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With Free Markets, Nations as Small as Luxembourg and as Large as the US Can Prosper - 2004-01-27

Among the richest countries in the world are both some of the smallest and some of the biggest. The same is true for nations struggling with poverty. What are the factors that enable nations as large as the United States or as small as Norway to achieve economic success and political stability? VOA’s Zlatica Hoke discussed the question with economic analysts and has this report.

Norway has only about four and one half million people, fewer than many large American cities. But the purchasing power of its citizens widely outpaces giants such as China, India, Brazil and Indonesia. Clearly, says Enrico Spolaore, professor of economics at Brown University, success is determined by something more than a country's population size: “The size of the nations alone does not seem to explain whether you would do well or you would not do well economically.”

Enrico Spolaore and his colleague Alberto Alesina, professor of economics at Harvard University, explore the optimal population size in a book titled “The Size of Nations.”

“And the point of view that we take," says Professor Alesina, "is that there is a trade-off between the benefit of being large and the cost of being large. And the benefit of being large comes from economies of scale: cost of defense, ability to do the distribution within the country and the cost emerged from the fact that a large country has a lot of diverse individuals with diverse preferences.”

Large countries can have proportionately smaller governments and defense systems, even though they often choose not to. Armies, roads, embassies and many other costs of running a country impose smaller costs per person in populous countries. Large countries also have large internal markets for their goods. But size has its costs. Large countries are likely to have diverse populations whose conflicting preferences may be hard to meet. Attempts by many ethnic minorities – Chechens in Russia, Albanians in Kosovo, Acehnese in Indonesia and many others – to break away from their countries, say the authors, point to people’s preference to live in smaller, homogeneous communities. And ethnic conflicts are costly, both in terms of economy and in terms of the loss of human lives.

The authors of “The Size of Nations” say a big country has certain advantages in a hostile world. For centuries, as an example, China was able to keep the outside world at bay. But at a cost, says professor Spolaore: “If you look at what happened in the past one thousand years in China, you can see that China was ahead in terms of technology and culture and the economy for long periods. But than at some point, because it was such a large country with a very large and almost self-sufficient society, at different points in time historically, China decided that they could close down completely from the rest of the world.”

When China ceased its naval explorations during the 15th century, says professor Spolaore, it missed the opportunities for development that Europe had. Its development also slowed down during the Communist era of isolation. But when it opened its borders to international trade and business a decade or so ago, its economy began to grow at a fast pace. Small countries do even worse in isolation, says Professor Spolaore. He says Albania under post-World-War-Two despot Enver Hoxha is the best example: “Being such a small country, it was in the worst possible situation: small openness and small size. That’s the worst situation you can be in – if you are small and if you are closed.”

Professor Spolaore says now that Albania has opened its borders, internal strife and corruption are stifling its progress.

“Conflict is a very important variable in the picture," he says. "And in fact, this is a cost that you could have from having many different groups or many different sides in a country fighting with each other.”

Professors Spolaore and Alesina say in the past half century, as some of the old political empires have disintegrated, new and much smaller countries were formed. At the same time there have been few mergers: North and South Yemen and the two Germanies. After the initial shock of transition, many of these countries are beginning to see growth. In addition to that, says professor Spolaore, other small countries that have embraced a free-market economy, such as Malta, New Zealand and Singapore have done exceedingly well.

“Economically Singapore had the highest growth rate between 1960 and 1990 – the highest growth rate in the world," notes Professor Spolaore. "So the highest increase in income per capita in the world was in Singapore that is a relatively small country. Now it has about four million people. It’s still below the average size of a country. Most countries in the world are smaller than five or six million people.”

So Professor Spolaore says the trend to form smaller, more homogeneous countries will continue.

But judging by the United States, the country with the world’s largest economy and second largest gross domestic product per head, large multi-ethnic nations can obviously also prosper. Professor Alesina says this is because the United States system is decentralized: “Often non-American observers don’t realize how much economy the local government and state governments have in the U-S and how different it is to live, say, in Vermont or in Texas. There are a lot of policies which are decided locally, from education policy, to welfare, to tax. In other words, if the United States was run the same way as France, where everything is decided in Paris, it would not work.”

But many economists say size and homogeneity have no effect on economic prosperity. Ian Vasquez, director of the project on global economic liberty at the Cato Institute, says: “Basically what makes a difference for a country’s prosperity is its level of economic freedom. We know that there is a very strong relationship between economic freedom and prosperity. The countries that are the most economically free also tend to be the most prosperous and tend to grow more than countries that are far more closed. And indeed the countries that top the list are also countries that are more open than the rest of the world.”

A free-market economy alone cannot guarantee prosperity either, says Mr. Vasquez: “Countries should maintain a disciplined monetary policy. They should allow their citizens the freedom to exchange property rights. So, the freedom of choice the freedom to exchange, the rule of law and property rights are all important. And it is not coincidence that those are all well protected in the countries that top the list.”

The authors of “The Size of Nations” conclude that given the choice, most people would prefer to live in small homogeneous nations. But those that are successful strive for economic if not political integration.