and spending responsibilities. Comparable living conditions throughout Germany are constitutionally guaranteed (Feld, 2011). In
Australia, both revenue capacity and spending needs are equalized. The intention is
to ensure that each state can provide the same level of public service, provided that it
achieves the average level of efficiency in public services delivery and makes the average
level of effort to raise taxes from its tax base. Countries such as Canada and Switzerland
adopt a much more laissez faire approach which could be described as competitive federalism. They place much less emphasis on equalization, partly because central government does not wish to encroach on the autonomy of sub-central authorities. Spain has
an asymmetric solution, with the Basque Country and Navarre having almost complete
power over taxation, while increased powers over public spending have been extended
to all regions of Spain in recent decades, though at differing speeds.
Experience suggests that there are no general rules regarding how revenue and spending functions should be distributed between central and sub-central governments. They
are the product of a mixture of economic and political forces, many of which are country-specific. The OECD supports fiscal decentralization in generalterms:

Scotland and small country independence: the assessment

195

IV.Macroeconomicissues
Independence negotiations will strongly influence future macroeconomic relationships
between the seceding and successor states. Each partys negotiating stance will reflect its
view of the optimal design of that relationship. The outcome will determine the extent
to which political independence for the seceding state can be extended into economic
independence.
Currency arrangements may play a vital part in these negotiations. If the seceding
state wishes to retain pre-secession currency arrangements, then the successor state has
to weigh up the costs and benefits of remaining within a currency union. Its considerations would be similar to those relevant to any currency-sharing agreement. They would
involve setting the benefits of reduced transactions costs against the risks associated

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

powers allocated to sub-central governments in Belgium, Spain, and Canada are documented in subsequent articles. In the UK, Scotland, Wales, and Northern Ireland have
been given powers to establish assemblies (or a parliament in the case of Scotland) with
increased powers since 1998. Faced with demands for increased autonomy, central governments in non-federal states have tended to concede additional fiscal powers to subcentral governments. They have tended to stop short of adopting a federal structure,
assuming that additional fiscal powers will provide a stable equilibrium.
Those wishing to press for further autonomy or independence may take a different
view. They might believe that the availability and use of new powers, and comparison
between the competence of governments at different levels, offer new opportunities to
reinforce group identity. While decentralization may enhance financial accountability
and the allocation of public goods, it is not clear that in game theoretic terms, it offers
a stable equilibrium in the face of secession threats. If secessionist pressures reflect differences in group identities, then there is no certainty that these pressures will be allayed
by the extension of fiscal powers.
For example, the possibility of tax competition between the central and sub-central
governments could strain relationships between these governments and thus strengthen
support for secession. This could come about as follows: vertical fiscal externalities
arise when central and sub-central governments set taxes on the same tax base. This
can lead to a version of the common property resource problemthe tax base will be
overexploited. If both or either government raises its tax rate, total revenue may decline.
Suppose that, in response to secessionist pressure, the central government grants the
sub-national government power to levy taxes over a shared tax base. Granting these
powers may permit the sub-national government to more closely meet local preferences
for public goods, which may, or may not, allay secessionist pressures. On the other
hand, competition to exploit the shared tax base may add to pressures for constitutional change by increasing conflict between the different levels of government.
The major fiscal instrument included in the Scotland Act (2012), which will come into
force in 2016/17 if the vote for independence fails, is the sharing of the income tax base
between the UK and Scotland. The Scottish Government will receive revenue equivalent
to 10 per cent of each tax pound payable by Scottish taxpayers. Given the above discussion, it cannot be assumed that this development will allay demands for further autonomy.

