Independence Fact No. 2

Small states have higher per capita GDP (are richer) than other states.

 

Memo

• This reflects a productivity advantage
• No certainty that a region of a country that becomes independent will enjoy higher productivity as a consequence: evidence may be due to small regions with higher productivity choosing to be independent while lower productivity regions may choose to be linked to bigger state.
• But there are mechanisms that could raise productivity in new small independent states: attraction of head office functions; better governance (?)

Evidence

Small states, small problems? William Easterly ([email protected]) and Aart Kraay ([email protected]) No 2139, Policy Research Working Paper Series from The World Bank

Large Markets, Gains from Trade, and a Puzzle, David Comerford, July 7, 2013,

Comments

[Dick Winchester]

The latest Research Councils UK report shows clearly that as a % of GDP the UK is only ranked 19th out of the 25 IEA countries listed in terms of the size of their public sector RD&D budgets.

Finland is top with Denmark 4th and Norway 5th.

[Alan Weir]

Thanks for those links which are very useful. But the first paper means by 'small state' a 'microstate': a state which is less than 1m in population size. I don't see that it is relevant to Scotland (which has a size near the world median population size which is, according to the paper on trade growth and country size you also link to, just under 6m).

Whether it amounts to 'fact' I am not sure, but there does seem to be strong evidence that there is a definite cost in terms of 'border friction' to international borders even with free trade, as the papers you link to make clear. There also seems to be a definite advantage, however, to being a small economically advanced state in the European Union. I just took a quick look at World Bank figures on GDP growth (PPP). If, for example, we start at 1973 which I choose purely because the UK entered the EU then but it covers quite a long time period, we find that the UK does better than Belgium, Denmark and Switzerland among the small economically advanced EEA states (and also better than Germany) but worse than Liechtenstein, Luxembourg, Ireland, Norway, Finland, Iceland, Austria, Netherlands and Sweden, and considerably worse than Norway arguably our nearest comparator.

These states, though all advanced democracies, differ quite a lot within that political type in terms of their political structures and economic policies. Nonetheless across that variety we seem to see a definite (though not unequivocal) pattern of advantage for being a small state in the Northern EU (the recent accession states of course have much higher growth rates but start from a very low base).

"evidence may be due to small regions with higher productivity choosing to be independent while lower productivity regions may choose to be linked to bigger state."

That's a possibility in the abstract or perhaps more generally, but is it plausible historically as an explanation of the borders in modern Europe? These borders, often very long-standing, surely owe little to economic choices and preferences. That isn't the reason for the existence of the small states I cited. Maybe in part for the creation of the German Empire in 1871 but then again Bavaria, independent until then, is one of the richer German regions and remains in. Of course you'd need also to look for regions which pulled back from independence for economic reasons and you might suggest Scotland, Catalonia and so on as examples. But I remain very sceptical, I think economic factors (will I be £500 better off etc. ) only kick in where there is a low sense of national self-confidence and historically have proven to be largely irrelevant when there is a strong sense of national identity. (Why isn't there a strong Anglian Nationalist Party, urging independence for London and the SE?)

At any rate, one question it would be good to see addressed is: would the border effect (which David Comerford, whom you cite, thinks might pose a drag of between 0.1 to 0.3% a year on GDP) outweigh the increased growth Scotland would (I suggest for the reason above) have if it performed as even just an average small advanced EU State?