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Is There a Size Premium for Nations?

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Abstract

This paper examines whether there is a premium in country size. We study whether there are significant gains from being a small or a large country in terms of certain socioeconomic indicators and how large this premium is. Using panel data for 200 countries over 50 years, we estimate premia for various sizes of nations across a variety of key economic and socioeconomic performance indicators. We find that smaller countries are richer, have larger governments, and are more prudent in terms of fiscal policies than larger ones. On the other hand, smaller countries seem to be subject to higher absolute and per capita costs for the provision of essential public goods, which may lower their socioeconomic performance in terms of health and education. In terms of economic performance, small countries seem to do better than large countries, compensating for smallness by relying on foreign trade and foreign direct investment. The latter comes at the cost of higher vulnerability to external shocks, resulting in higher volatility of growth rates. This paper’s findings offer essential guidance to policymakers, international organizations, and business researchers, especially those assessing a country’s economic or socioeconomic performance or potential. The study implies that comparisons with medium-sized or large countries may be of little utility in predicting the performance of small countries.

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Notes

  1. Note that we report only countries for which at least two variables (on population and GDP per capita) are available for a given year.

  2. For instance, two influential studies (Sachs & Warner, 1995, 2001) found a strong correlation between natural resource abundance and poor economic growth. However, recent studies find little support for the thesis. In a meta-study, Havranek et al. (2016) find weak support for the thesis that resource richness adversely affects long-term economic growth. They note that “approximately 40% of empirical papers finding a negative effect, 40% finding no effect, and 20% finding a positive effect,” but “overall support for the resource curse hypothesis is weak when potential publication bias and method heterogeneity are taken into account.” Kurtz and Brooks (2011) find that “natural resource wealth can be either a ‘curse’ or a ‘blessing’ and that the distinction is conditioned by domestic and international factors, both amenable to change through public policy, namely, human capital formation and economic openness”.

  3. Excluding the outliers as described does have a minor impact on our results. For instance, in terms of the GDP per capita, excluding the identified outliers (18 out of 1,827 observations, i.e., about 1% of all observations) does have a minor effect on improvement of the fit of regression (an improvement by 1.5 percentage points) as well as on the size of the main regressor (the latter changes at a third decimal point).

  4. See a list of countries in our dataset in Table 6 in Appendix.

  5. See Table 7 in the Appendix for robustness checks also for all other variables in our analysis.

  6. The Kuznets ratio is defined as the ratio of income shares between the highest 20% of earners and the lowest 40% earners.

  7. Note that due to the lower rate of coverage of countries both in IMD World Competitiveness Center (2012) and WEF scoreboards, we are unable to use them in our empirical analysis.

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Acknowledgements

We thank Abdul Rashid, Almat Kenen, Yerkezhan Kenzheali, and Zhibek Kassymkanova for excellent help with data collection and processing, and Annelore Van Hecke, Joep Konings, and Črt Kostevc for providing valuable comments to an earlier draft of the paper.

Funding

Financial support of VIVES Institute at the University Leuven is greatly acknowledged.

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Authors and Affiliations

  1. Faculty of Economics, University of Ljubljana, Kardeljeva pl. 17, 1000, Ljubljana, Slovenia

    Jože P. Damijan & Sandra Damijan

  2. University of Leuven, Leuven, Belgium

    Jože P. Damijan

  3. International School of Economics, Kazakh-British Technical University, 59 Tole Bi Street, 050000, Almaty, Kazakhstan

    Osiris Jorge Parcero

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  1. Jože P. Damijan
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Correspondence to Osiris Jorge Parcero.

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Appendix

Appendix

Table 6 Countries with available data included in the analysis, in 1960 and 2015
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Table 7 Robustness checks for size indicators
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Table 8 Coefficients for premia calculated in Figs. 3 and 5a, b
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Table 9 Coefficients for premia calculated in Figs. 3a–d and 6a–f
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Damijan, J.P., Damijan, S. & Parcero, O.J. Is There a Size Premium for Nations?. J Knowl Econ 14, 3974–4016 (2023). https://doi.org/10.1007/s13132-022-01021-x

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