December 3, 2012
The Optimal Size of Countries
The Optimal Size of Countries--Posner
I agree with Becker that a major factor in the growing number of countries as a result of the splitting up of countries like the Soviet Union and Yugoslavia is the reduction in international trade barriers, which reduces the value of economic self-sufficiency. Another factor, however, is the reduction in threat of conquest, partly as a result of the dissolution of the Soviet Union and partly as a result of the (related) emergence of the United States as the world's hegemonic power committed to maintenance (for the most part) of the international status quo. Iraq was unable to hold on to its conquest of tiny, defenseless Kuwait in 1990-1991 only because the United States organized and led a coalition of nations to intervene and defeat Iraq.
The fundamental question is the optimal size of a nation, a question similar to that of the optimal size of a corporation or other organization. Fear of conquest and height of trade barriers are only two factors to be taken into account in answering the question. The other factors bearing on the question tend to be either weak or ambiguous in direction. For example, it might seem obvious that ethnic and religious heterogeneity would be a fissiparous factor because of hostility among different ethnic and religious groups. But in many countries that has not been a problem—the United States (since the Civil War) and Switzerland are examples. India and Canada are examples of countries where it is a problem but not a serious enough one to lead to serious thought of a breakup.
Another type of tension is regional economic tension, as in Spain (discussed by Becker) and Italy, where the north is far more prosperous than the south and resents redistributive tax and fiscal policies because they send wealth out of the region, rather than redistributing it (say to the poor) within the region. If wealthy people are concentrated in one part of the country, it naturally occurs to them that they might be better off if their region were a separate nation, for their average wealth would increase. But the main significance of agitation for separation in such cases is as a negotiating tool. The poor region doesn't want to lose the rich, so if it thinks the risk of secession is substantial it will reduce the amount of redistribution that it imposes on the rich region.
A nation's government might encounter diseconomies of scale; that would be another reason for considering a breakup, but again I think not a decisive one. Government can be decentralized in order to overcome its diseconomies of scale, and in fact large countries, like the United States, do have federal (that is, decentralized) systems of government, even, as in the case of Canada and Australia, when they are not very populous. Our federal government is criticized a lot, but does not seem to be less efficient than that of other countries, large or small. So I think diseconomies of scale of government are not a significance cause of breakup.
An underappreciated advantage of being a large country with a large and varied economy is diversification of risk. Suppose a tiny country has one big export industry, and its export earnings finance most of its citizens' consumption, which is of imported goods. If that one big industry falls on hard times, the adverse economic impact on the country could be very great. That is unlikely to be a serious danger in a large country.
I noted earlier that most of the growth in the number of the world's countries is attributable to decolonization. I'm now going to argue that all of it is, provided that "decolonization" is broadly understood to mean the separation of communities that had been forcibly united. The United States began as a collection of separate colonies, but they all voluntarily joined to form a national government. In contrast, Yugoslavia was created out of bits of the Austro-Hungarian Empire plus Serbia by the great powers after World War I, and the constituents were separate communities with no affection for each other. (The breakup of the Austro-Hungarian Empire is a notable example of decolonization.) The Soviet Union was a product of conquest, not of the voluntary uniting of formerly separate states. The United Kingdom too, and it may be coming apart; and likewise Italy.
If fundamental cultural or religious differences, submerged by forcible integration, are not present in a large country, I doubt that there are net benefits from disintegration. There are scale advantages to being a large country, the risk diversification that I mentioned, and a measure of additional security, and I think they outweigh the efficiencies of being small. It may well be that the reduction in global barriers to trade and in threat of conquest has reduced the cost of being a small country, but I don't think it's increased the benefits, and the benefits are large only where the country is composed of groups that simply cannot get along with each other, so that if force is withdrawn the country breaks up.
Breakup of Countries: No Economic Disaster- Becker
The largest and some smaller political parties in Catalonia, one of the richest parts of Spain, want to have a referendum in that region on whether they should secede from the rest of Spain. This is despite the fact that during past several decades the central government of Spain has ceded considerable fiscal and other independence to Catalonia and other regional governments. Those supporting a breakup argue, among other things, that Catalonia is being heavily taxed to help support poorer and less hardworking regions of Spain. The opposition to a breakup both within and outside of Catalonia claims that secession would be illegal under the Spanish constitution, and that it would destroy Spain's culture.
Spain is not the only country that is experiencing pressure either to breakup, or to become much more decentralized politically. Major parties in Scotland want independence from the rest of the United Kingdom. As a result of this pressure, Scotland and other regions of the UK have received much more autonomy than they had in the past. The independence movement has quieted down in Quebec, but only after Canada established French on an equal footing with English, and after the province of Quebec received other special treatment from the rest of Canada.
The Western and Russian-influenced part of the small country of Georgia is essentially independent in most respects from the rest of Georgia, while Georgia only became independent after the breakup of the Soviet Union into many independent countries. At the close of the nineteenth Taiwan, which had long been part of China, became a colony of Japan until World War II ended. Taiwan was returned to China at that time, but became an independent republic in 1949. China is pressing hard for Taiwan to once again become a province of China, probably with a large degree of autonomy. However, the great majority of Taiwanese prefer the status quo, in part because per capita incomes are so much higher in Taiwan than in Mainland China.
Although emotions usually overflow on the subject of secession and forcible integration, I will not try to evaluate the significance of nationalistic feelings in a region or country. I will instead focus on the economic consequences of a country's breakup into smaller and largely independent countries. Often stressed is that since larger countries have bigger domestic markets, companies in larger countries can utilize economies of scale in production.
The movement toward free trade agreements and globalization during the past 60 years has enormously reduced the economic advantages of having a larger domestic market to sell goods ands services. Small countries can sell their goods to other countries, both large and small, almost as easily as large countries can sell in their own domestic markets. For example, during the past 30 years the small country of Chile has had the fastest growing economy of Latin America, larger than Brazil and Mexico, the two largest nations of this region. This would not have been possible without the access of Chilean companies to markets in other countries, both in South America and elsewhere. As a result, Chile now exports around 40% of its GDP, compared to a ratio of exports to GDP in the United States of about 13%.
To many in Czechoslovakia, the economic future seemed dim when Czechoslovakia voluntarily split in 1993 into the Czech Republic and the Republic of Slovakia. Similarly, emotions were strong after a destructive war forced Yugoslavia to split into six separate countries. Yet these separate nations are generally doing at least as well economically as did Czechoslovakia and Yugoslavia.
Small countries can do well with small domestic markets by taking advantage of a globalized economy by selling large fractions of its production to consumers and companies in other countries. That is why smaller countries usually export a considerably larger fraction of its production, and import a much bigger share of its consumption, than do larger countries. Size of country was much more important in the past when many countries had high tariffs, and transportation costs were much more important.
Political interest groups tend to be less able in smaller countries in distorting political decision in their favor. This is partly because smaller countries are more homogeneous, so it is harder for one group to exploit another group since the groups are similar. In addition, since smaller nations have less monopoly power in world markets, it is less efficent for them to subsidize domestic companies in order to give these companies an advantage over imports. The greater profits to domestic companies from these subsidies come at the expense of much larger declines in consumer well being.
The growth in the competitiveness of small countries on the global market is in good part responsible at a deeper level for the remarkable growth in the number of countries since 1950 from a little over 100 to almost 200 countries now. And the number of independent countries is still growing.