Calling the rise of small states amid a world of globalization a key megatrend, a new report from Credit Suisse notes a negative correlation between size and a country’s gross domestic product. This was among some of the surprising results in the study that found that, unlike the corporate world, there is not an economy of scale with larger government.
UN Human Development Index populated by small countries
When factoring the quality of life, and adding factors such as healthcare, education and intangible infrastructure as measures of success, small countries did very well in the study. In fact half of the top thirty countries in the UN Human Development Index, measuring income, education and health, is populated by small countries. Similarly, Credit Suisse’s Country Strength Indicator has six small countries in the top ten. Smaller countries tend to spend more on education and healthcare as a percentage of GDP than larger countries, the study noted, a factor in their long term success.
Small countries are more open to international trade
The study found that small countries are more open to international trade and have embraced globalization to a greater degree than their larger and more controlling counterparts. Larger countries, however, tend to have more ethnic diversification than smaller countries.
What the study did find is that large mega corporations like to reside in large countries. Of the top 500 companies by market capitalization, 86 percent are based in large countries. The report noted that with manufacturing outsourcing and a global workforce where nearly 30 percent of a corporation’s management jobs are oversees, the “home” advantage of having a large corporation headquartered there might not be as beneficial as generally thought.
Big business and government team up to break apart larger countries
Big government and big business often team up to fight moves to break apart larger countries. The report noted that large country political leaders and large corporations have consistently taken a “United we stand, divided we fall” world view, advocating for larger countries and government. They argue breaking up a large country creates legal, fiscal and monetary uncertainty.
While the assumption was made large countries would likely benefit from economies of scale, this generally wasn’t true. Large countries tend to have higher tax rates by as much as 5 percent to fund their largesse. The cost of funding public services is actually more on larger countries than smaller. The only area where the study found large countries exhibited a benefit from economies of scale was in public sector salaries.
Smaller countries, while they may not have the large and politically powerful multi-national corporations headquartered in their domains, collect more corporate tax than large countries. What was the reason for small country success? The report noted the rule of law seems to be a far more important determinant of economic success than political freedom.
Finally some good graphs from Credit Suisse