The Size of Nations
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Last annotated on July 5, 2016
China, the largest country in the world, has 1.2 billion inhabitants. Tuvalu, the smallest country with a seat at the United Nations, has less than 11,000 people.Read more at location 28
In recent years the number of independent nations has increased dramatically. The breakup of colonial empires, the collapse of the Soviet Union, and numerous secessions all over the worldRead more at location 29
many of today's countries are quite small. More than half are smaller in size than Massachusetts,Read more at location 31
Often regionalism and separatism take relatively peaceful manifestations, as in the case of Quebec or Catalonia. In other cases, as in the Basque region or in the Balkans, separatism has led to violence. Read more at location 33
Germany and Yemen have reunified, and the European Union is evolving from a free trade area to some form of political integration.Read more at location 34
These events raise two questions: What determines the size of nations and how does their size change over time? Does a country's size matter for economic success? Read more at location 36
However, national borders are not a natural phenomenon; they are human-made institutions and they can be studied with the same tools of political-economic analysisRead more at location 41
in important work on the geographical determinants of income per capita, Jeffrey Sachs and coauthors have stressed the costs of being a landlocked country, such as Bolivia or Afghanistan.6Read more at location 42
However, the definition of a "state" is controversial. Some authors include ancient empires, medieval theocracies, and Greek and Italian city-states.Read more at location 47
In this book we will argue that the sizes of national states (or countries) are due to trade-offs between the benefits of size and the costs of heterogeneity of preferences over public goods and policies provided by government.10 Read more at location 56
What are the benefits of large population size? First, the per capita costs of public goods are lower in large countries,Read more at location 57
Second, it is often argued that a large country (in terms of population or national product), all other things equal, can better protect itself from foreign aggressions by its greater military power.Read more at location 61
Third, the size of a country affects the size of its economy. To the extent that larger economies and larger markets increase productivity, larger countries should be richer.Read more at location 64
Fourth, large countries can provide regional "insurance." Take Texas, for example. Should Texas experience a recession that is more severe than the US average, it would receive fiscal transfers, on net, from the rest of the country.Read more at location 68
Fifth, large countries can build redistributive schemes from richer to poorer individuals and regions, thereby achieving distributions of after-tax income that would not be available were its regions acting independently.Read more at location 72
In principle, as countries become larger, administrative and congestion costs may defeat the benefits of sizeRead more at location 74
More important is the consideration that in larger countries there are more diverse preferences, cultures, and languages within the population. A country's heterogeneity of preferences increases as it become larger.Read more at location 76
costs of large and heterogeneous communities go back a long way in the philosophical and political debate. There was, for example, the argument of Aristotle that a polity should be no larger than a size in which everybody knows personally everybody else.Read more at location 81
As noted by Dahl and Tufte (1973), this Greek view of a small polity in which everybody knows each other often resurfaces in later philosophers, such as Montesquieu,Read more at location 83
The founding fathers of the United States often mentioned Montesquieu's views when they worried about the "excessive" size of the new federationRead more at location 86
His point was that the larger a territory becomes in size, the greater will be its variety of parties and interests, and hence the smaller will be the chance that "a majority of the whole will have a common motive to invade the rights of other citizens; or if such a common motive exists, it will be more difficult for all who feel it to discover their own strength,Read more at location 89
This part of Madison's argument can be viewed as a clever application to the political sphere of the "insurance" argument we mentioned before, where the existence of "factious leaders" is analogous to a natural calamity,Read more at location 94
However, it is questionable whether such "insurance" benefits stemming from the existence of many heterogeneous groups can be sufficient to offset the political and economic costs associated with heterogeneity.Read more at location 98
"Whether the classical arguments were actually refuted by American experience is ... doubtful." The Civil War sheds some serious doubts for the Madisonian defense of large size.Read more at location 99
Our hypothesis, which is backed by extensive empirical evidence, is that, on balance, heterogeneity of preferences tends to bring about political and economic costs that are traded off against the benefits of size.Read more at location 100
In the opposite extreme where widespread heterogeneity degenerates into an internecine war, a civil society cannot function.Read more at location 102
Hence we arrive at a concept of "equilibrium" country size that results from a trade-off between the benefits of size and the costs of preferences of a heterogeneous population.Read more at location 105
we will consider the optimal country size using standard economic tools of optimization under constraints. The optimal size of a national state is one that reaches the highest level of average welfare and that given certain constraints. Read more at location 108
It is useful to contrast our discussion of optimality with that of Dahl and Tufte (1973). They discuss various trade-offs concerning the size of polities, and they conclude that since there are trade-offs, the optimal size of a country does not exist.Read more at location 109
this is a valuable insight insofar as it stresses the impossibility of achieving an absolute best in which two goals are perfectly attained at the same time.Read more at location 111
