Smaller is Better

Of the 10 richest countries in the world, only two have more than 5 million people -- the United States and Switzerland. Six have populations of fewer than 1 million people. Apparently, small nations are more prosperous. A new book argues that small nations out-perform large nations because of freer trade and a safer world.

On initial examination, larger nations should outperform smaller nations. The authors argue that large countries have several advantages:

• Large countries can afford proportionally smaller government, by spreading out costs over a greater population.
• Moreover, they can raise taxes in more cost-effective ways.
• Additionally, large nations have bigger internal markets that allow more specialization and returns to scale.

Despite these advantages, there are significant costs to a large country. A large population is usually diverse, and a diverse population has varying preferences and demands from government. In many cases, several small nations can better satisfy a large population than one huge nation.

More importantly, small nations benefit from a safe world and free trade:

• Without the protection of an international order and the United States, many small countries would cease to exist -- China's invasion of Tibet is an example of this.
• In a world of trade restrictions, many small countries could not prosper, because they do not have sufficient indigenous resources.

Although large, the United States is able to achieves small-nation prosperity through federalism. Federalism retains the advantages of a large nation, but satisfies local aspirations and government demands.

Source: Book Review, Economic History Services, February 4, 2004 and "When small is beautiful," Economist, December 18th, 2003; based upon: Alberto Alesina and Enrico Spolaore, "The Size of Nations," MIT Press, December 1, 2003.

For Economist text

http://www.economist.com/finance/displayStory.cfm?story_id=2300223

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