Small but perfectly formed
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 ?

ICELAND is an oddity. With a population of just under 270,000, it is easily the smallest member of the OECD. It has about as many people as Louisville, Kentucky, but rather fewer than Tampa, Florida. Yet it has all the trappings of a modern state: its own language, currency and central bank, an airline and ambassadors, and a fine body of literature (a millennium old, some of it). This miniature nation is also a symbol of the future. For not only are there many more countries today than there were at the start of the 20th century; the forces of fragmentation are growing. The world of the next century will have many more Icelands. 

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 world’s 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 size—security and a large domestic market—count for less in a world of increasingly liberal trade and technologies that largely overcome distance? 

Chips off the old blocks 

Small states are nothing new, of course. The city-states of ancient Greece had populations smaller than Iceland’s 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 century’s 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 rule—above 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, India’s 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 world’s highest GDP per head, and the 8,000-odd citizens of Nauru, arguably the world’s 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 world 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.

The small case for being big 

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 Norway’s, 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 south’s 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 high—between 1918 and 1939, for instance, when few new countries were born—a 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 country’s 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 countries—those with populations of under 1m, which account for 22 of the Commonwealth’s 54 members—shows 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 lion’s share of their exports. If those products are raw materials, they may run out—as Nauru’s 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 year’s 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 Guyana’s 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. 

The pleasures of homogeneity 

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 Iceland’s 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 country—the result of being a tiny country with a unique language. One publisher, Benedikt Johannesson, puts the economic cost of Iceland’s 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 Möller, an economist at Iceland’s central bank, “it is simpler to accept from the start that your own language is going to be insufficient. The necessity of speaking English is unquestioned in Iceland, and there is a widespread acceptance of the usefulness of learning foreign languages.” Citizens of small countries are generally more polyglot than those of large ones. And, with English as an increasingly global language, more and more people have to invest in learning it, however many people share their native tongue. 

When small is beautiful 

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 member’s 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 Washington’s 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! 

* Many of the points in this article come from work by Professor Alesina and his colleagues. “On the Number and Size of Nations”, written with Enrico Spolare, appeared in the Quarterly Journal of Economics, November 1997; “Economic Integration and Political Disintegration”, written with Mr Spolare and Romain Wacziarg, was published by the National Bureau of Economic Research in September 1997


"Economic Integration and Political Disintegration" is available from the National Bureau of Economic Research’ website, in PDF and Postscript formats.