Wednesday, January 8, 2014

Small nations do very well in large federations

In 1957 the International Economic Association organized a conference to discuss about the economic consequences of the size of nations. The results were published in a volume in 1960 that I could find in my university's library. In the introduction, E.A.G. Robinson explained that although the issue had not been studied in depth until then, it deserved closer scrutiny, since national borders involved then significant discontinuities in terms of currencies, tariffs, communications, armies and population movements. The first article in the book was written by Simon Kuznets, who some years earlier had published his classical work on the relationship between development and inequality ("his" inverse U). It is interesting that in his article Kuznets does not say that small nations are better in any sense than larger nations, but that they face specific challenges, and that those small nations that succeed economically are those that are able to overcome their main drawbacks: lack of scale economies and lack of diversification. The usual way to overcome this was through trade openness and institutional innovation. The style of Kuznets was cautious and pragmatic. Some decades later, in a world where borders create much less discontinuities, a literature pioneered by Italian economists Alesina and Spolaore emerged extolling the virtues of small nations, as if it was possible or easy to suddenly become small. If following universalistic values we apply it to all the world, either we should increase the number of independent countries form 200 to 2000 perhaps, or we should shrink the world or Europe (so that they become small) if we believe in global or at least European federalism. Of course, in the world we observe a coexistence of very small, small, medium and large countries, and many of them are forging closer unions that create the institutional pre-conditions that are necessary for continued economic exchange. In Europe, many small nations seem mostly happy to be participating in the experiment of creating a Europe without borders.

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