Running-head: Little countries. Small but perfectly formed | |||||
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There are more countries in the world than there ever have been before. So is it better nowadays to be a small nation than a big one
The explosive growth in the number of independent countries in the
past 50 years means, as Alberto Alesina, a Harvard economics professor,
points out, that half of the worlds countries now have smaller populations than the state of Massachusetts.* Yet this growth has taken place at a time when
many parts of the world seem to be trying to band
together to capture the advantages of scale, such as the single
market and the common currency that Europe aims for. What does
that say about the costs and benefits of size? And do the main advantages of sizesecurity and a large domestic marketcount for less in a world of increasingly liberal trade and
technologies that largely overcome distance?
Small states are nothing new, of course. The city-states of ancient
Greece had populations smaller than Icelands today: Athens, at its peak in the age of Pericles,
had perhaps 200,000 people, slaves included. Renaissance Italy was also a
world of tiny city-states: Florence, that cradle of so much art,
had some 70,000 citizens in its heyday; Venice, the Hong Kong
of the medieval world, had 115,000.
But small states went out of fashion in the 19th centurys rash of national takeovers and mergers. Italy was unified in
1861, Germany a decade later. Britain, France, the Netherlands and others
busily assembled empires. The pundits of the day took a dim
view of the small is beautiful school of political theory: according to the late Eric Hobsbawm,
a British historian, the Dictionnaire Politique of Garnier-Pages averred in 1843 that it was ridiculous for Belgium and Portugal to be independent, because they were
too small to be economically viable. Giuseppe Mazzini, one of the
fathers of a unified Italy, thought that a dozen states were
quite enough for Europe. He dismissed the nationalism of the Scots,
Welsh and Irish on the ground that their economies were too
small to go it alone.
At the outbreak of the first world war, only 62 independent
countries existed in the entire globe. The past half-century has seen
the number grow from 74 in 1946 to 193 today. The
upshot has been the creation of many more small states. Thanks
to the simultaneous growth in the total world population, the average
population of a country has not declined greatly: it is down
from around 32m in 1946 to 29m today. But it is
the Icelands that have proliferated: all told, 87 countries have populations
of under 5m; 58 have fewer than 2.5m people; and 35
have fewer than 500,000.
Why the growth of the minis? The main country-creating force has been the end of colonial
ruleabove all in sub-Saharan Africa, which now has 48 independent states,
more than any other continent. Between 1960 and 1964, 25 new
African countries came into being. A second force has been the
collapse of the Soviet Union. Not only has that ex-union itself
split into 15 separate nations. In east-central Europe Slovaks seceded from
Czechs, and the former Yugoslavs have become five independent states. True,
the two Germanies reunited, but Europe as a whole went from
a continent of 32 countries to one of 48.
Nor does smaller generally mean poorer. Countries with big populations are
often politically powerful, but they are not so often prosperous. A
glance at a league table of
GDP
per head reveals a striking shortage of very large countries,
and even of middling-large ones, among the names at the top.
Of the ten countries with populations of over 100m, only the
United States and Japan are prosperous. Of the rest, Indias economy is dwarfed by that of the Netherlands (15.5m people);
the economies of Nigeria and Bangladesh are much the same size
as that of Puerto Rico (3.7m). Straight dollar
GDP
comparisons have shortcomings, of course. But of the ten countries
whose
GDP
per head is highest when measured in terms of purchasing
power, the most populous apart from the United States and Japan
is Belgium.
Of course, many small nations are poor. But littleness is no
barrier to wealth: in purchasing-power terms, Luxembourg (population 400,000) has the
worlds highest
GDP
per head, and the 8,000-odd citizens of Nauru, arguably the
worlds smallest country, have a
GDP
per head that matches fairly well-to-do countries such as Portugal
or South Korea. Nauru is a Pacific island composed largely of
phosphates.
Could it be, some wonder, that small countries, like small companies,
can grow faster than big ones? Look at Singapore, says Kenichi Ohmae, a Japanese management guru who wrote The Borderless World, describing the increasingly interlinked w
orld economy. Three million people, without their own sources of food or water,
have grown from a per capita
GDP
of $1,000 at independence to $24,000 today, and are host
to 500 multinationals. What matters is leadership and vision. A country
with more than about 10m-15m people, and especially one with a
centrally controlled economy, faces management complexities. And, like a big company,
it may simply be too large to be nimble.
Even if large size is not actually a handicap, it brings
fewer benefits than it once did. And, today, the drawbacks of
being small are shrinking.
