Small states have attracted a large amount of research. In this paper we test whether small states are any different from other states in terms of their income, growth, and volatility outcomes. We find that, controlling for location, small states have higher per capita GDP than other states. This income advantage is largely due to a productivity advantage, constituting evidence against the idea that small states suffer from an inability to exploit increasing returns to scale. Small states also do not have different per capita growth rates than other states. Small states do have greater volatility of annual growth rates, which is in part due to their greater volatility of terms of trade shocks. This terms of trade-based volatility is in turn due to small states’ greater openness. However, their greater openness on balance has a positive net payoff for growth. The one differential policy measure that might be relevant for small states is to further open up to international capital markets in order to better diversify risk, but the benefits of even that are still unresolved in the literature. We conclude that small states are no different from large states, and so should receive the same policy advice that large states do.
Dataset used for Easterly, William and Aart Kraay (1999). "Small States, Small Problems?". World Bank Policy Research Department Working Paper No. 2139
The database contains data on 176 countries from all regions in the world.
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William Easterly and Aart Kraay
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William Easterly and Aart Kraay. Small States, Small Problems? (SSSP) 1960-1995. Ref. WLD_1995_SSSP_v01_M. Dataset downloaded from www.microdata.worldbank.org on [date]
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