Economic consequences of the size of nations, 50 years on
Document de travail de l'OFCE
Paris : Observatoire français des conjonctures économiquestoto
Document de travail de l'OFCE : 2008-26
OECD, country size, growth strategy, governance strategy
In September 1957, the International Economic Association held a conference at The Hague on the “Economic Consequences of the Size of Nations”, which proceedings were published in 1960. Fifty years later, while the economic environment has dramatically changed, the issues put forward and discussed in this volume are still largely relevant. The goal of this paper is to assess whether the analytical framework and intuitions of the major contribution of the volume, that of Simon Kuznets, has passed well the test of time. Using a sample of the richest and freer OECD countries, many of the hypotheses made in the 1960 volume and neatly captured by Kuznets are found to be vindicated, as others have to be reformulated: small developed open countries have been able to overcome the “penalties of smallness” thanks to globalization, and large countries have relied on economies of scale to develop an endogenous domestic growth. Both strategies have been successful enough that large and small countries can not be distinguished in terms of their economic performance. Still, their preferred “growth strategy” differ, as their seeming ability to implement structural change. As regards “governance strategy”, small nations’ homogeneity has been blurred by migration flows and the only fragmentation difference remaining between large and small nations is that of religion diversity. Hence social diversity can not account for the substantially lower governance performance and higher income inequalities observed in large countries, all the more than confidence and trust among citizens do not appear significantly higher in small nations. Finally, the paper briefly explores some new country size related puzzles, unheard of in 1960, that have emerged since then: micro-states, giant states and “embedded states” (i.e. economic regionalization).