Independence Fact No. 3

Growth in small countries is neither more or less fast than in other countries but is more volatile.

 

Memo

• Small country growth benefits from greater openness to trade.
• Small country growth suffers from loss of scale: border effects (more trade within than between borders); technology (generation and adoption of new technologies may be harder); spillovers (greater within than between countries).
• Paradox between evidence of small country: higher income, higher productivity and evidence of small country: no growth differential and loss of scale benefits.
• Small country annual growth rates are more volatile, partly because of their greater volatility in responses to terms-of-trade shocks.

Evidence

Small states, small problems? William Easterly (william.easterly@nyu.edu) and Aart Kraay (akraay@worldbank.org) No 2139, Policy Research Working Paper Series from The World Bank.

Trade, Growth and the Size of Countries, Alberto Alesina, Enrico Spolaore, Romain Wacziarg.

Is there a large-country advantage in high-tech? Jan Fagerberg

 

Comments

[Ian Jenkins]

A problem with small countries, such as even the declining UK, is they often have insufficient political influence. This is a major disadvantage because there are stormy political times ahead internationally!

In a broadcast lecture from the London School of Economics this week, Michael Cox [founding co-director of LSE IDEAS and professor of International Relations] stressed the importance of international politics in global finance. He begged the question why a potentially powerful EU, with the largest economy in the world, doesn't try to use political muscle to guide the market.
Germany may soon be trading more with China than France [at an exchange rate heavily subsidised by Greece etc]. Will the EU hang together or hang separately?

Another example. In the absence of effective EU involvement, the White House says it is hoping through its Trans Pacific Partnership [TPP] bi-lateral trade proposal to introduce global standards for commerce in the 21st century. It is surely in our interests to have enforceable financial standards introduced. A key political task.