This Review was submitted to NZIR but proved to be outside the criteria for reviews. The writing was completed in August 2025 and has not been update for the turmoil caused by the Iran war.
The Size of Nations by Alberto Alesina and Enrico Spolaore (2003: MIT Press)
Economists tend to assume that the political borders of nations are fixed. They know that borders matter. Canadian provinces trade more with other provinces than with closer American states despite the common border being judged the most friction-free in the world.
Economists have put much effort, beginning with David Ricardo, into studying how international exchange mitigates, but does not eliminate, the economic impact of borders. There is a literature on optimal currency areas but generally the focus of economic analysis has been so short term that borders can be taken as given. An economic historian has to be more sensitive since few borders have been stable in the long term, natural borders like the sea aside.
Alberto Alesina and Enrico Spolaore, American economists but both Italian immigrants, are innovative by providing an economic analysis of the impact of national size (which they measure by population). Their book is, I’m afraid, not an easy read for the non-economist. They give what are intended to be nontechnical summaries but their resort to mathematics even there may be beyond many readers. Yet the book provides some insights of interest to New Zealanders despite our borders being among the most stable in the world. (Even so, there are those who think we should merge with Australia.)
Being economists, the authors pose the issue of the size of nations in terms of a trade-off – in this case between public goods and internal homogeneity (mainly modelled here as regional diversity). The provision of a pure public good is independent of the population size. An example might be military spending where cost is – in principle – independent of the population which has to be defended but is a function of the physical location of a nation and the threats it faces. It is a matter of economy of scales: a large population reduces the cost per head of a pure public good. (There are many not quite pure public goods when substantial fixed costs combine with population-based costs. So, to the fixed cost of a national broadcasting system is added the costs of reaching out to ‘minority’ regional, ethnic, language and religious groups.) The more diverse a nation, the more complex and costly is its governance.
Not surprisingly, the authors show that the trade-off outcome reflects the form of governance. A dictatorship wants a larger nation because it can accumulate more power and wealth; a democracy is likely to support smaller nations because it is harder to deliver services and formulate policy. Hence the democratic pressures for regional separation in order to seek greater homogeneity, while dictatorships want to impose uniformity and extend their borders. (Instructively, the book has been translated into both Catalan and Chinese.)
The empirical evidence is that being a small economy is not a handicap to affluence. Many of those with highest income per head do not have large populations. Consistent with the book’s theory, the small economies have larger public sectors and are more open to international trade.
New Zealand appears to be an exception. Our public sector as a proportion of GDP is relatively low for an affluent economy, as are our exports and imports. (The latter result may be attributed to our geographical isolation, which is not a factor the authors consider.) Another exception is that while the book predicts that democracies are more decentralised, New Zealand politics is generally considered as being concentrated at the top. (However, economists may have a different definition of the notion from that held by political and constitutional analysts.)
The authors cite another study which looked at merging two countries. Of the 123 pairings it considered, in only 14 cases would both countries economically gain from full integration. New Zealand would gain, but Australia would lose in an Australia-New Zealand merger, a common situation accounting for 92 of the 123 cases. In the remaining 17 cases, both countries would have lost. (Spolaore &Wacziar, 2002)
More generally, the book argues that in a peaceful world smaller economies can thrive providing they are internationally open, thereby benefiting from specialisation overcoming the lack of industrial scale in every industry. They have a particular interest in a word economic order organised around a liberal trade regime (and the rule of law). Where there is warfare, bigger is better.
On the whole the book’s notion of warfare is of the military kind. It does not address sanctions, nor the use of tariffs as an instrument of economic and political warfare, as the President of the United States is currently pursuing. In any bilateral negotiation the bigger bully is likely to succeed although at some point a tariff hike becomes so high further increases have no effect. Even so, it is far from obvious who suffers most, since domestic consumers may pay the tariff (just as military aggression is costly domestically in people terms and in diversion of output from consumption). But this is only the beginning of the analysis since tariffed products can be diverted to markets elsewhere, while smaller economies may work together both to resist the bully and to increase trade among themselves. That is a rich area, hardly yet explored by economic theorists. The analysis in the book may be its foundation although, but alas, Alberto Alesina died in 2020.
New Zealand cannot do much about its size nor its borders. We can ask why it does not more closely conform with the model’s prediction; as a country vitally dependent on international trade we need to understand how the rest of the world economy operates.
Reference
Enrico Spolaore & Romain Wacziar (2002) Borders and Growth. (NBER Working Paper 9223 http://www.nber.org/papers/w9223)