196

David N.F.Bell

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

with, for example, fiscal or banking failure in the seceding state. These might be precipitated by a sharp increase in sovereign borrowing costs or by a banking failure.
Again size matters: if the smaller state is too small to play a useful role in rescuing
the other in the event of fiscal or monetary failure, then its only bargaining position in
relation to the currency is the offer of reduced transactions costs. On the other hand,
if the larger state has the capacity to rescue the smaller one, but does not wish to do
so, then it might insist on a joint fiscal pact and joint banking regulation or banking
union as conditions for monetary union. The key issue is how such agreements can be
enforced, if at all. One inauspicious precedent is the Stability and Growth Pact in the
European Union (EU), which was designed to maintain the stability of the Economic
and Monetary Union in the EU. Its signatories agreed to maintain fiscal deficits at or
below 3 per cent of GDP and national debt at or below 60 per cent of GDP. Following
repeated breaches by many of its members, it was replaced in 2013 by a new, stricter
mechanismthe Treaty on Stability, Coordination and Governance in the Economic
and Monetary Union (TSCG). Each signatory to this treaty is bound to introduce an
act under domestic law which guarantees that the national budget balances, or is in surplus. The penalty for non-compliance is a fine of up to 0.1 per cent of GDP, enforced
by the European Court of Justice. This mechanism has not yet been tested.
Assuming that the successor state felt that such a mechanism was enforceable, it
might seek to establish an agreement similar to the TSCG as a price for membership
of the currency union. This would leave the seceding state in a difficult position if it
currently receives fiscal transfers from the central government, since acceptance might
place greater constraints on its ability to spend or cut taxes than the status quo. Political
independence might be achieved at the cost of reduced economic independence.
Alternatively, the successor state could refuse to make any agreement, believing that it
would be unenforceable. The seceding state then has the option of continuing to use the
existing currency without a formal monetary union (dollarization) or to establish its own
currency. The latter course implies greater economic freedom for the seceding state, but
prior to a referendum on independence might be perceived as risky by the electorate. With
dollarization, market discipline would supplant the role of the fiscal agreement. Markets
would determine the conditions under which loans would be made available to the seceding state, bearing in mind that dollarization implies the absence of a conventional lenderof-last-resort facility for the banking system and the absence of deposit insurance.
One card that the seceding state can play relates to sovereign debt. If such debt is
largely the legal responsibility of the successor state, then there is no obligation on the
seceding state to contribute to its repayment. This is the current situation in the UK.
However, unwillingness to accept a share of the debt is likely to be viewed negatively by
the markets. One solution is for the seceding state to pay the successor state some share
of the servicing costs on existing debt, this share reflecting in some way its imputed
liability for the debtsuch as its population share. Nevertheless, this arrangement is
one to which the seceding state would have to agreewhich strengthens its bargaining
position in negotiations on other issues, such as currency. Clearly, the strength of this
position depends on the size of the debt and the seceding states imputed share, agreement over which is likely to be a further source of friction.
The seceding state may try to use its more advantageous bargaining position in relation to debt to influence the currency negotiations. How these issues may be resolved
is impossible to predict and may be influenced by the goodwill (or lack thereof) among

Scotland and small country independence: the assessment

197

V. Independence movements: international case studies

This issue includes articles on the history of independence in Ireland (population 4.6m)
and Lithuania (population 3m), which have become independent, and on the continuing pressures for greater autonomy in Belgium (population 11.1m), Catalonia (population 7.6m), and Quebec (population 8.1m). They discuss and describe different forms
of heterogeneity, but also illustrate the importance of history and the way in which
borders were formed around homogeneous or heterogeneous populations.
The Irish case (presented by Frank Barry (2014, this issue)) has clear parallels with
Scotland in that it involves separation from Westminster government. Its genesis is completely different, in that it arises from a period of guerrilla warfare and harsh military
reprisals between 1918 and 1922. Barry discusses several decades of post-independence
economic development, including the protectionist stance followed by Fianna Fil during
the early history of the republic, which was followed by a change to an outward economic
orientation during the 1950s. The creation of the Irish Industrial Development Authority
(IDA) in 1949 was an inspired decision which led to a period of significant foreign direct
investment (FDI). Increased trade openness became an essential precondition for its strategic aim of joining the European Union, which in turn led to an export led convergence
on Western European living standards over the 1990s. The expansion of trade and FDI
led to reduced dependence on the former colonial power: in 2011, of the foreign-owned
firms manufacturing in Ireland, only 8 per cent were oriented towards the UK market.
The Irish pound was created in 1927 and initially pegged at par with sterling.
Sterlings decline during the 1970s precipitated a search for greater monetary stability
and a reorientation towards the European Monetary System (EMS). The Irish economy
struggled to maintain competitiveness with the UK, its main trading partner, within
this arrangement and was consequently devalued three times within the EMS. During
the 1990s political support for joining the nascent euro increased, with issues such as
asymmetry between the Irish and main European business cycles and the lack of fiscal
transfer mechanisms and cross-border regulatory structures within the eurozone being
set aside. The initial experience with the euro appeared to be successful. Irish exports
to Europe expanded and there was considerable net immigration from A8 countries.4
However, there was also a considerable new inflow of capital from Europe which eventually led to a property bubble and in turn to a banking crisis caused by the failure of
4

The A8 countries were the eight countries with low per capita incomes that joined the EU during the
2004 enlargement.

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

both parties. However, neither party has any interest in causing the other extreme economic dislocation, due to negative spillover effects.
Discussions of these three areas show that secession clearly provides an intriguing set
of challenges for economics. We devote the next section to a discussion of whether the
experience of secession movements in other countries has much relevance to the arguments surrounding Scottish independence. Section VI examines aspects of Scotlands
economic performance and draws some broad conclusions about the strategies being
followed by the protagonists in the referendum campaign.

