Size and Growth: Small States in the Global Economy Thorvaldur Gylfason
Big countries and small To paraphrase Ernest Hemingway: • Small countries are different from big ones in that … • … they have fewer people • Do small countries differ also in other respects? If so, how? • What are the benefits and costs of being small? • What are the challenges for future?
1 Blessing or curse? • Controversial issue • “Our shortage of people is our most serious social evil,” said our national poet, Einar Benediktsson • Consider arguments and evidence
2 What are the benefits? What are the costs? Being small: Benefits • Homogeneous population • Social cohesion is good for growth • Openness to trade and investment • Being small and closed is not an option • Small agriculture and natural resource base • Too much agriculture impedes growth • Everyone knows practically everything about everybody else
Being small: Costs • Economies of scale and scope • Public sector, defense • Private sector • Lack of diversification • Vulnerable to external shocks • Poor location • Remote, landlocked • High transport costs • Few like Mozart, and far between
3 What do the data tell us? Empirical evidence: Sample of countries • There are now 207 countries in all reporting to World Bank, and Taiwan • Of these, 61 have fewer than 1.3 million inhabitants … • … and 18 have fewer than 100,000 • So, there are 43 countries with population between 0.1 million and 1.3 million • Of which, 26 are islands: Our sample
Sample of 26 small island economies I Population1 GNP per capita2 Bahamas 29815,500 Bahrain666 11,600* Barbados267 14,000 Cape Verde4284,500 Channel Islands149 Comoros5441,400 Cyprus76119,100 Fiji 8014,800 French Polynesia 231 22,200 Guam 152 1 Thousands 2 USD * 1998 Figures refer to 1999. GNP is adjusted for purchasing power parity.
Sample of 26 small island economies II Population GNP per capita Iceland278 27,200 Maldives269 3,400* Malta 37922,900 Mauritius1,174 9,000 Mayotte 140 Micronesia 116 Netherlands Antilles215 New Caledonia20921,100 Samoa1694,100 Sao Tome & Principe 145 1,300 * 1998 Figures refer to 1999. GNP is adjusted for purchasing power parity.
Sample of 26 small island economies III Population GNP per capita Solomon Islands429 2,100 St. Lucia1545,200 St. Vincent & Grenadines 114 5,000 Trinidad & Tobago 1,293 7,700 Vanuatu193 2,900 Virgin Islands (U.S.)120 Average for all 26 373 9,600 Average for world 28,740 6,900 Figures refer to 1999. GNP is adjusted for purchasing power parity.
4 Empirical evidence: Research strategy • Compare small island economies with world economy at large • Stress variables that have proved to be strong and robust determinants of economic growth across countries • Openness to trade and investment • Education and health • Manufacturing vs. natural resources • Investment
Results Exports and FDI 1960-99 (% of GDP) Small countries are more dependent on trade than larger ones; even so, differences in FDI are not statistically significant * t-value is 2.7 if world’s net FDI is taken to be nil t = 4.4 t = 1.8*
Results Duties and reserves 1960-99 (% of imports) t = 0.7 Small countries levy higher duties on imports and keep more reserves, but differences are small t = 0.4
More results Education 1960-99 (%) t = 1.0 Small countries spend significantly more on education, or 5.7% of GNP against 4.2% t = 3.3
More results Health 1990-99 (%) t = 6.1 Small countries spend a bit more on health, or 5.3% of GNP against 5.1%, but difference is insignificant t = 0.4
More results Government spending 1960-99 (% of GDP) Public services cost more to provide in small countries; small islands cost less to defend t = 3.0 t = -1.8
More results Manufacturing exports 1963-99 (% of exports) Need manufacturing and high-tech exports for rapid growth t = -10.7 t = -1.6
More results Agriculture and personal computers 1960-99 Too much agriculture, too few computers t = 0.5 t = 3.4 * 1999
Bottom line Investment and growth 1960-99 (%) Small countries invest a bit more than larger countries, but growth differential is small and insignificant t = 1.8 * Bosnia and Herzegovina, Azerbaijan, Ukraine, and Turkmenistan not included t = 0.2 2.1% 2.0%
Bottom line Investment and growth 1960-99 (%) No evidence either of greater volatility of investment and growth in small countries t = 1.8 * Bosnia and Herzegovina, Azerbaijan, Ukraine, and Turkmenistan not included t = 0.2 2.1% 2.0%
5 Empirical evidence: Conclusion • Small countries seem remarkably similar to larger ones • More open to trade, yes • More public expenditure on education • More – and better? – investment • More government spending • More dependent on natural resources Good for growth Not so good for growth • In sum, their growth performance has been similar as elsewhere
Empirical evidence: Conclusion • This is good news • Many have expressed concern that small is more dangerous than beautiful • The key to further economic success is greater openness to trade and also investment to break outside the confines of small domestic markets • Small countries must have market access • Can buy insurance against trade risks • Must share gains from trade fairly The End