Another economic look at sovereignty

Our results suggest that a certain degree of sovereignty – though a ra ther limited one is necessary – in order to be able to pursue successful eco-nomic strategies, but there is by no means an automatism that leads to higher levels of welfare in sovereign (very small) countries. As noted

above, the structure of the current international economic system (free capital movements, less protectionism etc.) has it made easier to survive economically as a VSC. This conclusion, which is in marked contrast to economic theory, is the only one that is able to explain the recent surge in secessions from an economic point of view. It must have generally be-come more feasible to succeed as a small country or territory (even if the economic impact on this greater feasibility may be rather small), al -though public sector disadvantages seem to have risen, according to Chapter 3. The actual level of wealth in VSC, however, mainly depends on the ability of exploiting opportunities and adapt to the international economic environment. There are good opportunities for VSC to succeed, but there are no sine qua nonprerequisites for success if trade openness is pursuable and geographic location is not remote. Further evidence for this conclusion is provided by the 13 low-income VSC, which have been specializing in sectors very similar to those of the eight high-income VSC, with many of them having had economic starting po-sitions similar to those of the high-income countries.

Sovereignty may be simply viewed as a territorial law-making mo-nopoly. It allows the favoring of certain groups of people, certain branches or certain individuals. A country which is internationally recog -nized can exert full law-making authority, but it is limited by a lot of ex-ternal constraints. These constraints might be inherent to the economic and political system (it would be rather silly, for example, to forbid im-ports). They might also be the consequence of international treaties and regulations. The latter are however mostly general enough to leave some space for preferential strategies and some scope for tailored law-making in VSC.¹³⁰It would be very costly to change these treaties and regula tions, because it often requires a high quorum of consent, which is some -times difficult to achieve. Some larger countries also profit from these loopholes of treaties and international regulations, which is an incentive for them to protect the status quo.Note that it is often much more fea-sible to install a system of monitoring against unfair competi tion bet-ween countries, tax haven policies and races to the bottom. In many ca-ses, monitoring activities do not lead to serious consequences, but the

130 A notable exception is the EU, where we have very detailed regulations in some areas. When we take tax policies as an example, there is however quite a lot of space left for national policies.

negative publicity alone may be a very effective tool in eliminat ing ad-verse behavior.

It is nevertheless astonishing that the tax policies of certain VSC, which have often been criticized by larger countries as unfair, have not been tackled seriously. The problem with the modification of interna -tion al treaties is only one explana-tion for this phenomenon, because there are always possibilities to challenge adverse practices. Think, for instance, of the endless discussions and retaliation policies between the EU and the USA in the WTO framework, when certain protectionist measures or «unfair» subventions are at stake.

Two arguments can provide good explanations. First, VSC and SAR are sometimes simply negligible, and what is important for them is prac-tically a non-issue for larger countries. Given the ongoing discussion on tax havens and harmful tax practices, which are a serious concern for lar-ger countries, this first argument can only be a partial explanation, and the argument is not supposed to hold in the case of tax policy. The se-cond argument is assumed to have much more explanatory power. It states that influential groups in larger countries have an incentive to maintain loopholes in international treaties and regulations which allow VSC and SAR to pursue niche strategies. This argument might also ex-plain why countries allow some of their territories to have a higher level of effective sovereignty than other parts of the country. These autono-mous regions, of course, often originate from secession endeavors, but many countries have the possibility and power to cut back autonomous rights just as the international community could constrain VSC policy options, especially in the field of tax competition if it wanted to.

Which groups in larger countries might have an interest in main -tain ing the status quo? There are several groups that benefit from the status quo of VSC’s and SAR’s law-making authority. From a public choice point of view, (tax) competition between larger countries and VSC and/or SAR limits the effects of the territorial monopoly that one’s own country can exert. In an environment of capital flow liberalization, the existence of VSC and SAR, combined with their tax haven policies, clearly limits the scope of action of a leviathan government in a larger country. Protecting VSC and SAR is therefore a kind of self-protection against the monopoly power of one’s own government. Federalists, libe-rals, enterprises, rich individuals, advocates of subsidiarity and the relevant lobbies might have an interest in protecting the lawmaking au

-thor ity of VSC and SAR in those areas where they thereby can constrain their own country’s policy options. It is questionable if the niche strate-gies of VSC and SAR would still be possible without this external sup-port.

The benefits of sovereignty hence do not depend on country size, but the negligibility of VSC and SAR makes it much easier to pursue niche strategies. In principle, however, larger countries would be able to follow similar strategies, though they would have to face serious oppo-sition from other countries. Negligibility therefore is a necessary but not sufficient condition.