198

David N.F.Bell

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

the Anglo-Irish bank which had invested heavily in property. State bail-outs for the
banking system led to a significant increase in sovereign debt and eventually to the Irish
Government having to ask the International Monetary Fund and the European Central
Bank for support. The price extracted by the IMF and the ECB for this support was a
severe fiscal tightening.
What lessons could new sovereign states draw from the Irish experience? First, it is
clear that economic re-orientation may be a prolonged and painful experience. Ireland
has diversified away from the UK for much of its trade, but the process took several
decades. Second, the quality of institutions and the way in which they are regulated are
extremely important for a newly independent state. The IDA has been effective in making Ireland one of the most attractive locations for FDI in Europe. On the other hand,
failure to properly regulate the banking system led to the financial collapse in 2008 and
the rolling back of many of the economic gains that had been made in the preceding
two decades. This may exemplify the failure of smaller countries to realize economies
of scale in public-good provisionin this case regulation. However, this argument is
perhaps not that strong. Had Ireland remained part of a currency union with the UK,
it might equally have been caught up in the financial crises in 2008 which to some extent
could be attributable to regulatory failure. Nevertheless, the ability to spread risk across
a relatively large polity meant that the associated costs were less onerous.
Ramnas Vilpiauskas (2014, this issue) describes the process by which Lithuania
became independent. Lithuania experienced a double transformation in the early
1990s. First, it achieved independence from the Soviet Union. Second, it transformed
itself from a centrally planned to a market economy. This involved major economic
and institutional reform, including issues as fundamental as the definitions of property rights, and separation of the links between the Lithuanian and Soviet economies,
including the banking systems. Some of this process was troubled: the implementation
of privatization and land reform suffered from problems of insider information, corruption, and criminal activity. In the years following independence, Lithuanian real
GDP declined by around 70 per cent. Since then it has recovered, but its performance
still compares poorly with that of Estonia, whose institutions and practices had been
less influenced by the former Soviet regime. Estonia has also been much quicker than
Lithuania in opening its economy to trade. The delay in Lithuania has partly been the
result of opposition from domestic vested interests. Infighting over issues such as trade
openness has reduced trust in the political system, which in turn has made it more difficult to effect economic reforms. For new states, the lessons would seem to be about
the paramount importance of establishing strong institutions which facilitate economic
development rather than rent-seeking. The importance of establishing sound institutions is clearly vital for newly establishing states. Although their paths to independence were quite different, both Ireland and Lithuania experienced problems due to the
failure to establish sound institutions and the loss of risk-sharing capabilities. Larger
states, which can realize economies of scale in the establishment of an institutional
framework, might not be so susceptible to institutional failure.
The article by Kim Somers and Franois Vaillancourt (2014, this issue) describes the
experience of Quebec, which remains part of Canada. It held independence referendums in 1980 and 1995. The 1995 referendum followed a period during which support
for sovereignty had grown strongly. The Canadian constitution was seen as an obstacle
to increasing sovereignty in Quebec: several attempts to amend it to give Quebec greater

Scotland and small country independence: the assessment

199

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

autonomy had failed. This was interpreted by many citizens of Quebec as a rejection
of their legitimate demands for enhanced powers, which in turn led to victory by the
Parti Qubecois (PQ) in the 1994 provincial elections. In the following year, the referendum on sovereignty that had been driven by the PQ was defeated by only 1.2 per
cent. This was followed by a decision of the Canadian Supreme Court that, under both
constitutional and international law, Quebec did not have the right to determine its own
independence.
The Quebec case for independence is based on linguistic, cultural, and economic
grounds, which might be described as preference heterogeneity. Equally, it could be
argued that French Canadians have a distinct identity within Canada. The economic
arguments that support the case for secession are similar to those rehearsed in other
potentially seceding territories. First, the PQ desires to retain the Canadian dollar. This
is a mechanism for reducing perceived risks for both businesses and individuals. Lossaversion arguments would suggest that retaining elements of the status quo may be necessary to gain majority support for independence. Second, membership of the North
American Free Trade Agreement (NAFTA) would guarantee access to markets. This
exemplifies the argument that free trade reduces the costs of secession. Third, the PQ
has not committed itself to any particular solution in relation to the sharing of national
debt, though the option of reneging on the debt is largely dismissed owing to the negative effects that it might have on the financial credibility of the new state. (This proposal
has met with a similar response in the Scottish case.) Somers and Vaillancourt suggest
that political uncertainty over the status of Quebec has not had a significant impact
on GDP and investment in Quebec, though there has been a substantial net outflow of
population. Therefore the possibility of significant emigration following independence is
a significant concern. Large numbers of English speakers left Quebec in previous periods
of uncertainty: it is expected that such events would be repeated or perhaps amplified
should Quebec gain independence. Secession would cause sorting that would lead to a
more homogeneous population within Quebec. How that would impact on its economic
performance, given that there are likely gains from diversity, is largely unknown.
As in Quebec, the case for separation in Belgium is based primarily on differences in
language and culture between the Flemish and Walloon populations, with the added
complication of a major city, Brussels, which is largely French speaking, located within
Flemish territory. Marcel Grards short history of Belgium (Grard, 2014, this issue)
reveals the arbitrary nature of its boundaries and the cultural and linguistic heterogeneity that have characterized its development. Asequence of six major reforms between
1970 and 2013 has progressively hollowed out the central state, leaving it with relatively few powers. Grard characterizes this as a dynamic game that has yet to establish
a stable equilibrium and will perhaps only do so when the central state breaks up. The
major, and in a sense accidental, impediment is the location of Brussels within the
Flemish-speaking part of the country. Belgium provides an example of how conceding
economic powers may not offset preference heterogeneity or differences in identity.
Belgium has a public debt of around 100 per cent of GDP, slightly more than that in
the UK. The break-up of the state would likely lead to downgrading of Belgian debt
and increased financing costs. Unlike the UK, the debate around redesigning the state
has moved towards fundamental reforms. These include starting from an assumption
that all competencies are assumed attributed to regions and then arguments put forward for transferring some to the federallevel.

