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10.18 The Size of Nations

Since the late 1990s several economists have been using the tools of modern

economic analysis to explore the determinants of the size of nations (see

Alesina and Spolare, 1997, 2003; Bolton and Roland, 1997; Alesina et al.,

2000, 2005). Although historians and other social scientists have studied this

issue, economists ‘have remained on the sidelines’. Of particular interest to

economists is the observation of Alesina et al. (2005) that there has been a

dramatic increase in the number of nations since the end of the Second World

War. In 1948 there were 74 countries, 89 in 1950, and 192 in 2001. They also

note that the world ‘now comprises a large number of relatively small countries:

in 1995, 87 of the countries of the world had a population of less than 5

million, 58 had a population of less than 2.5 million, and 35 less than 500

thousands’. The proliferation of countries has also led to too many separate

currencies (Alesina and Barro, 2002; Alesina et al., 2002). During this same

period the second age of globalization has emerged and the share of international

trade in world GDP has ‘increased dramatically’ (Snowdon, 2002a,

2003c). Is there a connection? Alesina et al. (2005) make the following

important points:

1. political borders are made by humans and are not exogenous geographical

features;

2. economists should think of the equilibrium size of nations (measured

by total population) ‘as emerging from a trade-off between the benefits

of size and the costs of preference heterogeneity in the population’;

3. the main benefits of size are as follows: economies of scale with respect

to the production of public goods such as defence, maintenance of law

and order, public health and so on; greater safety from foreign aggression;

internalization of cross-regional externalities; better income

insurance to regions subject to specific shocks; transfers of income

across regions to achieve greater equity among the overall population; a

larger internal market increases the potential for greater specialization,

as noted by Adam Smith;

4. in a world of free trade, country size, as measured by population, is no

longer a determinant of market size;

5. it therefore follows that ‘the benefits of country size decline as international

economic integration increases’;

6. the benefits of international economic integration increase the smaller

is a country;

7. economic integration and political disintegration are positively correlated;

8. the costs of size include administrative and congestion costs, but much

more important are problems associated with the heterogeneity of preferences

of individuals, which obviously increase with the size of a

nation;

9. using ethno-linguistic fractionalization as a proxy for heterogeneity of

preferences economists have found that ethnic diversity is inversely

correlated with economic performance, the quality of governance, and

economic and political freedom (see Alesina et al., 2003);

10. as international economic integration increases, the trade-off between

the benefits of size of a nation and the costs in terms of heterogeneity of

preferences shifts in favour of small nations.

This work has important implication for the future of the European Union

(EU). EU enlargement clearly increases the heterogeneity of preferences and

economic integration lowers the benefits of country size, thereby reducing

the costs of independence for small countries. As Alesina et al. (2005) note,

‘many have argued that Europe will (and perhaps should) become a collection

of regions loosely connected within a European confederation of

independent regions’.

Research by economists on the determinants of the size of nations is in its

infancy. However, many interesting relationships remain to be explored, including

the interconnection between international integration, democracy, the

size of nations and international conflict.