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The State

State – portion of geographical state within which the resident population is governed by an authority structure

States have externally recognized sovereignty over their territory

Nation – a reasonably large group of people with a common culture, sharing one or more cultural traits, such as religion, language, political institutions, values and historical experience. They tend to identify with one another, feel closer to each other than outsiders. It may not have a recognized and defined territory.

Nation-state – condition where state and nation are coterminous

There are currently about 190 nation states

Small statesHalf of the world’s countries now have smaller populations than the state of Massachusetts

Yet this growth has taken place at a time when many parts of the world seem to be trying to band together to capture the advantages of scale, such as the single market and the Euro

What does that say about the costs and benefits of size? And do the main advantages of size—security and a large domestic market—count for less in a world of increasingly liberal trade and technologies that largely overcome distance

Small states are nothing new, of course.

The city-states of ancient Greece had populations smaller than Iceland’s today: Athens, at its peak in the age of Pericles, had perhaps 200,000 people, slaves included. Renaissance Italy was also a world of tiny city-states: Florence, that cradle of so much art, had some 70,000 citizens in its heyday; Venice, the Hong Kong of the medieval world, had 115,000.

At the outbreak of the WW I, only 62 independent countries existed in the entire globe. The past half-century has seen the number grow from 74 in 1946 to 193 today. The upshot has been the creation of many more small states. Thanks to the simultaneous growth in the total world population, the average population of a country has not declined greatly: it is down from around 32m in 1946 to 29m today.

But it is the Icelands that have proliferated: all told, 87 countries have populations of under 5m; 58 have fewer than 2.5m people; and 35 have fewer than 500,000.

Why the growth of the minis? The main country-creating force has been the end of colonial rule—above all in sub-Saharan Africa, which now has 48 independent states, more than any other continent.

Between 1960 and 1964, 25 new African countries came into being.

A second force has been the collapse of the Soviet Union. Not only has that ex-union itself split into 15 separate nations. In east-central Europe Slovaks seceded from Czechs, and the former Yugoslavs have become five independent states. True, the two Germaniesreunited, but Europe as a whole went from a continent of 32 countries to one of 48.

Nor does smaller generally mean poorer. Countries with big populations are often politically powerful, but they are not so often prosperous. Tables of GDP/capita reveals a striking shortage of very large countries, and even of middling-large ones, among the names at the top. Of the ten countries with populations of over 100m, only the United States and Japan are prosperous.

Of course, many small nations are poor. But littleness is no barrier to wealth: in purchasing-power terms, Luxembourg (population 400,000) has the world’s highest GDP per head, and the 8,000-odd citizens of Nauru, arguably the world’s smallest country, have a GDP per head that matches fairly well-to-do countries such as Portugal or South Korea. Nauru is a Pacific island composed largely of phosphates.

Case for being big

Bigness gives you clout. A small state may enjoy a seat at the United Nations, but not in the Security Council or the Group of Seven, the rich-world club.

Pakistan has an economy less than half the size of Norway’s, but its bigger army gives it a louder voice. And the security that size brings you is not just of the military sort. A large economy is better placed to absorb shocks in different regions. If an oil-price collapse throws Texas into recession, California and New York may still boom. Not only can national taxes provide a regional insurance fund; unemployed Texans can easily move to work in states that have jobs on offer.

As for insurance against regional economic shocks, that is fine if the shocks are temporary. But many regions on the receiving end of such insurance are more like southern Italy: permanently on the receiving end of transfers from their wealthier countrymen. That creates a regional welfare dependency, and resentment

Admittedly, bigness brings certain efficiencies. Most obviously, a large market, undivided by customs duties and united by a single set of standards and of cultural tastes, allows economies of scale such as large production runs. This is the advantage of the United States that inspired Europe to try to weld a single market out of the European Economic Community.But this benefit has dwindled as trade barriers have come down.

Small countries have been the biggest beneficiaries of freer trade. That is hardly surprising: small countries are big traders.

Trade allows small countries the luxury of specialising. That can bring vulnerability: the smallest states often rely on one or two products for the lion’s share of their exports.

Small home markets bring another weakness. Since trade deals are done on the most-favoured-nation principle, and a concession to one partner has to be extended to every other, small economies have no bargaining clout.