Bigness gives you clout. A small state may enjoy a seat
at the United Nations, but not in the Security Council or
the Group of Seven, the rich-world club. Pakistan has an economy
less than half the size of Norways, but its bigger army gives it a louder voice. And
the security that size brings you is not just of the
military sort. A large economy is better placed to absorb shocks
in different regions. If an oil-price collapse throws Texas into recession,
California and New York may still boom. Not only can national
taxes provide a regional insurance fund; unemployed Texans can easily move
to work in states that have jobs on offer.
Some of these benefits, though, may be more apparent than real.
In many countries, a lot of people care more about prosperity
than about standing tall in the world. And the optimists argue
that military security matters less now that two superpowers no longer
glower at each other across the world. Anyway, if things go
wrong, small countries (think of Kuwait) can sometimes hitch a ride
to security on the tailcoats of bigger, better-armed powers.
As for insurance against regional economic shocks, that is fine if
the shocks are temporary. But many regions on the receiving end
of such insurance are more like southern Italy: permanently on the
receiving end of transfers from their wealthier countrymen. That creates a
regional welfare dependency, and resentment. Professor Alesina points to his native
Italy: In the early years after the war, migration from the south
to the north helped growth. But for the past 20 years
the south has stopped catching up with the north. It is
no longer clear whether the financial transfers from north to south
are beneficial to the souths economy or harm entrepreneurship and growth. Small countries have to be more self-reliant, and build their
own barriers to outside shocks.
Admittedly, bigness brings certain efficiencies. Most obviously, a large market, undivided
by customs duties and united by a single set of standards
and of cultural tastes, allows economies of scale such as large
production runs. This is the advantage of the United States that
inspired Europe to try to weld a single market out of
the European Economic Community.
But this benefit has dwindled as trade barriers have come down.
As John Maynard Keynes pointed out in The Economic Consequences of the Peace:
In a regime of Free Trade and free economic intercourse it would be of little consequence that iron lay on one side of a political frontier, and labour, coal, and blast furnaces on the other. But as
it is, men have devised ways to impoverish themselves and one another; and prefer collective animosities to individual happiness.
The ideal size for a market would be the whole world.
While trade barriers were highbetween 1918 and 1939, for instance, when few new countries were
borna large country was the best approximation to a global market,
and so size was a source of economic strength. Now, markets
are more open and technological changes have cut the cost of
transport and of conveying information over large distances.
Small countries have been the biggest beneficiaries of freer trade. That
is hardly surprising: small countries are big traders. Professor Alesina, in
an article written with Romain Wacziarg, suggests that population explains a
third of a countrys openness to trade (trade relative to
GDP
). A detailed study, of 127 developed and developing countries by
the World Trade Organisation (
WTO
), finds a clear relationship between the size of a country
and its openness to trade. And work by the Commonwealth Secretariat
on the smallest countriesthose with populations of under 1m, which account for 22 of
the Commonwealths 54 membersshows that their ratio of imports to
GDP
, at around 60%, is three times the typical ratio for
developing countries.
Trade allows small countries the luxury of specialising. That can bring
vulnerability: the smallest states often rely on one or two products
for the lions share of their exports. If those products are raw materials,
they may run outas Naurus phosphates are likely to do early in the next century,
leaving it with lots of dead coral and little else. If
they are foodstuffs, a hurricane may blow away half a years exports overnight.
Small home markets bring another weakness. Since trade deals are done
on the most-favoured-nation principle, and a concession to one partner has
to be extended to every other, small economies have no bargaining
clout. If a small country with a big footwear industry offers to
open its entire domestic market to the United States in exchange
for a zero tariff on its footwear exports, says Patrick Low, chief economist at the
WTO
, the United States has little incentive to agree, because it would
then have to open its footwear market to everybody else. This helps to explain why small countries are often keen
on trading blocks. A study last year by Maurice Schiff of
the World Bank found that it was better for a small
country to join a large trading block than for a big
one to join a small block.
In general, specialising is likely to bring efficiency. Icelandic fishermen, says
Mr Ohmae, are ten times as efficient as their Canadian counterparts,
mainly because their government cannot afford to cosset or subsidise its
fishing industry, as a country with a more diversified economy might
do: Canada is now a net importer of fish, he points out. And openness to trade brings prosperity. It
may be precisely because their smallness forces small countries to open
their markets that they have so often prospered more than larger
countries which turn their backs on the global market.
Small countries have also been big beneficiaries of technologies that kill
the extra costs of communicating over long distances. One sign is
the proliferation of Internet host computers in small, rich countries: of
the ten countries with the highest ratio of Internet hosts to
population, seven have populations of less than 9m (and Iceland is
second from the top).