200

David N.F.Bell

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

Antoni Castells describes the case for Catalonian independence (2014, this issue). It
involves both preference heterogeneity and economic issues. The economic case is contingent on the relative wealth of Catalonia compared with the rest of Spain. Incomes
are 20 per cent higher than the Spanish average and it runs a fiscal surplus variously
estimated at between 6.5 and 9.8 per cent of GDP with the rest of Spain (Castells,
2014). Nevertheless, the economic arguments are, in his opinion, trumped by those
which Alesina and Spolaore would describe as preference heterogeneity and which he
describes as political.
Following the demise of Franco in 1978, the Spanish constitution created a State of
Autonomies which put in place sub-central governments. The difficulty was that the
degree of self-determination at the community level was equalized, whereas the demand
for autonomy varied substantially. As in Belgium, further reform followed, involving
the granting of additional power to sub-central governments, albeit in a highly asymmetric fashion. This again raises the question of whether there is any stable equilibrium
between an initial ceding of powers and full independence. An attempt by Catalonia
to call an independence referendum has been rejected by the Spanish Constitutional
Court even though it has 80 per cent support among Catalans.
Castells discusses several options for reform of the existing Spanish constitution and
for secession. The options that involve Spain remaining intact include the introduction
of a truly federal system or a special deal for Catalonia. Under the secession option, key
concerns would be whether it would lead to a reduction in the volume of trade between
Catalonia and the rest of Spain. This so-called border effect has been investigated by
Rodriguez Mora (2012), who suggests that it would result in a 9 per cent fall in Catalan
GDP. Clearly this is a substantial fall and not surprisingly has been contested by other
economists. Nevertheless, such border effects are important for studies of secession
because the empirical evidence is that, other things being equal, trade flows across
regional boundaries are much greater than those across national boundaries.
An alternative explanation of trade patterns within currency unions is the so-called
Rose effect (Rose, 2000). The argument is based on the notion that trade volumes
between countries within a currency union are relatively large, perhaps due to reduced
transactions costs and greater competition. Cafiso (2008) investigates whether the
introduction of the euro caused a reduction in border effects between eurozone members. Larger trade volumes between eurozone members are observed after 1999, but
are not caused by trade costs reductions, which would be expected from the border
effect.
Castells argues that improved economic decision-making would mirror enhanced
political powers, but does not explain why this might be the case. Clearly, the arguments
of Barry and Vilpiauskas around the importance of a sound institutional structure
for a new sovereign state have some relevance. He also discusses the currency issue,
with Catalonia already being locked into the euro and no obvious mechanism for it to
secede while continuing its membership of the euro with the access to ECB liquidity
mechanisms that have provided a lifeline to its banking system in recent years. Potential
exclusion from the euro area might be the one economic issue that would hold back the
pressure for Catalonian secession. This explains why Spain, due to domestic pressures,
may have little incentive to allow Scotland an easy passage into the European Union
an essential precondition for joining the euro. Perhaps this is an appropriate point at
which to focus more specifically on Scotland.

Scotland and small country independence: the assessment

201

VI. Scottish independence: economicissues

5See https://www.gov.uk/government/speeches/chancellor-on-the-prospect-of-a-currency-union-with-anindependent-scotland

