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

October 1996 Why after the breakup of such multinational states as the Soviet Union, Czechoslovakia, and Yugoslavia - whose republics justified their decision by claiming that they wanted to regain their sovereignty - did the new states express strong desire to join the European Union, thus dissipating the very sovereignty they had sought? One of the apparent inconsistencies in the breakup of such multinational states as the Soviet Union, Czechoslovakia, and Yugoslavia is that while the republics justified their decision by claiming that they wanted to increase (regain) their sovereignty, the new states' strong desire to join the European Union shows their intention to dissipate the very same newly acquired sovereignty. How can the two desires be reconciled? Why would someone go through the ordeal of secession in order to quickly get rid of the very sovereignty that justified the secession? Or was sovereignty not the real (or sole) goal behind the secessionist drive? Milanovic explains that full sovereignty (like the individual's full freedom) is neither reachable for most countries nor desirable - because greater sovereignty is often traded for reduced income. Economic sovereignty is normally limited in key areas: exchange rate policy (by rules stemming from IMF membership, for example, or participation in regional currency systems), trade policy (by GATT rules, for example), labor and banking regulations, accounting practices, and so on. There is a tradeoff curve between sovereignty and income. Countries do not choose maximum sovereignty, but an optimal one. They choose a combination of income and sovereignty that allows them to maximize welfare. But that combination is not the same for all countries. ° Larger countries (measured by their GDP) have the luxury of choosing more sovereignty per unit of income, simply because for them domestic markets are mo...