Some small countries are turning electronic communications into big revenue earners,
sometimes in slightly sinister ways: as havens for on-line gambling or
unregulated financial transactions, or for electronic porn. Indeed, the growth of
telephone sex chat has been a boon to midget countries such
as Moldova, Guyana and the Netherlands Antilles. Their short dialling codes
mean that the punter may think he is dialling a domestic
long-distance number rather than making an expensive international call. In 1993
Guyanas revenue from telecommunications traffic came to a startling 40% of
national
GDP
.
Electronic activities of a more conventional sort may eventually become the
mainstays of many small countries. The fastest growing bits of modern
economies are the weightless ones such as financial services, software and data processing, where
distance is relatively unimportant.
Big countries have some other apparent advantages over small fry. A
large population of taxpayers can share the cost of public goods
such as roads, a telephone network, defence and civil servants. As
Donald Witman of the University of California at Santa Cruz noted
some years ago, the most efficient size for a centrally planned
economy, with its hefty government, may be larger than that of
a capitalist country. Work by Professors Alesina and Wacziarg confirms that
small countries tend to have bigger governments, and bigger government consumption,
as a share of
GDP
.
But being able to spread the costs of government could have
drawbacks. People may feel unhappy about having to share the cost
of policies with other people whom they dislike; government may seem
unaccountable and remote. Thor Sigfusson, an adviser to Icelands finance ministry, who has written a book on The Ministate in Turbulence, argues that small countries may suffer more
than large ones
from an old boys network: their senior politicians and businessmen have often known each
other since nursery school. But a miniature bureaucracy may intervene less
because it simply does not have a big enough staff to
draft the regulations.
Bigness brings other efficiencies. Icelanders grow up talking a language spoken
by 0.005% of humanity. That has costs for education (and the
second language taught at Icelandic schools is Danish, tongue of a
mere 5.2m people). It has costs for publishing and entertainment, too:
Iceland publishes more book-titles per head than any other countrythe result of being a tiny country with a unique language.
One publisher, Benedikt Johannesson, puts the economic cost of Icelands language at about 16 billion Icelandic kronur, 3-3.5% of
GNP
.
Set against this, though, is the clear need to learn another
language early on: In some ways, says Markus M
As the advantages of being large diminish, the attractions of being
small increase. As Professor Alesina puts it, You trade off economies of scale against a desire to share
your country with people you like. Large countries are usually ethnically and culturally diverse (Japan, a
rare economic success among giants, is an exception).
Small countries tend to be ethnically homogeneous, and independence movements from
Quebec to Catalonia feed at least partly on a desire for
cultural or racial exclusivity. A global move to democracy may indirectly
encourage separatism: democracies could find it harder than dictatorships to balance
the demands of minorities against the majority. As Professor Alesina says,
Trade liberalisation and political separatism go hand in hand . . . In a world of free trade and global markets, even relatively
small cultural, linguistic or ethnic groups can benefit from forming small
and homogeneous political jurisdictions that trade peacefully and are economically integrated
with others.
Small countries will seek the advantages of size by joining international
clubs, where they often have a lot of influence. Even when
the rules are not one country, one vote (as in the
EU
, where big countries have more votes than small), voting rights
are never proportionate to a members population: in the
EU
Council, Germany has ten votes and Luxembourg two.
Can big countries, threatened from above by the proliferation of global
clubs and from below by regional separatism, acquire any of the
strengths of the small without wholesale dismemberment? Back in Japan, a highly centralised big country, Mr Ohmae
is promoting the concept of the doshu republic; a do is a regional unit the size of Kyushu or Hokkaido.
I want to divide Japan into 11 regions, reducing the role
of central government to diplomacy, central banking and co-ordination.
Big countries, he argues, must learn to emulate big companies like
ABB
, a Swedish-Swiss multinational with a highly decentralised structure. In other
words, they must allow as much regional autonomy as possible. The
United States can defy the norm, he says, and flourish in
spite of its size, because of Washingtons weakness and the power of the states; Massachusetts has little
incentive to go it alone.
Elsewhere, separatists will take hope. In the past, they rarely thought
much about the economic consequences of opting for independence. Now, as
their supporters grow richer, they are likelier to vote from the
pocket rather than from the heart. But today the costs of
going it alone are probably smaller than they have been for
at least the past couple of centuries. Freedom ho!
"Economic Integration and Political Disintegration" is available from the National Bur
eau of Economic Research |