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

The remaining articles in this issue focus on economic issues as they might relate to
an independent Scotland. This is no substantial discussion of preference heterogeneity which was evident in the cases of Quebec, Belgium, Catalonia, and Ireland. This is
because the case for Scottish independence is largely being made on economic grounds
rather than on differences in language, culture, etc. Arecent survey of voters attitudes
to Scottish independence (Bell etal., 2014a) shows that economic issuesincomes, pensions, currency, debt etc.dominate cultural and historical concerns in determining
voting preferences. As mentioned earlier, although Scottish identity may be relatively
strong, differences between Scotland and the rest of the UK (RUK) based on language,
culture, ethnicity, or economic disadvantage are relatively minor. Further, Scotland,
when compared with Wales, Northern Ireland, and the regions of England, turns out
to be average in relation to indicators such as income, unemployment, and employment rates. While its business cycle differed from some other parts of the UK when its
economy was dominated by heavy industry, it has been closely correlated with the rest
of the UK for at least the last two decades.
There are two important themes that link these articles. The first is uncertainty.
Scotlands future economic performance is inevitably uncertain. The greater the extent
of the uncertainty, the more likely it is that voters will opt for the status quo. Implicitly
or explicitly, this conclusion has clearly influenced the campaigns, with supporters of
independence suggesting that the future of the Scottish economy under independence
can be predicted accurately, while those who oppose independence portray the future as
very uncertain. Both sides of the independence argument understand that uncertainty
about currency could have significant effects on voter attitudes and in February 2014
the UK Government announced that it would not share a currency with an independent Scotland,5 a conclusion that was supported by the major opposition parties and the
Permanent Secretary to the Treasury. This might appear to be an example of strategic
game-playing, with the objective of increasing uncertainty in the minds of Scottish voters. Trying to dampen this reaction, the response of the Yes campaign is to argue that
the UK Government stance is not credible because it is against its own interest.
The second theme is interdependence. Future economic performance is inevitably
contingent on bilateral or multilateral negotiation whose outcome cannot be known
prior to the referendum. The UK Government has refused to engage in any pre-negotiation before the outcome of the referendum is known. Negotiations would be necessary in areas such as fiscal rules, debt, and currency (Adam etal., 2014; Armstrong and
Ebell, 2014). Another aspect of interdependence is the extent to which the freedom to
set economic policy in an independent Scotland would be constrained by its interactions with goods, labour, and capital markets that extend beyond its own boundary.
This is certainly true of energy (Hughes, 2014) and of labour (Comerford and Eiser,
2014; Bell etal., 2014b).
Angus Armstrong and Monique Ebell (2014, this issue) consider the issue of the
debt that an independent Scotland might inherit and how that might constrain its fiscal
policy in the future. Their argument is that, on the basis of any reasonable division of

202

David N.F.Bell

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

existing assets and liabilities, an independent Scotland would begin with a significant
level of debt. They argue that both the experience of the break-up of Czechoslovakia
and the failed attempt to establish independence in Quebec suggest that retaining physical assets where they are located, and assigning non-physical assets and liabilities using
population or income shares, would be perceived by external observers, including financial markets, as fair. Scotland would also benefit from around 56 billion worth of oil
revenues due to the application of internationally accepted norms regarding the allocation of seabed resources.
They argue, however, that some assets cannot be shared. These include the reputation
of the UK Government as a body which does not default on its debt. An independent
Scotland could not share in this asset and markets would therefore price Scottish debt
differently due to a different defaultrisk.
Armstrong and Ebell analyse different measures of debt and show that, measured in
relation to UK public-sector net debt, an independent Scotland would be likely to have
a debt-to-GDP ratio of between 80 and 91 per cent, depending on whether the measurement is based on a population share, or on an historic debt share (Scotlands contribution to UK net debt aggregated over time). The choice of starting date1980/81for
the construction of the historical record particularly suits the Yes campaign since it
coincides with the onset of significant North Sea oil revenues. They show that Scotland
would need to run primary surpluses of around 3.1 per cent per annum to achieve the
Maastricht-defined debt-to-GDP ratio of 60 per cent over 10years following independence. This would be a daunting target.
David Bell, Allan Findlay, David McCollum, and Robert Wright (2014b, this issue)
focus on migration. Whereas net migration has historically been negative, it turned
positive during the early part of this century, following the accession of the A8 states
to the EU. Data from the Workers Registration Scheme showed that by March 2009
over 80,000 A8 workers had registered in Scotland, representing around 7 per cent of
all A8 workers who have come to the UK under this scheme. They argue that labour
migration to Scotland is unusually low, given its per capita income. In contrast, international student migration is relatively high. The latter has a greater economic significance in Scotland than in RUK in that it makes a greater contribution to net trade.
The Scottish Government (2013) White Paper argues that increased net migration is a
potential driver of economic growth.
Bell etal. (2014b) explore the extent of popular support for increased migration to
Scotland. Using survey evidence, they find that attitudes to immigration are negative
among Scottish voters, but less so than is the case in RUK. Further, and somewhat in
contrast to the Alesina and Spolaore argument of secession as a response to preference
heterogeneity, they find that supporters of independence are more open to the prospect
of increased immigration than are opponents of independence.
Finally, they investigate whether it is possible for a central state to implement subcentral migration policies successfully. Whereas most central governments retain control
over entry conditions to a state, but perhaps devolve responsibility over assimilation
policies, there are instances where a central government applies different immigration
policies within its territory. An example is the agreement between the Canadian federal
government and Quebec. The Ottawa government uses a points-based system to select
migrants: the Quebec government is allowed to vary the points allocation to the various
personal attributes used in the assessment. Thus, the threshold for migration to Quebec

