I recently heard the economist and Professor Xavier Sala i Martín in the morning political talk radio show led by Jordi Basté, reflecting on the possible independence of Catalonia, with a totally different approach that everyone has been doing until now. He focused on Game Theory to analyze the current and future situation. For many of you these concepts will be known, while for others, will be entirely new. So, here’s a brief summary.
Game theory has many applications: math, poker, real life, and a great burden on the economy. It is used to study the decisions you make in a given situation with incentives and various agents involved. In general, we study the alternatives and optimal strategies.
The clearest example is the Prisoner’s Dilemma in which two people are arrested for minor felonies and placed in two separate interrogation rooms. Interrogators are aware that they may have committed a major felony, so they proceed to a deeper questioning. The sanction for minor felonies is two years of jail. If they both betray the felony, the sanction is stipulated in 5 years. Whereas if one betrays and the other does not, the traitor will go 1 year to jail for collaborating and the betrayed will go 10 years to jail for being the main offender.
What will be their choice? The optimal situation (Pareto optimal) would be Not Reveal, but the lack of information is the reason by which they both will betray each other, meaning that they reach the Nash equilibrium. That is, the point at which everyone has made a decision and cannot change it, because changing worsens their situation. In the Nash equilibrium both spend 5 years in prison, but if one of them decides not to betray their situation will actually be worse, changing to 10 years in prison instead of 5.
And so, how does all of this apply to the situation between Spain and Catalonia?
Although the situation has considerably reduced voltage, it should be noted that Catalonia continues to raise the referendum process, and therefore we have to evaluate the position of both agents to see what their next move might be.
Step by step. Catalonia:
• It is the largest contributor to the State Tax Administration: according to figures provided by the Government there is a deficit of 8% of GDP, or what is the same, in 2009 the state collected 61,812,000€ in Catalonia, and reversed 45,403,000€ .
• Is the Community with the largest influx of foreign tourists in Spain, 13.2 million foreign tourists in 2010, more than four million than Baleares (second most visited).
• It is the HUB between Spain and Europe via Highway and Train. Almost every single track with Spanish products crosses Catalonia to reach France.
• Has one of the most powerful cargo ports in Europe. It is the entry gate of many products imported by Spain.
• Represents 20% of Spanish GDP, a weight and a great economic engine.
• Needs to stay within the euro, because otherwise, it is presumed independence as impossible.
• As an independent state, could manage its own resources, and for example, invest in the Mediterranean Corridor.
• Is the tax collector and the first interested to force Catalonia to remain within the State, basically in order to contribute for future debt payments.
•Needs to show integrity and stability in order to get support, resources and approvals by EU member countries.
• Is not interested in putting a border barrier with Europe, because this would mean having to pay duties and taxes when crossing the border to get access to France.
• Has the ability to veto the entry of Catalonia within the Euro.
• Is responsible for investing and managing infrastructure and resources.
Taking all these assumptions and theoretical situations into account, it seems clear that although many want economic independence, cultural and boundaries with Spain, the game theory pushes us to Nash equilibrium with almost perfect information in which:
• Spain and Catalonia reach a fiscal pact allowing Catalonia to continue growing and investing in infrastructure and social services in a more intensive way than today.
• Catalonia abandons the struggle for independence to ensure economic and social stability in the country.
• Spain guarantees tax revenue, port controls, airports, building taxes, etc. to Catalonia.
• Catalonia jointly contributes to the rest of the country in a fair and agreed deal