Nations, Conglomerates, and Empires: The Tradeoff between Income and Sovereignty

Abstract

One of the apparent inconsistencies in the breakup of multinational states is that, while the republics justified their decision by claiming they wanted increased sovereignty, the new states' strong desire to join the European Union shows their intention to dissipate this sovereignty. How can the two desires be reconciled? The author explains that full sovereignty is neither reachable nor desirable for most countries. Economic sovereignty is normally limited in key areas: exchange rate policy, trade policy, labor and banking regulations, and so on. There is a tradeoff curve between sovereignty and income. The author tests the following premises: a) larger countries (measured by GDP) are more sovereign; and b) countries with abundant natural resources or skilled workers as well as democratic countries tend to be more integrated. The author finds a statistically strong impact of per capita wealth and democracy on international integration. The effect of country size is weaker. The author discusses why different countries may wish to form conglomerates. He finds that the willingness to join conglomerates is greater for countries that are relatively poor and for democracies. The country size effect is U shaped. The key gain from independence for the relatively rich republics that were former members of the Communist conglomerates was not the economic sovereignty in itself but the ability to switch from a poor to a rich conglomerate.