Can New Zealand blame its small size for its economic woes?

The median national population size is not much more than New Zealand’s current population.

  • Controlling for location, Easterly and Kraay (2002) found that smaller states were richer than other states in per capita real GDP.
  • Rose (2006) reviewed the impact of size on the level of income, inflation, material well-being, health, education, and the quality of a country’s institutions and found that small countries are more open to trade than large countries, but are not systematically different otherwise.

As I argued in my previous post on distance, New Zealand were prosperous from the time of European settlement despite a small population and their great distance from the main markets of the world on each side of the Atlantic.

Of the ten richest countries in terms of GDP per capita, only four have populations above one million people (Alesina 2003). These countries are the USA (290 million people), Switzerland (7 million people), Norway (4 million people) and Singapore (3 million people). Of these four nations, two are below the global national population median of six million (Alesina 2003).

New Zealand’s population is similar and often larger in size than most of the richest countries in the world. Singapore and Hong Kong were initially far from the global Trans-Atlantic economic hubs before their respective development miracles unfolded in the mid and late 20th century.

Something must have happened recently for either small population size or distance to have become important when it was not important for most of the history of New Zealand. New Zealand has been on the same place on the map for all its history.

Transport costs on exports to England and the rest of Europe did not hold back New Zealand’s economic development in the 19th century and for most of the 20th century despite far more primitive and more expensive forms of transport.

New Zealand specialised in commodities that could be produced at a low cost because land and water was plentiful and exported them in bulk to large markets on the other side of the world because of falling transport costs. The invention of refrigeration in 1881 was a major boost to meat exports to England.

The main economic difference between smaller and larger nation-states around the globe is smaller nations are more open to international trade and foreign investment (Alesina et al. 2005).

In a world of freer overseas trade, small countries can extend the size of their markets by trade and sidestep many of the costs of small internal markets. As long as political borders do not greatly limit international trade, economic success is increasingly independent of national size (Alesina 2003; Alesina et al. 2000).

A leading economic advantage of large national size in more isolationist times was a large marketplace free of trade and investment barriers and fewer national borders and different legal systems to parry. As more nations open up to the world, the single market benefits of large size for a country start to melt away quickly (Alesina 2003; Alesina and Spolaore 2003; Alesina et al. 2000).

As countries become larger, administration costs and the growing heterogeneity in the political preferences of larger and more diverse populations counterbalance the benefits of size and scale (Alesina et al. 2003, 2004, 2006; Spolaore 2006). More nation-states and freer trade increase the degree that governments must compete for citizens and investment. Inter-jurisdictional competition increases the incentives for governments to adopt institutions and policies that promote efficiency and productivity and serve their peoples better (Friedman 2005).

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