Enrico Spolaore is a professor of economics at Tufts University specializing in political economy, international economics and economic growth. Recently he gave two lectures in Montreal titled "Trade, Growth, and the Size of Countries" and "The Size of Nations in Times of Democracy and Globalization."
The number of sovereign states has dramatically increased in the past few decades. At the end of World War II there were 76 independent countries in the world. Today there are 191 independent countries with a seat at the United Nations. Over half of these sovereign countries have smaller populations than Massachusetts. Such a large increase in the number of nations in the past few decades, and the fact that so many independent countries in the world are small, has renovated interest in two questions: "How large should countries be?" and "What determines the number and size of countries in reality?"
The number and size of sovereign states have been at the centre of human history for thousands of years, from the times of Sumerian city states to the post-cold war era. Plato calculated the optimal size of a state as 5,040 heads of family (do not ask me how he came up with that number!).
Aristotle in The Politics wrote, "experience has shown that it is difficult, if not impossible, for a populous state to be run by good laws" - a view probably not shared by Aristotle's famous pupil, Alexander the Great, who went on to conquer a huge empire, showing once again that professors have only a limited influence on their students. Montesquieu in The Spirit of Laws wrote that "in a small republic, the public good is more strongly felt, better known, and closer to each citizen."
A theory of "optimal size" was sketched in 1764 by Cesare Beccaria, the Italian philosopher who inspired Bentham's utilitarian approach: "To the extent that society increases, each member becomes a smaller part of the whole, and the republican sentiment becomes proportionally smaller, if the laws do not take care to reinforce it. Societies, like human bodies, have their circumscribed limits, and if they grow beyond them their economy is necessarily disturbed... A republic that is too vast cannot save itself from despotism except by subdividing itself and uniting itself into so many federative republics."
These are selective quotations from an enormous philosophical, political and historical literature. By contrast, for a long while economists have taken political borders as given. Only in recent years has a small but expanding economic literature started to address questions of country formation and break-up with the tools of economic analysis.
This research is motivated by the fact that political borders are not a fixed part of the geographical landscape but human-made institutions, affected by the decisions and interactions of individuals and groups who pursue their objectives under constraints. The economics approach to the size of nations can be viewed as a natural extension of the research program of modern political economics, whose aim is to "endogenize" (that is, to explain) collective decisions and institutions.
When one considers the size of nations from an economic perspective, a natural staring point is the trade-off between benefits and costs from a larger size. Benefits of scale are associated with the provision of public goods, which are cheaper in per capita terms when more taxpayers pay for them (empirically, smaller countries have larger governments). Larger countries can also better internalize cross-regional externalities (for example, pollution), a point extensively studied in the literature on decentralization and fiscal federalism. Additional benefits from size come from insurance against natural and economic shocks through inter-regional transfers. For example, when the Gulf coast is hit by a hurricane, the rest of America can help to rebuild.
But size also comes with costs. As countries become larger, congestion may overcome some of the above benefits. More importantly, an expansion of a country's borders is likely to bring about higher "heterogeneity" of preferences across different individuals. In many cases it is good that people have different preferences over choices. With more variety and diversity comes specialization and benefits from exchange.
But there may also be substantial costs when we talk about different preferences over indivisible "public goods," like a common legal system and common public policies, which everybody must share within a country, whether they like it or not. Decentralization of some public goods and policies may offer a partial response to heterogeneity. But many policies that characterize a sovereign state (basic characteristics of the legal system, foreign policy, defense policy) are indivisible and must be shared among the whole population. This may induce a trade-off between economies of scale in the provision of public goods and heterogeneity of preferences.
The trade-off depends not only on the degree of heterogeneity of preferences but also on the political regime through which preferences are turned into policies. For example, non-democratic rulers who are less concerned with the preferences of their subjects may pursue expansionary policies that lead to the formation of inefficiently large countries and empires. Historically, successful societies are those that have managed to minimize the costs of heterogeneity while maximizing the benefits stemming from a diverse pool of preferences, skills and endowments.
Economic analyses of the size of nations have pointed out that the trade-off between benefits and costs of size is also a function of the degree of international economic integration. The size of the market may or may not coincide with the political size of a country as defined by its borders. Larger nations mean larger domestic markets when political borders imply barriers to international exchange. By contrast, market size and political size would be uncorrelated in a world of perfect free trade in which political borders imposed no costs on international transactions. Therefore, market size depends both on country size and on the trade regime. Small countries can prosper in a world of free trade and high economic integration, while a large size is more important for economic success in a world of trade barriers and protectionism.
Empirically, the effect of size on economic performance (income per capita, growth) is higher for countries that are less open, while the effect of openness is much larger for smaller countries. The highest rate of economic growth in the past few decades has been achieved by Singapore, a small open economy, while the richest country in the world in terms of income per person is Luxembourg, a small open economy in the heart of Europe.
As economic integration increases, the benefits of a large political size are reduced, and political disintegration becomes less costly. Conversely, smaller countries, all other things being equal, tend to benefit from more openness. Hence, economic integration and political disintegration tend to go hand in hand.
