Thursday, June 30, 2011

We are too big! part two

After our last post, which  I will retroactively dub as part one,  I came across the following book by chance:
Alberto Alesina and Enrico Spolaore
A summary:
The authors of this timely and provocative book use the tools of economic analysis to examine the formation and change of political borders. They argue that while these issues have always been at the core of historical analysis, international economists have tended to regard the size of a country as "exogenous," or no more subject to explanation than the location of a mountain range or the course of a river. Alesina and Spolaore consider a country's borders to be subject to the same analysis as any other man-made institution.
In The Size of Nations, they argue that the optimal size of a country is determined by a cost-benefit trade-off between the benefits of size and the costs of heterogeneity. In a large country, per capita costs may be low, but the heterogeneous preferences of a large population make it hard to deliver services and formulate policy. Smaller countries may find it easier to respond to citizen preferences in a democratic way.

In flipping what I was able to of the online copy, I noted the following at the end of chapter 6:
We provide a model in which the benefits of country size decrease as international economic integration increases.  Conversely, the benefits of trade openness and economic integration become larger for smaller countries.  Second, we argued that economic integration and political integration go had in hand.  As the world economy becomes more integrated, one of the benefits of larger countries (the size of markets) vanishes.  As a result the trade-off between size and heterogeneity shifts in favor of smaller and more homogeneous countries.
One could also think of the reverse source of causality: small countries have a particularly strong interest in maintaining free trade because so much of their economy depends on international markets. Indeed, we could think of two possible worlds. One world of large and relatively closed economies, and another of many more smaller and more open economies.
This explains why it was to the advantage of the United States to be big in the first place.  Those of us who were born in the United States are used to the idea of it being a good thing to be big and powerful.  But minority groups within a big powerful country may have mixed emotions about the idea that being big is in of itself an advantage.  In fact the authors note that one advantage of China (which they may be overstating) is that it is relatively homogeneous for such a large country.
In chapter 11 they note the following historical patterns:
The size of a country emerges from a trade-off between the benefits of scale and the costs of heterogeneity in the population.
·         Heterogeneity costs stem from differences in preferences over public policies. Such differences are related both to non-economic factors (cultural, religious, and linguistic) and to economic factors, such as income differences in the population; regional differences in per capita income create secessionist tendencies.

·         Benefits of scale include the provision of public goods and the size of the market.

·         The benefits of market size depend on the trade regime; small countries are viable in a free trade regime; a large size is crucial in a world of trade barriers.

·         Size matters for security reasons; in a more peaceful world one would observe an increase in the number of countries; conversely, external threats lead to the creation of larger countries and the centralization of federations.

·         Democratization should be associated with an increase in the number of countries; on the contrary, dictators try to consolidate large political jurisdictions…because they are able to extract larger rents from larger populations.
So ideally, in the global economy of today, we would want to be in a small country that is protected by a large country.  Failing that, you could be part of a confederacy (say a union of states) that banded together for the purposes of protection.

But you would not want to be in an oversized bureaucratic state, which has few trade advantages in the open economy of today's world, and whose shear size creates bureaucratic costs, and creates conflicts in desires/aspirations between its component populations.


FeminizedWesternMale said...

"...we would want to be in a small country that is protected by a large country."


russell1200 said...

LOL- no I was think more like Singapore, or maybe Switzerland. The small countries within the EU likely lose a lot of the size advantage to bureaucracy.

Israel has nukes and a big defense budget. They obviously are helped by the U.S. but they are not getting a completely free ride. They are also more threatened by their neighbors than by any particular large country. Georgia obviously thought they were in the protected category.