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Size and Growth:

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  1. Size and Growth: Small States in the Global Economy Thorvaldur Gylfason

  2. 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?

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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.

  8. 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.

  9. 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.

  10. 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

  11. 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*

  12. 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

  13. 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

  14. 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

  15. 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

  16. More results Manufacturing exports 1963-99 (% of exports) Need manufacturing and high-tech exports for rapid growth t = -10.7 t = -1.6

  17. More results Agriculture and personal computers 1960-99 Too much agriculture, too few computers t = 0.5 t = 3.4 * 1999

  18. 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%

  19. 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%

  20. 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

  21. 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