Small states, small problems?
Small states have attracted a good deal of research. The authors test whether micro-states are any different from other states in income, growth, and volatility. They find that, controlling for location, smaller states are actually richer than other states in per capita GDP. This income advantage largely reflects a productivity advantage--evidence against the idea that micro-states are unable to exploit increasing rates of return to scale. Small states do not have different per capita growth rates, with or without controls. Their annual growth rates are more volatile, partly because of their greater volatility in responses to terms-of-trade shocks--to which they are exposed because of their greater openness pays off positively in growth. The authors do recommend that small states diversify their risk by opening up more to international capital markets, although the benefits of doing so are still unresolved in the literature. In general, they conclude, small states are nor different from large states and should receive the same policy advice large states do.
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