Economic size and long -term growth: An empirical analysis of the consequences of small economic size on investment, productivity and income growth
This research presents evidence supporting the hypothesis that small country size constitutes a burden for long-term economic growth. Based on statistical data for 130 countries (excluding transition economies and oil exporting countries) for the 1970–97 period, the evidence shows that, whether measured by population or GDP, small country size is associated with high export concentration, high market concentration of exports, and high share of primary products in total exports. The econometric evidence also suggests that export concentration leads to export instability. Moreover, using an accelerator model, the findings of this research suggest that export instability reduces income growth specifically by deterring private investment growth.
I also found a strong negative correlation between openness (measured by the ratio of taxes on trade to trade) and country size: the smaller the country, the less exposed the economy is to international competition. Furthermore, econometric evidence from panel data for the 1970–92 period indicates that trade opening negatively affects productivity and income growth.
These results challenge the notion of market-led specialization as an optimal policy choice for smaller countries, and point towards deliberate export diversification and careful trade policies, as opposed to single-minded liberalization programs.