The size of nations: Chat with Enrico Spolaore

Greg Nunes @greg_nunes

Today we chat with the Professor of Economics at Tufts University Enrico Spolaore, co-author with Alberto Alesina of "The Size of Nations" (2003, MIT press) one of the most acclaimed monographs in the topic. Which are the main advantages and disadvantages of size when it comes to states?

-From the beginning you present the question about the optimal size of nations as a tradeoff between the benefits of size and the costs of heterogeneity of citizens’ preferences and/or ideology? In what sense social heterogeneity rises problems?

Heterogeneity is not always bad: it comes with both costs and benefits. Consider everyday goods – like food and drinks – which are “rival” in consumption. If I drink my favored brand of beer, you don’t have to drink the same brand – you can drink a different one, or you can drink wine instead, if you prefer. The fact that people have different preferences about those goods is beneficial, because such heterogeneity can generate gains from specialization and trade. The problems arise when we consider “public goods,” which, by definition, must be shared by everybody. For example, every US citizen must share the same defense and foreign policies, whether they like them or not. Defense is a public good with large economies of scale. It is provided to millions of citizens, who may have different views on what the US should do or should not do with respect to the rest of the world. In general, there is a trade-off between economies of scale and the political costs of heterogeneity. On the one hand, we cannot have everyone in the world declare independence and provide their own defense or foreign policy. On the other hand, heterogeneity costs can be too high when one centralized government rules over large and heterogeneous populations with different political preferences - say, because they have different cultures, languages, religious beliefs, and so on. An optimal size would balance the benefits from economies of scale with heterogeneity costs.

-You talk about “overlapping jurisdictions” as the ideal political organization. What’s that, and why it can only work in theory but not in practice?

Overlapping jurisdictions would be ideal only in an abstract world where each public good could be provided separately from any other public good. For example, my health services would be provided by a government that only deals with health, monetary policy by another government that only provides the currency, and so on. Then, each individual would belong to a separate jurisdiction for each public good, optimally designed to provide the maximum utility in terms of highest economies of scale and lowest heterogeneity costs. In reality, however, public goods are provided in “bundles". A reason is that there are also “economies of scope”; it is much more efficient to provide a common monetary policy in a jurisdiction that also has a common fiscal policy, a common unemployment policy, a common banking policy, and so on. The fact that people in different European countries share the euro, but they do not share many other important complementary public goods, is at the source of many of Europe’s economic and political problems.

-Which are the three main reasons offered to explain the geographically connected jurisdictions of nations?

A reason can be purely technological: lower transportation costs make it easier to provide public goods to geographically connected people. But there might also be deeper political reasons: people who live close to each other geographically may also tend to more similar in preferences for public policies, on average (and with many exceptions). This can occur for three reasons: 1) people who are more similar may voluntarily choose to live closer to each other, 2) people who have lived close to each other for a long time share a more similar culture, language, and so on, and 3) governments implement policies of “nation building” (education, propaganda, even violent repression of minorities) in order to reduce heterogeneity within their borders.

-You claim that allowing people to vote on the size of borders wouldn’t result necessarily in the optimal configuration (from a welfarist point of view). Why? In which way allowing transfer schemes between jurisdictions would help in this regard?

Yes, voting on border is no guarantee that borders would be chosen optimally. The problem is that, when we vote on any public issue, including borders, we often consider only the costs and benefits for ourselves, not the consequences for all other voters. Thus, voters in a region could decide in favor of a breakup that brings positive benefits to themselves, but at a much larger costs for the rest of the country. Very often, a more efficient solution would be to maintain a larger union, while compensating the individuals and regions that are farther from the central government politically and culturally. It is easier to implement such transfers if the region that is culturally and politically father from the central government is also economically disadvantaged. It is much harder if the government would have to transfer resources to regions that are already wealthier than the rest of the country, because such transfers could be perceived as inequitable by the voters.

-However, you also claim that “Democratization induces smaller countries to form” (p.100). Could you briefly develop this point?

Non-democratic rulers, by definition, do not have to worry about the preferences of most of their subjects, but only of those groups (aristocracy, party elite, nomenklatura) whom they need for their political survival. Therefore, when policies and borders are decided by kings and dictators, the political costs of heterogeneity in large populations tend to be ignored, leading to the creation of large and heterogeneous polities, such as the colonial empires and the former Soviet Union. When voters acquire a direct voice, it becomes more costly to support large centralized states and empires. Thus, democratization leads to forms of decentralization, regional autonomy, and, in more extreme cases, secessions and formation of smaller countries.

