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A way to go

Nationalist movements often argue that small countries are more economically successful than big ones.  The Scottish Nationalist Party claims that independence would allow Scotland to advance from ‘its subordinate position within the UK, and generate a new prosperity for Scotland’.  And former Plaid Cymru MP, Adam Price, who is currently taking a career  break at Harvard University, goes further, wrapping the ‘small  equals rich’ argument in a cloak of pseudo-academic jargon.

Price’s article, published in an on-line student journal, is entitled ‘Small is Cute, Sexy and Successful’.  He argues that smaller countries grow faster because they are more open to trade, more socially cohesive and more adaptable.  Rather optimistically, Price even argues that differences in population size alone account for ‘mighty minnows’ outperforming the big five (UK, Italy, Germany, France and Spain) between 1997 and 2007.  Furthermore, he argues that small countries did no worse than large countries when financial catastrophe hit in 2008, concluding that a ‘rising tide lifts small boats faster, it seems, but they are no more likely to sink in a storm’.

Although ‘Small is Cute’ is littered with academic terminology, Price’s analysis lacks any pretence of scholarly rigour. He jumps between different sets of countries and different time frames, cherry-picking examples from the six original Coal and Steel Community states, the EU15 and the EU27.  Sometimes he presents data from 1979-2007, and sometimes he presents figures from 1996-2009.  He is rarely clear about which data set is being referenced.

His arguments are also weak.  The Bosnians and the Belgians may be interested to hear that small countries are more cohesive than big ones. But Price’s most naïve contention of all is that small, export-driven countries fare no worse than larger countries in hard times.  In reality, the very reliance of small countries on trade, much vaunted by Price, leaves them particularly vulnerable to downturns in the global economy.

Latvia’s GDP plummeted by 18% in 2009.

The Lithuanian economy shrank by 15% in 2009.

Estonia’s economy contracted by 13.9% in 2009.

In the same year, Slovenia lost 7.3% of its GDP, Ireland’s economy shrank by 7%, Iceland’s by 6.8% and Hungary’s by 6.7%.

Unable to access credit on bond markets, many of these countries were forced to accept IMF bailouts in exchange for blistering austerity measures.  Far from enjoying prosperity, these countries are still straining for any glimpse of recovery on the horizon.

So, Adam Price’s article is nine parts polemic and one part academic, and talk of ‘mighty minnows’ is mere wishful thinking.

Alison Smith is a DPhil Student at St. Anthony’s College, Oxford. This article also appears on her blog, Political Developments. You can follow her on Twitter @AliFionaSmith

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2 Comments

  1. Adam Price
    February 21, 2012 at 4:38 pm — Reply

    Alison,

    Thank you for the review of my Review article. If I can be accused of writing a polemic then I guess your blog qualifies as an ad hominem attack. “Pseudo-academic” is a pretty strong phrase for one academic to use of another. You never know, we might run into each other at a conference!

    Anyway, if I can issue a small disclaimer: the Kennedy Review article was, of course, an opinion piece because that is the nature of the publication. The brief was “to challenge the status quo” which it does, just as your response seeks to defend it. I suggest you have a look at a policy paper on the economics of small countries I wrote with Ben Levinger – The Flotilla Effect – for a more detailed, scholarly account of the state of play in economics on the question of country size.

    I think it would be misleading to your readers if they gained the impression that it was only miscreant former Welsh nationalist politicians who believe that small size confers some economic benefit (and I do stress “some” – nowhere do I suggest it is the only determinant of economic outcomes, a patently false proposition and a straw man argument which I would kindly ask you withdraw) over the long run in the context of small European economies. As I reference in the article, Jean-Paul Fitoussi, one of the biggest names in international economics, and his team at Sciences-Po, have argued very much along similar lines – as have other prominent figures like Alberto Alesina here at Harvard and Xavier Sala-i-Martin at Columbia. These conclusions may make uncomfortable reading back in the UK, but there is a world beyond Oxford.

    As to the choice of time-sets then the point is that whichever set of countries – the original six founders, EU-15, EU-27 – and whichever appropriate time series you choose there does appear to be a general growth advantage in favour of small countries. It is correct, as you note, and I acknowledge in The Flotilla Effect, that small countries because of their dependence on exports tend to be more volatile, but that volatility works in both directions as they are much more agile in responding to external shocks, which means the overall effect is a much higher growth rate on average than the slower-reacting large countries whose economies are more difficult to turn around. Estonia, who you quote, are a case in point here, registering a 6.6% growth rate in 2011, just ahead of Lithuania. In fact all the top-growing economies in the advanced industrialised world in 2011 – Singapore, Taiwan, Israel, Sweden – have been small countries.

    Mighty minnows still seems a pretty accurate summary of their economic actualite, don’t you think?

    Adam Price
    Fellow, Harvard Kennedy School

    • February 23, 2012 at 8:05 am — Reply

      Dear Adam,

      Thank you for your comment. Actually, we already met (Split, March 2004), and I am sure it would be lovely to meet again at a conference.

      However, talking one academic to another, rather than one politician to another as before, it not the academic way to cherry pick cases – and you do it again in your response by giving five examples of small countries that have performed well in one particular year (2011). It would be the easiest thing in the world for me to reel off five small economies that performed badly in 2011, but that would be debate, not academia. The question is, did they perform well because they were small, or was there something else going on?

      I spend most of my time in Estonia at the moment, and it is true that their economy has recovered well. However, the main reason for their impressive economic growth (on average, over the last twenty years) is their economic policy of a low rate flat tax and very low levels of spending on public services. Would this be acceptable in, say, Wales? I certainly can’t imagine such a policy being well-received in my native Scotland, even if it would be good for economic growth. The same goes for Singapore and Taiwan – is their growth a result of their size, or the result of a pro-business policy environment?

      Although Lithuania posted good growth last year, its economy came under considerable financial pressure at the very end of year when Bank Snoras collapsed – a challenging budgetary setback for a small country emerging from a harsh recession. I was carrying out field work in Lithuania in December – unfortunately, the economic atmosphere was far from positive.

      In fact, my blog post only mentioned one or two of the problems with your analysis. Other problems were:
      1) The definition of ‘small’ as less than 15million people appeared to be arbitrary (certainly, the choice of cut-off was not explained), and didn’t seem…well, very small.
      2) You may say that, whichever set of countries you look at (Coal & Steel 6, EU15 or EU 27) the effect is positive for small countries – but, as a reader, it was impossible to follow which cases you were referring to at any given point, or to confirm and replicate your findings.
      3) Your analysis did not consider the effect of intervening variables (e.g. pro-business policy environment, low rate flat taxes). I would argue that these choices are highly salient.

      It was interesting that you used the phrase ‘uncomfortable reading’, as if I were standing up for the establishment. I have no personal bias for or against small countries. My research is focussed on the Baltic States, three lovely small countries. Whatever their current economic situation, the Estonians, Latvians and Lithuanians do not regret becoming independent – first and foremost, it’s a cultural choice. I remain to be convinced that there is any fundamental economic benefit (or, indeed, disbenefit) for small countries. I think that small economies are more volatile than large ones, but the policy environment is the major determinant of economic fortune.

      I am glad that you clarified that ‘Small is Cute’ was an opinion piece, and that it was intended to challenge status-quo thinking. In that case, you’d be pleased to spark debate – is that not what opinion pieces are supposed to do? However, when you throw around phrases like ‘makes uncomfortable reading’ and ‘there is a life outside Oxford’, you can’t be surprised that people question whether you are making an academic point or a political point.

      Alison Smith
      St Antony’s College, Oxford

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