Scotland and small country independence: the assessment

203

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

is different from that applied in the rest of Canada. This system appears to operate without great concern over post-entry movement between Quebec and the rest of Canada.
Stuart Adam, Paul Johnson, and Barra Roantree (2014, this issue) focus on tax
design in an independent Scotland. They first show that sources of onshore revenue
do not differ greatly between Scotland and the UK as a whole. The biggest difference
lies in income tax receipts, which are somewhat lower in Scotland than in RUK. The
explanation lies in there being relatively fewer very high-income taxpayers in Scotland
and somewhat lower investment income. Council tax receipts are also lower, with rates
of council tax applied to properties in a given band being 20 per cent lower in Scotland
than in England in 2011/12. This is a policy choice of the Scottish Government that has
no obvious spillover effects due to the immobility of the taxbase.
Adam etal. (2014) also address the question of the oil revenues that an independent Scotland might expectan issue of considerable complexity and controversy. Most
commentators now accept that, based on international legal conventions, an independent Scotland would be entitled to a geographical share of oil revenues, giving it around
90 per cent of current UK revenues, rather than a population share, which would reduce
its entitlement to 8.4 per cent. There is substantial disagreement on how the revenues
are likely to evolve post-independence. First, it is not clear whether Scotland would be
able to raise more or less revenue per barrel produced. This would depend on whether
it could deal more or less effectively with oil producers than the UK Government: it
would be in a weaker bargaining position since oil companies would be aware that it
is more dependent on oil as a source of revenue than is the UK Government. There is
also substantial disagreement between the Scottish Government and other commentators about the likely course of oil revenues in the short to medium term. Oil revenues
are clearly very volatile, but with production on a declining trend, the evidence seems
to suggest that oil revenues are also likely to fall. Adam etal. conclude that: Going
forward it is clear that an independent Scotland could not plan its public finances by
treating oil and gas revenues as certain.
In relation to the design of taxes in an independent Scotland, Adam et al. (2014)
argue that there will be increased compliance costs because taxpayers have to sort out
the jurisdiction within which their tax liabilities now fall. Such costs also arise if there
is increased tax devolution within the UK. Narrowing the geographical scope of taxes
creates incentives to relocate the tax base. Income elasticities are unlikely to fall as a
result of independence so long as freedom of movement is maintained, since, aside
from other behavioural responses to changing rates, taxpayers will have the additional
option of moving to a different tax jurisdiction. Corporate taxation would be complicated by the need to determine where income is earned, which is both conceptually
and administratively difficult. This may affect the viability of some investment opportunities, cause inefficient redirection of economic activity or increased manipulation
of profits (and taxes) through transfer pricing. Indirect taxes are generally charged on
the basis of where the goods or services are consumed. This reduces the possibility of
tax distortions. But they are not eliminated. In particular, cross-border transactions
between registered traders would have to be zero-rated. This increases administrative
costs and increases the scope for seriousfraud.
The Adam etal. paper clearly explains the several challenges that would face an independent Scotland in designing its own tax system. This would clearly involve a number
of initial costs, but the design would also have to take account of the mobility of the

204

David N.F.Bell

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

tax bases, which would be relatively more important for a small country with a large
neighbour than for a large country with a small neighbour. The existence of separate
tax jurisdictions may lower average tax rates below their social optimum. In particular,
the Scottish Government has an aspiration to reduce corporation tax by up to 3p below
equivalent rates for the UK. The intention is to use a low corporation tax rate to attract
inward investment in the way that Eire has done in recent decades. It is difficult to see how
this would be acceptable to a UK government. Strong opposition to this measure would
likely form part of the UK negotiating stance. However, tax competition can occur within
states as well as between states. Even if Scotland does not become independent, it has
already gained enhanced powers over income tax. Enhancement of these powers may be
offered by politicians anxious to deter voters from supporting independence. This could
result in tax competition between different levels of government that in turn results in
excessively high tax rates that diminish social welfare (Dahlby and Wilson, 2003).
Though the case for separation may be based on economic issues, these are not
restricted simply to raising average or median levels of various economic indicators.
Distributions also matter. David Eiser and David Comerford (2014, this issue) examine whether an independent Scotland could promote social justice by reducing current
levels of income inequality, which are among the largest found in the OECD. Levels
of inequality in Scotland are broadly the same as those in England excluding London.
Eiser and Comerford argue that realistic adjustments to the tax and benefits system
are unlikely to lead to sufficient reductions in inequality to bring Scotland in line with
Scandinavian countries. This could only be achieved through mechanisms that led to a
more equal distribution of pre-tax incomes.
The paper by Gordon Hughes (2014, this issue) focuses on natural resources and
energy. These are relatively more important to the Scottish economy than to the UK
as a whole and would continue to be so post-independence. Akey element in the case
for independence is that constitutional change will offer more control over the way in
which Scotlands resources are exploited and, thus, perhaps ensure that a higher proportion of the resource rents accrue to those living in Scotland. That argument is valid
but double-edged. The benefits of obtaining a greater share of resource rents must be
weighed against a sharp increase in the risks of being exposed to the macro and micro
effects of relying on a sector where prices are extremely volatile.
These issues will require economic discipline and adjustment to a degree of increased
revenue volatility. Relying on convenient assumptions about market arrangements and
performance after independence, the Scottish Government makes the case that greater
ability to exploit natural resources will enhance economic performance. It is easy to
react to such presentations by over-emphasizing the potential disadvantages of separation. That is equally misleading. Scotlands energy sector can, and will, adapt to independence, but the process will not be simple and the costs may include an acceptance
of much higher levels of risk. If this is the case, rates of return on capital are likely to
increase, reducing the rent available for taxation.
This brings us to the final paper by Robert Young (2014, this issue). The literature
discussed at the beginning of this assessment used comparative statics to explain the
forces that determine the size of nations. This meant that the transition costs associated
with independence were largely neglected. Young shows that these costs of transition
are extremely important. They may influence voter behaviour, particularly those with
high rates of time preference.

