Size isn’t all that matters for global economies

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For countries as for businesses, small scale is no barrier to success. John explains why size isn’t all that matters.

America has the world’s largest economy. Japan and Germany are next, followed by Britain and France, which are closely matched for fourth and fifth position.

America’s population is growing, while that of old Europe is stagnant or declining, so America’s lead will increase. But China is coming up fast on the outside. Commentators speculate that China will be the world’s largest economy within two or three decades.

What do people mean when they say such things? These are the countries with the highest gross domestic product, the measure of output of goods and services compiled by national and international statisticians. But does it matter how large an economy is in this sense? Should we look at international economic competition as another sporting World Cup or the contest described in the mock-history textbook 1066 and All That, in which countries vie with each other to be “Top Nation”?

Are people right to be scared by China’s prospective elevation, and fearful that Europe’s declining population means decline in a wider sense?

Big does not mean rich. Norway, the Netherlands and Denmark are among the most prosperous countries in the world. Swiss GDP is not far behind that of India although India has more than a hundred times as many people.

These small countries prosper by being active participants in global markets.

Switzerland thrives because it specialises in a limited range of goods and services – precision engineering, financial services, speciality chemicals – and imports most other commodities. For countries, as for businesses, small scale is no barrier to success if you develop competitive advantages and produce what others want to buy.

There are advantages to being small. If California and Bavaria were independent countries they would be very rich. But the statistics we see average them with Mississippi and Brandenburg, and redistribution from rich regions to poor reduces the standard of living of the rich and probably slightly reduces the overall average.

There are costs to having a legislature and a head of state, and maintaining a seat at the United Nations. But these costs are not a large proportion of GDP and small countries deal with them efficiently. The US embassy in London is a massive building surrounded by a security compound and guarded by Marines and armed police. However, the embassy of Iceland, 100 yards away, is a small but elegant Mayfair town house with not a single policeman outside. And the president of Iceland does not require an entourage of 700 people in order to visit London.

The representative of a large nation carries more clout at international meetings, of course. But the benefit to him is more obvious than the benefit to those he represents. Norway and Switzerland, the most successful of small countries, have eschewed the European Union. Their political elites would like to join: their populations have the confidence not to care.

There are few economies of scale in statehood. Size is as much a disadvantage as an advantage when it comes to carrying out the principal functions of modern government: justice, health, education, internal security.

Only in military spending does the size of an economy really matter. But there are few runners left in the dangerous race to be “Top Military Nation”. The cost of trying to achieve this goal destroyed the Soviet Union – its poorly managed economy was not large enough – and, after a century of competing with one another, other European states have sensibly lost interest.

Today, there is an undisputed Top Nation that spends not only more money but also a higher proportion of its GDP on military activities.

If China chooses to use the future size of its economy as a base to rival this US military achievement, the result will be costly to both countries and dangerous for the rest of us.

However, if China chooses not to enter the contest, it will consign to history the last field in which economic weight used to count for something.

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