Introduction

Does size matter for economic success? Of the five largest countries in the world in terms of population, China, India, the United States, Indonesia and Brazil, only the United States is a rich country.^[336] In fact the richest country in the world in 2000, in terms of income per capita, was Luxembourg, with less than 500,000 inhabitants.

In this chapter, we discuss the relationship between the scale of an economy and economic growth from two points of view. We first discuss the effects of an economy’s size on its growth rate and we then examine how the size of countries evolves in response to economic factors.

The “new growth literature”, with its emphasis on increasing returns to scale, has devoted much attention to the question of size of an economy.^[338] It is therefore some­what surprising that the question of the effect of border design and size of the polity as a determinant of economic growth has received limited attention. One reason is that, as we will see below, measures of country size (population or land area) used alone in growth regressions, generally do not have much explanatory power. Even less attention has been devoted to the endogenous determination of borders even by those researchers who have paid attention to the effect of geography on growth.

While economists have remain on the sidelines on this topic, philosophers devoted much energy thinking about country size. Plato, Aristotle and Montesquieu worried about the political costs of large states. Aristotle wrote in Politics that “experience has shown that it is difficult, if not impossible, for a populous state to be run by good laws”. Influenced by Montesquieu, the founding fathers of the United States were preoccu­pied with the potentially excessive size of the new Federal State. On the other hand, liberal thinkers who in the nineteenth century contributed to defining modern nation­states were concerned that in order to be economically, and therefore politically viable, countries should not be too small. Historians have studied the formation of states and their size and emphasized the role of wars and military technology as an important de­terminant. In fact, rulers, especially nondemocratic ones, have always seen size as a measure of power and tried to expand the size of the territory under their rule. So, while throughout history country size seemed to be a constant preoccupation of philosophers, political scientists and policymakers, economists have largely ignored this subject.

In recent decades the question of borders has risen to the center of attention in in­ternational politics. The collapse of the Soviet Union, decolonization, and the break-up of several countries have rapidly increased the number of independent polities. In 1946 there were 76 independent countries, in 2002 there were 193.^[339] East Timor was the latest new independent country at the time of this writing.

In this chapter, we explore the relatively small recent economics literature dealing with the size of countries and its effect on economic growth.

This chapter is organized as follows. Section 2 discusses a general framework for thinking in economic terms about the optimal and the equilibrium size of countries, providing a formal model that focuses on the effect of size on income levels and growth, with special emphasis on the role of trade. Section 3 reviews the empirical evidence on these issues and provides updated and new results. Section 4 briefly explores how the relationship between country size, international trade and growth have played out historically. The last section highlights questions for future research.

2.