Scotland and small country independence: the assessment

205

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

Transition costs take the form of transactions costs, fiscal costs, and uncertainty
costs. Transactions costs which bear on both states include the resources devoted to
disentangling the two states. These would be acute where cross-border contracts would
need to be renegotiated and rearranged. There might be an issue with public assets,
such as defence establishments, where control might be contested or not be clear. The
costs of setting up new institutions bear on taxpayers in the seceding state. But not all
of the costs, such as the adjustment costs of firms, will necessarily be reflected in the
national accounts. Fiscal costs will emerge if the seceding state has a more adverse
fiscal balance than the predecessor state. This issue is discussed both by Adam etal.
(2014) and by Armstrong and Ebell (2014). Finally, uncertainty will impact on individual and firm location decisions, on the location of transactions, credit, and capital flows. Uncertainty is likely to be reflected in increased borrowing costs which will
adversely affect the public finances. These risks include: (i) political riskthe result
of uncertainty about future public policies; (ii) default risk, because of uncertainty
about the creditworthiness of both the continuing and the seceding state (again see
Armstrong and Ebell, 2014); (iii) currency risk, arising from uncertainty about future
exchange rates; or (iv) redenomination riskthe risk that Scotland continues to use
sterling, but reserves the right to establish its own currency at some future date (Scottish
Government, 2013).
However, these are not all one-sided risks. The political, macroeconomic, and fiscal
environments always carry a degree of risk, irrespective of pressures for secession. It is
possible, for example, that the UK will leave the EU in the medium term, an outcome
which poses significant risks for the business sector. UK taxation policy in respect of
North Sea oil has been variable, leading to significant swings in exploration activity.
The Scottish Governments case for independence emphasizes such risks, attempting to
present them as balancing the risks associated with independence.
The strategies followed by the Scottish and UK Governments in the lead-up to the
referendum fit exactly within Youngs characterization of the strategic game playing aspects of the secession process. The proponents of secession try to minimize the
expected costs of leaving a political union. Advocates of the status quo try to depict the
costs of independence, including the transition costs, as high. Pre-commitment to postindependence arrangements is unlikely. Pre-negotiation is even less probable. The debate
becomes increasingly polarized, minimizing any likelihood of cooperation between the
parties. Public opinion also becomes increasingly polarized. Young observed this phenomenon in the Czech and Slovak Republics and in Quebec. Most recently, extreme
polarization between Russian and Ukrainian residents has been evident in the Crimean
process of secession. Polarization may perhaps best be explained by reference to the
first part of this article. Though observable differences between individuals have not
changed, the divisive nature of the debate causes individuals to feel compelled to
identify with one or other side of the independence argument. Recalling Chen and Li
(2009), identification with a group causes individuals to take actions that are beneficial
to group members and adverse for others, possibly reinforcing the polarization.
Young shows that such non-cooperative stances mean that outcomes of strategic
games played between the continuing and seceding states may be sub-optimal. He
argues that threats of non-cooperation and practising retaliatory non-cooperation can
be seen as the strategy most likely to produce mutually beneficial compromises in the
long run. This conclusion is based on the view that secession is a repeated game though