-In the sixth chapter you argue that “whether country size matters for economic prosperity depends on a country’s degree of economic integration with the rest of the world” (p.61). However, in the first sections you identify several economic advantages of being big that have to do with economies of scope and scale among other factors. Could we conclude then that all else being equal –such as the degree of economic integration- bigger is better from a pure economic point of view?

Bigger countries, in principle, could provide public goods more efficiently because of economies of scale and scope. But this does not mean that, in the real world, bigger is always better, even from a purely economic point of view. The issue is that, in the real world, we do not observe that “all else remains equal” when one varies size. For example, economic integration with the rest of the world tends to be larger in smaller countries. The other effect is that political heterogeneity costs may also come with economic costs if they lead to more frequent civil conflicts or other disruptions. Therefore, in reality, smaller countries on average are no less prosperous or economically less dynamic than larger countries. On the contrary, smaller countries have often outperformed larger countries economically over the past few decades.

-Why you predict that a more peaceful world would tend to produce smaller countries?

Yes, the need to provide defense against foreign threats has always been a fundamental drive towards the formation of larger political unions and federations. In a peaceful world, economies of scale in defense would be much less important, and smaller countries could be formed without the threat of foreign aggression.

-Can we reverse the conditional? Would you agree with Bastiat that international commerce is a great proxy against international wars and that, therefore, small states would tend to produce a more peaceful international order (insomuch as they are heavily inclined to trade intensely with foreign powers)?

There is an extensive debate in the empirical literature on whether international commerce actually reduces the likelihood of international wars. The evidence is mixed. As a supporter of international openness, I would hope so. Many economists believe that bilateral trade reduces conflict between two countries. For example, the fact that France and Germany now trade a lot with each other within the EU has probably been a major force towards keeping the peace in Europe – contrary to what had happened between 1870 and 1945. The peaceful effect of multilateral trade is not as clear: some have argued that the possibility of trading with a third country should reduce the incentives to keep the peace with one’s trading partner – thus, the fact that Germany can trade more with China or Russia could lower its incentives to cooperate with France. That said, I do believe that high barriers to trade and “beggar-thy-neighbor” policies are not good for peace. Small countries lose more from imposing high barriers to trade and gain more from international trade. Therefore, they can be a force for peace, if they act rationally and in a coordinated way.

-Recent studies about the quality of democracy in some micro-states in the pacific islands have suggested that small might not be always beautiful, meaning that contrary to the popular belief in the field, small democracies face important challenges such as lack of independent and critical enough press, deep factionalism and clientelism. How do you position yourself in this debate about the optimal size of democracies?

As an economist, I believe in trade-offs and the need to achieve an equilibrium between costs and benefits of size. I also think that different societies might achieve very different outcomes, for equal size, depending on other deeper characteristics, such as history, culture and institutions. Thus, a size that can work very well within a specific historical and cultural context might not be as appropriate in a different context. One size does not fit all!

-One last question regarding our country. You claim that, among other few states, the union of Portugal and Spain would be mutually beneficious. Which are the main reasons?

You are referring to a passage at the end of chapter 10 (p. 173) in The Size of Nations, where Alberto Alesina and I cite the results of a counterfactual exercise that Romain Wacziarg and I conducted in our study “Borders and Growth,” published in the Journal of Economic Growth in 2005. In that study, we estimated what rates of economic growth could have been achieved by different pairs of countries between 1960 and 1998 if they had formed a political union. We found that Spain and Portugal could indeed have grown faster if they had formed a political union. A reason for that result, probably, was that both countries would have benefited from a larger domestic market by forming a union, during a period when they were not fully integrated with each other and with the rest of Europe (they became full EU members only in 1986). I don’t know if the result would continue to hold now, when both countries are much more open (to each other and to other European markets), and therefore much less likely to benefit economically from eliminating internal barriers to trade between themselves by forming a political union. Moreover, when two countries consider the costs and benefits from political unification, an increase in income per capita should be only one of the relevant considerations. As we have already discussed, there are also political costs. In our exercise, we only focused on the economic benefits. We did not include the political heterogeneity costs from the unification of two countries that, while sharing common historical roots, have distinct cultures, languages, and political preferences.



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