efficiency and economic trade-offs are useful for several reasons. First, we could argue that over time various forces drive institutions (in our case political borders) toward efficiency.22Read more at location 123
We will contrast optimal solutions with two different concepts of equilibrium: (1) voting equilibria where borders are determined by democratic vote and (2) equilibrium border configurations determined by dictatorialRead more at location 130
We will see how alternative democratic rules might lead to different configurations of borders.Read more at location 136
After the First World War, the world leaders faced the task, in Versailles, of redesigning country borders in Europe, and as many have argued, they failed.Read more at location 146
Many students of Africa believe that inefficient borders have contributed heavily to the economic failures of countries on that continent.25Read more at location 148
The collapse of the Soviet Union in the early 1990s led to a tremendous explosion of number and shape of nations in Eastern and Central Europe.Read more at location 148
The process of deep economic integration in Western Europe, accompanied by pressures for political decentralization, has called into question the role and function of national states.Read more at location 149
Every now and then scientific theories of economics and sociology are challenged as disregarding certain particulars. That, instead, is a merit. One must first obtain a general concept of the thing one is studying, disregarding details, which for the moment are taken as perturbations.Read more at location 153
three chapters entirely devoted to historical facts, chapters 10 through 12.Read more at location 161
An alternative, and potentially more efficient, organization, as we just mentioned, would be one in which various groups of individuals share certain public goods with some regions and other public goods with other regions. For example, California might share a currency with Mexico, and army with Oregon, and a supreme court with Nevada. Or, two adjacent cities share a school system, but not an army.Read more at location 167
overlapping jurisdictions create a large amount of transaction and communication costs,Read more at location 171
The second problem is that it may be impossible for regions to share a public good if they do not also share some other goods, in particular, defense and monopoly of coercion.Read more at location 172
In chapter 3 we discuss the formation of democratic institutions within countries whose borders can be decided by majority vote, and also the formation of regions that are free to proclaim their independence.Read more at location 177
individuals far away from the administrative center of the country (i.e., removed from the administrative center of government in preferences and location) could vote to break up a country because they do not experience the benefits of public goods as much as closer regions in preferences to government policy making.Read more at location 180
In chapter 4 we carry this discussion forward into the direction of interregional transfers.Read more at location 185
we analyze the case where it may be in everyone's interest to compensate the distant region with favorable fiscal policy in order to avoid inefficient secession.Read more at location 186
Large dictatorial empires like the Indian empire, the Ottoman empire, or the Soviet Union served precisely the purpose of providing the elites with rents and power.Read more at location 189
democratization should lead to the creation of many new countries, which is precisely what we observed after the collapse of the Soviet Union.Read more at location 193
Imagine for a moment a world of complete autarky in which all borders are closed. In this world the size of each country's market is determined-equivalent to-the country's size.Read more at location 196
At the opposite extreme is a world of completely open to trade in goods, factors of production, and financial instruments. In this world political borders do not delimit markets in any way,Read more at location 198
However, as globalization progresses, we can expect the world to move closer to free trade where the benefits of large country size fade away.Read more at location 201
In a peaceful world any regions considering separation may feel that they will be safe from aggression. But, as the number of seceding countries increases, many more borders must be defended by many more armies.Read more at location 205
Chapter 9 addresses decentralization, or the subdivision of a nation's government into local jurisdictions.Read more at location 208
We discuss how decentralization can, up to a point, substitute for secessions Read more at location 209
Chapters 10 and 11 present empirical evidence for the various arguments developed in the preceding chapters.Read more at location 210
We find that the size of government is actually inversely related to country size, meaning that the ratio of government spending over gross domestic product (GDP) is larger in small countries.Read more at location 212
We find that the benefit of size depends on the trade regime. Small countries can prosper with free trade, and large countries prosper in closed economies. Read more at location 213
Chapter 11 presents a historical discussion on the evolution of states, starting from the Italian and Low Country city-states.Read more at location 214
we argue that economic integration and trade liberalization have accompanied and encouraged the rise of countries since 1945.Read more at location 216
Whatever that size is, it will be smaller as world markets become larger. This is precisely why so many very small countries can prosper in today's world of relatively free trade compared with other periods in history. To see this, imagine the difficulties a country the size of Singapore would face in the protectionist interwar period?Read more at location 217
In terms of efficiency, the European Union can offer a set of public goods and policies for which the benefits of size cannot be handled efficiently within country borders.Read more at location 221
we find that in areas where excessive centralization occurs, there is a democratic deficit at the root of the problem.Read more at location 223
Chapter 13 recapitulates our main argument that democratization, trade liberalization, and reduction of warfare are associated with the formation of small countries,Read more at location 225
