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Stanford Professor Michael Boskin : Coming Together And Falling Apart

1232 Michael J. BoskinMillions of people worldwide watched the athletic achievements at the Sochi Olympics and the opening and closing ceremonies’ majestic portrayals of Russian history and culture. But the cost was immense, the alleged corruption dispiriting, and the contrast with the political situation in nearby Ukraine alarming.

After lining up for an Association Agreement with the European Union, former Ukrainian President Viktor Yanukovych instead opted for closer ties with Russia, following immense pressure from the Kremlin, as well as a promise of $15 billion in financing. Three months of protests and riots ensued. A parliamentary vote stripped the high-living Yanukovych of power, and he fled to Russia. The situation remains tense and fluid. Russian troops have occupied Crimea, and European and American leaders are threatening to impose stiff sanctions on Russia if it does not respect Ukraine’s sovereignty.

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But Ukraine’s disunity is obvious. Eastern Ukraine has close linguistic, cultural, and economic ties to Russia, while western Ukraine leans more toward continental Europe. Some of Ukraine’s regions have historically been a part of Russia, Poland, or the Ottoman Empire. Peter the Great, whose eighteenth-century Westernization of Russia was portrayed in Sochi, fought the Crimean Tatars, many of whose descendants were dispersed by Stalin to other parts of the former Soviet Union. Some fear that Ukraine could break apart.

An EU Association Agreement could be a huge boon to the Ukrainian economy. When smaller economies gain access to a much larger market, trade volumes expand and wages rise, with a small part of the trade expansion diverted from other countries (one of Russia’s concerns).

But, beyond the direct gains from trade, such a pact holds the promise of opening up and accelerating the transformation of Ukraine’s economy and polity. Competing for the EU’s more discriminating consumers would force Ukrainian producers to improve their competitiveness by raising productivity, quality control, and marketing and logistical capabilities. Over time, Ukrainian producers would become part of an integrated supply chain alongside EU producers.

Canada and Mexico were transformed in this way by the 1987 US-Canada Free Trade Agreement and the 1994 North American Free Trade Agreement. On average, 40% of Mexican exports to the United States now have US content.

But free-trade agreements presuppose the existence of established political borders, and Ukraine is not the only country that might come apart. The United Kingdom, Canada, Spain, Iraq – and even the US state of California – among others, face a similar possibility, albeit more or less remote. What all of these situations have in common is a wide diversity of cultural, ethnic, and economic interests.

Scotland, for example, has much local authority, yet will vote on independence in September. The secessionists hark back to eighteenth-century English brutality and claim that Scotland will be able to keep all of its North Sea oil and shed its share of the UK’s debt. In fact, both are likely to be shared. Those who prefer to remain in the UK cite a loss of markets, possible loss of the pound sterling, and reduced significance on the European and world stage. The betting is that the Scots will vote to remain.

In Spain, some Catalonians have episodically demanded independence, as have some Flemish in Belgium and some Québécois in Canada. Iraq periodically verges on splitting into Sunni, Shia, and Kurdish states (the Kurds already have considerable autonomy).

In California, every decade or two, proposals surface to split the state into a North and South California. The more arid and populous south has traditionally been more politically conservative than the north (Los Angeles is an exception). Water diversion in a difficult drought year, along with Governor Jerry Brown’s proposal for massive new infrastructure to send water south, has heightened tensions.

A prominent venture capitalist, Tim Draper, wants to put a proposition on the ballot to split California into six separate states. (California often makes big decisions – from limiting property taxes to formulaic restrictions on state spending – by ballot initiative.) Even if Draper’s proposed initiative qualifies and passes, it would require approval by the US Congress, which is unlikely.

Which responsibilities should be left primarily to individuals acting within markets, families, and communities, and which fall to government? And at what level of government – federal, regional, municipal, or supranational – are the latter responsibilities best exercised?

These are timeless questions; but, in an era of increased and instantaneous communication, centralized, big-government bureaucracies are creaking or worse. People want more effective and more affordable government that responds to their concerns, and are demanding that decisions be decentralized.

We may be in the early stages of reversing the trend toward increases in the size, scope, and centralization of government, with authority devolving on more localized environments, closer to where people live and work. More and more people seem to be increasingly unwilling to live by current government decision-making processes. Even with democratic majority rule, minorities believe that their interests and rights – economic, cultural, or religious – are not being protected. The proliferation of calls for devolution, secession, and independence is but one manifestation of this tectonic shift.

Michael J. Boskin, Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution, was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993.

© Project Syndicate 1995–2014



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