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Do we need to be more innovative in understanding how country size matters?

Mohammad Amin's picture

In 2009, there were over 65,000 Chinese for each of the 20,398 residents of Palau. As of now, there are 20 countries with a population of less than 100,000 and 11 countries with a population over 100 million. As these numbers suggest, differences in country size or population are indeed large and breathtaking. Ever wondered if these differences really matter?

One thing that has puzzled me for long is the failure in a number of studies such as Rose (2006) to find any significant impact of country size on socio-economic variables. For example, Rose (2006) uses panel data for 200 countries and over 40 years, but fails to find any significant relationship between country size and a host of variables such as the level of income, inflation, material wellbeing, health, education, the quality of a country’s institutions and a number of different international indices and rankings. The only exception is international trade in that small countries are found to be more open to trade (as measured by exports plus imports as percentage of GDP) than large countries. The failure to find any significant relevance of country size except for trade made me wonder if the trade-country size relationship is robust enough or not. For example, do small countries have better ports and trade facilitation than large countries? It also made me wonder if the effect of country size on economic variables is somewhat complicated and hence not so easy to detect on the surface. For example, could it be the case that country size matters but only among the relatively small or large countries and not otherwise.  

Together with my co-author, we put the above thoughts to work in a recent paper. The results confirm our suspicion that country size may matter in ways more nuanced than what existing studies assume. Specifically, the paper analyzes the relationship between country size (population) and the number of documents required to export and import, a measure of trade facilitation.

The paper reports three important results. “First, trade facilitation does improve as the country size becomes smaller; that is, small countries perform better than large countries in terms of trade facilitation. Second, the relationship between country size and trade facilitation is non-linear, much stronger for the relatively small than the large countries. Third, contrary to what the existing studies might suggest, the relationship between country size and trade facilitation does not appear to be driven by the fact that small countries trade more as a proportion of their GDP than the large countries.”

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