In general, specializing is likely to bring efficiency.openness to trade brings prosperity. It may be precisely because their smallness forces small countries to open their markets that they have so often prospered more than larger countries which turn their backs on the global market

Big countries have some other apparent advantages over small fry. A large population of taxpayers can share the cost of public goods such as roads, a telephone network, defense and civil servants.

But being able to spread the costs of government could have drawbacks. People may feel unhappy about having to share the cost of policies with other people whom they dislike; government may seem unaccountable and remote.

As the advantages of being large diminish, the attractions of being small increase. Large countries are usually ethnically and culturally diverse (Japan, a rare economic success among giants, is an exception).Small countries tend to be ethnically homogeneous, and independence movements from Quebec to Catalonia feed at least partly on a desire for cultural or racial exclusivity.

Small countries will seek the advantages of size by joining international clubs, where they often have a lot of influence. Even when the rules are not one country, one vote (as in the EU, where big countries have more votes than small), voting rights are never proportionate to a member’s population: in the EU Council, Germany has ten votes and Luxembourg two

Separatists will take hope. In the past, they rarely thought much about the economic consequences of opting for independence. Now, as their supporters grow richer, they are likelier to vote from the pocket rather than from the heart. But today the costs of going it alone are probably smaller than they have been for at least the past couple of centuries.

States as containers

Four cultural dimensionsIndividualism versus collectivismMasculinity versus femininity

High means strong distinction in rolesStrong or weak uncertainty avoidance

Strong avoidance tries to beat the futureLarge or small power distance

This is a measure of how inequalities are dealt with

Varieties of capitalism

Neo-liberal market capitalismUS and UK

Social-market capitalismGermany and Scandinavia

Developmental capitalismJapan, SE Asia

States as regulators of trade

Trade policy influenced byThe nation’s political and cultural complexion and the strength of institutions and interest groupsThe size of the national economy, especially that of the domestic market

The nation’s resource endowment, both physical and humanThe nation’s relative position in the world economy, including the level of economic development and degree of industrialization

Type of marcoeconomicpolicies

Monetary policiesInfluencing the size of the money supply

Interest rates, exchange rates

Fiscal policiesRaise and lower taxes, determine levels of government expenditures

Governments provide or secure provision of physical infrastructure and human infrastructure

Roads, railways, airports, telecommunication systemsEducation, health care, regulations

Trade policiesTrade policy is set within the framework of the World Trade Organization (WTO)

Policies on importsTariffs

Tariff level generally raises with level of processingTariff levels have been falling

Non-tariff barriers (NTBs)

NAFTA: USA and Mexico

Foreign Direct Investment

4 categories of inward investment policiesEntry of foreign firms

Screening, exclusion, only joint ventures, level of local employment required, information disclosure

Operations of the firmLocal content rules, required % exported, technology transfer

Corporate profits and the transfer of capitalStimulation of FDI

Current FDI

Industrial Policies

States as Competitors

Do states competeConventional view (Porter) is that they areKrugman’s view

Nations are not like firmsInternational trade is not a zero sum gameEmpirical evidence doesn’t support it

Factor conditionsGiven and created factorsMost important ones are created: skills and knowledge

Demand conditionsHome market very important

Related and supporting industriesInnovation and upgrading

Firm strategy, structure and rivalry

Secondary components

The role of chanceThe role of government

He is important because he stresses the importance of localized geographical clustering

Porter’s diamond

Criticisms

Highly reductionistUnderplays the role of the stateNeglects the influence of transnationalizationof business activity on national diamonds

Canada

Porter’s analysis of CanadaArgues Canada’s diamond is weak and cannot be internationally competitive except in resources

Rugman answers that Canada should be considered as part of a North American diamond

States as collaborators

Preferential trading arrangements (PTAs)Bilateral investment treaties (BITs)Double taxation treaties (DTTs)

Trade effects of blocs

Trade diversionTrade diverted from outside of bloc to inside

Trade creationTrade replaces home production

Types of regional economic integration

Free trade areaCustoms unionCommon marketEconomic union

Major Economic Blocs, 2000

Other

Economic BlocNAFTA

Andean Pact

Mecosur

Caricom

EFTA

EU

Europe's Associates

ASEAN

US Impact

Mexico and Canada

Salinas, Bush and Mulroney

Regional Economic Organizations

APEC (Asia-Pacific Economic Cooperation)ASEAN (Association of Southeast Asian Nations)

ASEAN & AFTA

APEC