Size and Size and Growth:Growth:

Thorvaldur Gylfason

Small States Small States

in the Global in the Global

EconomyEconomy

Big countries and Big countries and smallsmallTo paraphrase Ernest Hemingway:To paraphrase Ernest Hemingway: Small countries are different Small countries are different

from big ones in that …from big ones in that … … … they have fewer peoplethey have fewer people

Do small countries differ also Do small countries differ also in other respects? If so, how?in other respects? If so, how?

What are the benefits and What are the benefits and costs of being small?costs of being small?

What are the challenges for What are the challenges for future?future?

Blessing or curse?Blessing or curse? Controversial issueControversial issue ““Our shortage of people is our Our shortage of people is our

most serious social evilmost serious social evil,” said our ,” said our national poet, Einar Benediktssonnational poet, Einar Benediktsson

Consider arguments and Consider arguments and evidenceevidence

1

Being small: BenefitsBeing small: Benefits Homogeneous populationHomogeneous population

Social cohesionSocial cohesion is good for growth is good for growth Openness to trade and Openness to trade and

investmentinvestment Being small Being small and closedand closed is not an is not an

optionoption Small agriculture and natural Small agriculture and natural

resource baseresource base Too much agriculture impedes Too much agriculture impedes

growthgrowth Everyone knows practically Everyone knows practically

everything about everybody elseeverything about everybody else

2What are the

benefits? What are

the costs?

Being small: CostsBeing small: Costs Economies of scale and scopeEconomies of scale and scope

Public sector, defensePublic sector, defense Private sectorPrivate sector

Lack of diversificationLack of diversification Vulnerable to external shocksVulnerable to external shocks

Poor locationPoor location Remote, landlockedRemote, landlocked High transport costsHigh transport costs

Few like Few like Mozart, and far , and far betweenbetween

Empirical evidence: Empirical evidence: Sample of countriesSample of countries3 There are now 207 countries in There are now 207 countries in

all reporting to World Bank, and all reporting to World Bank, and TaiwanTaiwan

Of these, 61 have fewer than 1.3 Of these, 61 have fewer than 1.3 million inhabitants … million inhabitants …

… … and 18 have fewer than and 18 have fewer than 100,000100,000

So, there are 43 countries with So, there are 43 countries with population between 0.1 million population between 0.1 million and 1.3 millionand 1.3 million

Of which, Of which, 2626 are are islandsislands: Our : Our samplesample

What

do the

data

tell us?

Sample of 26 small island economies I

Bahamas 298 15,500

Bahrain 666 11,600*Barbados 267

14,000Cape Verde 428

4,500Channel Islands 149Comoros 544

1,400Cyprus 761 19,100Fiji 801

4,800French Polynesia 231

22,200Guam 152

Figures refer to 1999. GNP is adjusted for purchasing power parity.* 1998

1 Thousands

2 USD

Population1 GNP per capita2

Sample of 26 small island economies II

Iceland 278 27,200Maldives 269

3,400* Malta 379

22,900Mauritius 1,174

9,000Mayotte 140Micronesia 116Netherlands Antilles 215New Caledonia 209

21,100Samoa 169

4,100Sao Tome & Principe 145

1,300

Figures refer to 1999. GNP is adjusted for purchasing power parity.* 1998

Population GNP per capita

Sample of 26 small island economies III

Solomon Islands 429 2,100

St. Lucia 154 5,200

St. Vincent & Grenadines 114 5,000

Trinidad & Tobago 1,293 7,700

Vanuatu 193 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.

Population GNP per capita

Empirical evidence: Empirical evidence: Research strategyResearch strategy4 Compare small island economies Compare small island economies

with world economy at largewith world economy at large Stress variables that have proved Stress variables that have proved

to be strong and robust to be strong and robust determinants of economic growth determinants of economic growth across countriesacross countries Openness to trade and investmentOpenness to trade and investment Education and healthEducation and health Manufacturing vs. natural resourcesManufacturing vs. natural resources InvestmentInvestment

Exports and FDI Exports and FDI 1960-99 (% of GDP)1960-99 (% of GDP)

