The Proliferation of Sovereigns: Are There Lessons for Integration?

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While most of the attention recently has gone to the vaguely defined phenomenon of “globalization” it is not often noted that an empirically equally important phenomenon is the proliferation of sovereign states. This proliferation of states has created increasing numbers of the political and economic perquisites of statehood: not only are their more flags, more borders, more armies, but also more monies, more control of labor flows, more control of trade, more independent contract enforcers (judiciaries), more independently determined economic policies. In this paper we ask what can be learned from the grand “experiment” with the expansion of the numbers of sovereign states about current discussions of reform and integration. First, we examine the pattern of expanding numbers of sovereign states. Second, we postulate a simple theoretical framework that establishes that sovereignty may increase or decrease steady state income. The impact of borders would tend to reduce market scope and hence reduce income. The policies adopted with sovereignty could either increase or decrease income. Third, we use an episodic analysis to compare growth outcomes of countries before and after sovereignty. Fourth, we compare the variance of growth outcomes across countries to variances across states or provinces within countries. Fifth, we examine a specific case study by focusing on the variation across the Caribbean. Sixth, we do some econometric analysis to try to disentangle the effect of market size from that of policies. This analysis produces several conclusions. First, unlike the optimistic expectations, the expansion of sovereignty, which allowed national control of economic policies, has not in fact produced universally positive results. In particular, the newly independent countries slowed down relative to OECD countries and did no better on average than old independent countries. Second, econometric analysis shows that — controlling for the quality of policies — the market size effect is large. Third, the variance of outcomes has been dramatically increased by the expansion in sovereignty. Fourth, deep integration — in the sense of binding commitments on the range of actions of the national sovereign — holds some promise of reducing growth rate variance but would only accelerate mean growth if the effect of increasing market size is not accompanied by a worsening of policies.