Small is best

In Europe, Asia, Latin America and Africa small nations lead in terms of economic and social development

Tim Congdon

Raucous applause greeted Guy Verhofstadt’s speech at the Liberal Democrat party conference in September. According to the former Belgian prime minister, “the world order of tomorrow” will not be “based on nation states or countries”. It will instead be “based on empires”, such as China, India, the Russian Federation and of course the United States of America. The hint could have been more pointed, but it was obvious enough. The nations of Europe are all too small to matter by themselves in the future “world order”; they must consolidate into a “European empire”, which is the final destination and ultimate justification of the European Union. So the British are mad to leave the EU.

The argument is hardly new. In 1943 Jean Monnet, often regarded as the architect of the post-war European project, became a member of the would-be French government in exile in Algiers. At a meeting on 5 August, he told his colleagues, “There will be no peace in Europe if the states are reconstituted on the basis of national sovereignty. The countries of Europe are too small to guarantee their peoples the necessary prosperity and social development. The European states must constitute themselves into a federation.” The obsolescence of Europe’s nation states, and the modernity of the EU (and eventually a fully-fledged United States of Europe), remained one of Monnet’s themes until his death in 1979.

But is it true that the consolidation of small states into large ones leads to “the necessary prosperity and social development”? Counter-examples are easy to cite. Verhofstadt may regard the Russian Federation as an empire that belongs to “the world order of tomorrow”, but the unravelling of its predecessor, the Soviet Union, is a clear rebuttal. The now-vanished Yugoslavia is perhaps an even more decisive warning that integration and scale do not make nations rich.

More generally, no correlation holds between the size of political entities (in terms of, say, population and land area) and incomes per head. When Monnet was commenting on these questions in 1943, geopolitical speculation centred on the outcome of the Second World War. Only a fool could overlook that the US and the Soviet Union were large nations that were heading to victory. Germany was by comparison a small nation, and so were France and Italy. Even Britain, shorn of its own empire, lacked the people, landmass and resources of the two big continent-size powers. But 1943 was special and unique, and it proved to be a bad time to make long-term conjectures about the destiny of nations. In the postwar decades many small states have delivered rapid economic growth, and enjoyed high living standards relative to both the global average and larger neighbours. Indeed, in Europe, Asia, Latin America and Africa it is small nations that today lead in terms of economic and social development.

Does that seem a bit of a stretch? Think of Switzerland and Norway in Europe. Consider in Asia Hong Kong (next to larger and much poorer China) and Singapore (surrounded by again larger and much poorer Indonesia and Malaysia). Notice that in Latin America Chile now has the highest income per head; it comes top, despite having fewer people and less territory than Brazil, Mexico, Argentina, Peru, Colombia and Venezuela. Reflect on tiny Botswana, which has arguably been the most economically successful country in Africa.

If a single-paragraph survey sounds glib, should an appeal be made to academic research? In 1995 Alberto Alesina and Enrico Spolaore wrote a paper for the US National Bureau of Economic Research, On the number and size of nations, in an attempt to apply economic theory to determine — in their words — “the equilibrium number of political jurisdictions”. By 2003 their work had evolved into a book, The Size of Nations. Neither the paper nor the book is an easy read, and the authors readily concede that many questions have been left open. But one message stands out.

Economies of scale and specialisation do help productivity and living standards, and on the face of it small countries cannot achieve them as easily as large countries. But two drivers enable small countries to overcome the problem. The first is that they should pursue free trade. Not only does that lead to specialisation according to comparative advantage and hence efficient resource allocation, but it may also secure decreasing costs per unit of production because of scale economies. Further, openness to the rest of the world enables companies to access best technologies and to buy the latest equipment and the cheapest inputs.

The second is that both large and small countries should seek a liberal trading environment, and promote globalisation. In short, free trade and economic liberalism are the keys to British prosperity and social development in the world order of tomorrow. That is what really matters, not membership of the increasingly protectionist, over-regulated and inward-looking EU proto-empire on our doorstep.

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