0

5

10

15

20

25

30

35

40

45

Exports FDI (net) 1970-99

Small states

World

Results

Small countries are

more dependent on

trade than larger

ones; even so,

differences in FDI

are not statistically

significantt = 4.4

t = 1.8*

* t-value * t-value

is 2.7 if is 2.7 if

world’s world’s

net FDI net FDI

is taken is taken

to be nilto be nil

Duties and reserves Duties and reserves 1960-99 (% of 1960-99 (% of imports)imports)

0

2

4

6

8

10

12

14

16

Import duties Reserves (months)

Small states

World

Results

Small countries

levy higher duties

on imports and

keep more

reserves, but

differences are

small

t = 0.7

t = 0.4

Education 1960-99 Education 1960-99 (%)(%)

0

10

20

30

40

50

60

Secondaryenrolment

Publicspending/ GNP

Small statesWorld

More

results

Small countries

spend significantly

more on education,

or 5.7% of GNP

against 4.2%

t = 1.0

t = 3.3

Health 1990-99 (%)Health 1990-99 (%)

0

10

20

30

40

50

60

70

80

Life expectancy1999 (years)

Healthspending/ GDP

Small statesWorld

More

results

Small countries

spend a bit more on

health, or 5.3% of

GNP against 5.1%,

but difference is

insignificant

t = 6.1

t = 0.4

Government spending Government spending 1960-99 (% of GDP)1960-99 (% of GDP)

0

5

10

15

20

25

Governmentspending

Military spending1985-97

Small statesWorld

More

results

Public services cost

more to provide in

small countries; small

islands cost less to

defend

t = 3.0

t = -1.8

Manufacturing Manufacturing exports 1963-99 (% of exports 1963-99 (% of exports)exports)

0

10

20

30

40

50

60

70

Manufacturingexport share

High-tech exportshare 1988-99

Small statesWorld

More

results

Need manufacturing

and high-tech

exports for rapid

growth

t = -10.7

t = -1.6

Agriculture and Agriculture and personal computers personal computers 1960-991960-99

0

20

40

60

80

100

120

Agriculture (% ofGDP)

Computers per1000 inhabitants*

Small statesWorld

More

results

Too much

agriculture, too few

computers

t = 3.4

t = 0.5

* 1999

Investment and Investment and growth 1960-99 (%)growth 1960-99 (%)

0

5

10

15

20

25

30

Investment/ GDP Growth per capita*

Small statesWorld

Bottom

line

Small countries

invest a bit more

than larger

countries, but

growth differential

is small and

insignificant

t = 1.8

t = 0.2* Bosnia * Bosnia

and and HerzegovinHerzegovin

a, a, Azerbaijan, Azerbaijan,

Ukraine, Ukraine,

and and TurkmenistTurkmenist

an not an not

includedincluded

2.1% 2.0%

Investment and Investment and growth 1960-99 (%)growth 1960-99 (%)

0

5

10

15

20

25

30

Investment/ GDP Growth per capita*

Small statesWorld

Bottom

line

No evidence either

of greater volatility

of investment and

growth in small

countries

t = 1.8

t = 0.2* Bosnia * Bosnia

and and HerzegovinHerzegovin

a, a, Azerbaijan, Azerbaijan,

Ukraine, Ukraine,

and and TurkmenistTurkmenist

an not an not

includedincluded

2.1% 2.0%

Empirical evidence: Empirical evidence: ConclusionConclusion5 Small countries seem Small countries seem

remarkably similar to larger ones remarkably similar to larger ones More open to trade, yesMore open to trade, yes More public expenditure on More public expenditure on

educationeducation More – and better? – investmentMore – and better? – investment More government spending More government spending More dependent on natural More dependent on natural

resourcesresources

Good for Good for

growthgrowth

Not so Not so

good for good for

growthgrowth

In sum, their growth In sum, their growth performance has been similar as performance has been similar as elsewhereelsewhere

Empirical evidence: Empirical evidence: ConclusionConclusion

The EndThe End

This is good news This is good news Many have expressed concern that Many have expressed concern that

small is small is more dangerous than more dangerous than beautifulbeautiful

The key to further economic The key to further economic success is success is greater opennessgreater openness to to trade and also investment to trade and also investment to break outside the confines of break outside the confines of small domestic marketssmall domestic markets Small countries must have market Small countries must have market

accessaccess Can buy insurance against trade Can buy insurance against trade

risksrisks Must share gains from trade fairlyMust share gains from trade fairly