206

David N.F.Bell

References
Adam, S., Johnson, P., and Roantree, B. (2014), Taxing an Independent Scotland, Oxford Review of
Economic Policy, 30(2), 32545.
Alesina, A., and Reich, B. (2013), Nation Building, Working Paper No. 18839, National Bureau of
Economic Research.
Spolaore, E. (1997), The Size of Nations, Cambridge, MA, MIT Press.
Akerlof, G. A., and Kranton, R. E. (2000), Economics and Identity, Quarterly Journal of Economics,
115(3), 71553.
(2005), Identity and the Economics of Organizations, Journal of Economic Perspectives, 19(1),
932.
Anderson, B. R. OG. (1991), Imagined Communities: Reflections on the Origin and Spread of
Nationalism (revised and extended edn), London, Verso.
Armstrong, A., and Ebell, M. (2014), Assets and Liabilities and Scottish Independence, Oxford
Review of Economic Policy, 30(2), 297309.
Barry, F. (2014), Diversifying External Linkages: The Exercise of Irish Economic Sovereignty in
Long-Term Perspective, Oxford Review of Economic Policy, 30(2), 20822.
Bell, D. N. F., Delaney, L., and McGoldrick, M. (2014a), Citizen Preferences for Constitutional
Change in Scotland, available at http://esrcscotecon.files.wordpress.com/2014/05/individualpreferences.pdf
Findlay, A., McCollum, D., and Wright, R. E. (2014b), Labour Migration Policy and Constitutional
Change in Scotland, Oxford Review of Economic Policy, 30(2), 31024.
Besley, T. J., and Coate, S. (2003), Centralized versus Decentralized Provision of Local Public Goods:
APolitical Economy Approach, Journal of Public Economics, 87(12), 261137.
Rosen, H. S. (1998), Vertical Externalities in Tax Setting: Evidence from Gasoline and Cigarettes,
Journal of Public Economics, 70(3), 38398.
Cafiso, G. (2008), Euros Influence upon Trade: Rose Effect versus Border Effect, European Central
Bank Working Paper 941, September.
Castells, A. (2014), Catalonia and Spain at the Crossroads: Financial and Economic Aspects, Oxford
Review of Economic Policy, 30(2), 27796.
Chen, Y., and Li, S. X. (2009), Group Identity and Social Preferences, American Economic Review,
99(1), 43157.
Comerford, D., and Eiser, D. (2014), Constitutional Change and Inequality in Scotland, Oxford
Review of Economic Policy, 30(2), 34673.
Dahlby, B., and Wilson, L. S. (2003), Vertical Fiscal Externalities in a Federation, Journal of Public
Economics, 87(5), 91730.
Easterly, W., and Levine, R. (1997), Africas Growth Tragedy: Policies and Ethnic Divisions, Quarterly
Journal of Economics, 112(4), 120350.

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

the time periods involved may be extended, and the credibility of retaliatory threats
may change. Nevertheless, Youngs characterization of the secession process accurately
captures the behaviours observed in the UK and Scotland.
The transition costs associated with secession are uncertain in the sense that they
depend on how the parties behavewhether they choose to cooperate or not. Noncooperation is likely to be the best strategy prior to a referendum. Opponents of independence will attempt to increase uncertainty before a vote and will not engage in
pre-referendum cooperation even though this may incur future costs. Young argues
that more dispassionate scholarship and analysis can help citizens better understand
the situation and make informed choices. This seems like good advice for any state
affected by secession movements.

Scotland and small country independence: the assessment

207

Downloaded from http://oxrep.oxfordjournals.org/ at Biblioteca de la Universitat Pompeu Fabra on March 17, 2015

Feld, L. (2011), written evidence to the Scottish Parliament, available at http://archive.scottish.parliament.uk/s3/committees/scotBill/documents/49.SBProfessorLarsPFeld.pdf

Grard, M. (2014), Economic Aspects of Constitutional Change: The Case of Belgium, Oxford
Review of Economic Policy, 30(2), 25776.
Hughes, G. (2014), The Energy Sector in Scotlands Future, Oxford Review of Economic Policy, 30(2),
37491.
OECD (2014), OECD Fiscal Federalism 2014, Paris, Organization for Economic Cooperation and
Development, available at http://www.keepeek.com/Digital-Asset-Management/oecd/governance/
fiscal-federalism-2014_9789264204577-en#page4
Posner, R. (2012), The Optimal Size of Countries, available at http://www.becker-posner-blog.
com/2012/12/the-optimal-size-of-countries-posner.html
Rose, A. K. (2000), One Money, One Market: The Effect of Common Currencies on Trade, Economic
Policy, 15(30), 746.
Scottish Government (2013), Scotlands Future, available at http://www.scotland.gov.uk/
Publications/2013/11/9348
Somers, K., and Vaillancourt, F. (2014), Some Economic Dimensions of the Sovereignty Debate in
Quebec: Debt, GDP, and Migration, Oxford Review of Economic Policy, 30(2), 23756.
Spolaore, E. (2008), Civil Conflict and Secessions, Economics of Governance, 9(1), 4563.
Rodrguez Mora, J. V. (2012), Portugal, Espaa, Catalua. Amics per sempre (I and II), Nada es
Gratis (fedeablogs), 12 and 14 October,
Tilly, C. (1975), On the History of European State Making, in C. Tilly (ed.), The Formation of
National States in Western Europe, Princeton, NJ, Princeton University Press.
Vilpiauskas, R. (2014), Lithuanias Double Transition after the Re-establishment of Independence in
1990: Coping with Uncertainty Domestically and Externally, Oxford Review of Economic Policy,
30(2), 22336.
Young, R. (2014), Transition Costs in Secessions, with a Brief Application to Scotland Oxford Review
of Economic Policy, 30(2), 392405.