The Size of Nations
Since the late 1990s several economists have been using the tools of modern
economic analysis to explore the determinants of the size of nations (see
Alesina and Spolare, 1997, 2003; Bolton and Roland, 1997; Alesina et al.,
2000, 2005). Although historians and other social scientists have studied this
issue, economists ‘have remained on the sidelines’. Of particular interest to
economists is the observation of Alesina et al. (2005) that there has been a
dramatic increase in the number of nations since the end of the Second World
War. In 1948 there were 74 countries, 89 in 1950, and 192 in 2001. They also
note that the world ‘now comprises a large number of relatively small countries:
in 1995, 87 of the countries of the world had a population of less than 5
million, 58 had a population of less than 2.5 million, and 35 less than 500
thousands’. The proliferation of countries has also led to too many separate
currencies (Alesina and Barro, 2002; Alesina et al., 2002). During this same
period the second age of globalization has emerged and the share of international
trade in world GDP has ‘increased dramatically’ (Snowdon, 2002a,
2003c). Is there a connection? Alesina et al. (2005) make the following
important points:
1. political borders are made by humans and are not exogenous geographical
features;
2. economists should think of the equilibrium size of nations (measured
by total population) ‘as emerging from a trade-off between the benefits
of size and the costs of preference heterogeneity in the population’;
3. the main benefits of size are as follows: economies of scale with respect
to the production of public goods such as defence, maintenance of law
and order, public health and so on; greater safety from foreign aggression;
internalization of cross-regional externalities; better income
insurance to regions subject to specific shocks; transfers of income
across regions to achieve greater equity among the overall population; a
larger internal market increases the potential for greater specialization,
as noted by Adam Smith;
4. in a world of free trade, country size, as measured by population, is no
longer a determinant of market size;
5. it therefore follows that ‘the benefits of country size decline as international
economic integration increases’
6. the benefits of international economic integration increase the smaller
is a country;
7. economic integration and political disintegration are positively correlated;
8. the costs of size include administrative and congestion costs, but much
more important are problems associated with the heterogeneity of preferences
of individuals, which obviously increase with the size of a
nation;
9. using ethno-linguistic fractionalization as a proxy for heterogeneity of
preferences economists have found that ethnic diversity is inversely
correlated with economic performance, the quality of governance, and
economic and political freedom (see Alesina et al., 2003);
10. as international economic integration increases, the trade-off between
the benefits of size of a nation and the costs in terms of heterogeneity of
preferences shifts in favour of small nations.
This work has important implication for the future of the European Union
(EU). EU enlargement clearly increases the heterogeneity of preferences and
economic integration lowers the benefits of country size, thereby reducing
the costs of independence for small countries. As Alesina et al. (2005) note,
‘many have argued that Europe will (and perhaps should) become a collection
of regions loosely connected within a European confederation of
independent regions’.
Research by economists on the determinants of the size of nations is in its
infancy. However, many interesting relationships remain to be explored, including
the interconnection between international integration, democracy, the
size of nations and international conflict.
Since the late 1990s several economists have been using the tools of modern
economic analysis to explore the determinants of the size of nations (see
Alesina and Spolare, 1997, 2003; Bolton and Roland, 1997; Alesina et al.,
2000, 2005). Although historians and other social scientists have studied this
issue, economists ‘have remained on the sidelines’. Of particular interest to
economists is the observation of Alesina et al. (2005) that there has been a
dramatic increase in the number of nations since the end of the Second World
War. In 1948 there were 74 countries, 89 in 1950, and 192 in 2001. They also
note that the world ‘now comprises a large number of relatively small countries:
in 1995, 87 of the countries of the world had a population of less than 5
million, 58 had a population of less than 2.5 million, and 35 less than 500
thousands’. The proliferation of countries has also led to too many separate
currencies (Alesina and Barro, 2002; Alesina et al., 2002). During this same
period the second age of globalization has emerged and the share of international
trade in world GDP has ‘increased dramatically’ (Snowdon, 2002a,
2003c). Is there a connection? Alesina et al. (2005) make the following
important points:
1. political borders are made by humans and are not exogenous geographical
features;
2. economists should think of the equilibrium size of nations (measured
by total population) ‘as emerging from a trade-off between the benefits
of size and the costs of preference heterogeneity in the population’;
3. the main benefits of size are as follows: economies of scale with respect
to the production of public goods such as defence, maintenance of law
and order, public health and so on; greater safety from foreign aggression;
internalization of cross-regional externalities; better income
insurance to regions subject to specific shocks; transfers of income
across regions to achieve greater equity among the overall population; a
larger internal market increases the potential for greater specialization,
as noted by Adam Smith;
4. in a world of free trade, country size, as measured by population, is no
longer a determinant of market size;
5. it therefore follows that ‘the benefits of country size decline as international
economic integration increases’
6. the benefits of international economic integration increase the smaller
is a country;
7. economic integration and political disintegration are positively correlated;
8. the costs of size include administrative and congestion costs, but much
more important are problems associated with the heterogeneity of preferences
of individuals, which obviously increase with the size of a
nation;
9. using ethno-linguistic fractionalization as a proxy for heterogeneity of
preferences economists have found that ethnic diversity is inversely
correlated with economic performance, the quality of governance, and
economic and political freedom (see Alesina et al., 2003);
10. as international economic integration increases, the trade-off between
the benefits of size of a nation and the costs in terms of heterogeneity of
preferences shifts in favour of small nations.
This work has important implication for the future of the European Union
(EU). EU enlargement clearly increases the heterogeneity of preferences and
economic integration lowers the benefits of country size, thereby reducing
the costs of independence for small countries. As Alesina et al. (2005) note,
‘many have argued that Europe will (and perhaps should) become a collection
of regions loosely connected within a European confederation of
independent regions’.
Research by economists on the determinants of the size of nations is in its
infancy. However, many interesting relationships remain to be explored, including
the interconnection between international integration, democracy, the
size of nations and international conflict.
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