Small is beautiful

On October 11, 1991, the Wall Street Journal published a beautiful article by Robert Barro on the size of nations. Although this was a newspaper article, it became a really influential article as it turned out to be the seminal work on which the literature on the "optimal size of nations" grew. Alesina and Spolaore's paper ("The Size of Nations") is a direct descendant of Barro's. Alesina was and still is a colleague of Barro's at Harvard.

Robert Barro is one of the most influential macroeconomists in history. He is the most cited economist in the world among economists not yet with a Nobel Prize.

And, for the record and for those who accuse analysts to lose their senses and their ability to reason when they speak about Catalonia, Robert Barro is not Catalan.

Small is beautiful, by ROBERT J. BARRO

The U.S. government is instinctively opposed to secession. It has not supported the Kurds in Iraq, the Croats in Yugoslavia the Ibos in Nigeria or the Quebecers in Canada. We were pretty much the last major country to sign on to sovereignty for the Baltic states, and we have not endorsed the independence movements of any of the other Soviet republics.

There seem to be two main reasons for this opposition. The first is the potential trouble from changing borders. Even borders that were drawn in an arbitrary manner sometime in the past-such as in Yugoslavia, Iraq and much of Africa-may reasonably be defended because the process of change involves disruptions, possibly including armed conflict. Of course, the attempt to maintain unsatisfactory boundaries may cause even more disruption.

The intense opposition of the U.S. government to secession also reflects the specifics of American history. The U.S. Civil War-by far the most costly conflict ever fought by Americans-was waged primarily to maintain the union. The war caused more than 600,000 military fatalities and an unknown number of civilian deaths, and severely damaged the southern economy. Per-capita income in the South fell from about 80% of the northern level before the war (using the sketchy data available for 1840 ) to about 40% after the war (based on the more complete data for 1880 ). The fall in per-capita income reflected the destruction of capital-plant and equipment, livestock and educated labor-and the end of the plantation system based on forced labor.

War's True Cost
Although only the first part of the fall in measured per-capita income represents a true cost of the war, the overall setback to the economy was striking: It took more than a century after the war's end in 1865 for Southern per-capita income to reattain 80% of the Northern level. This rate of convergence of the poor South to the rich North may seem slow, but the pace is typical of regional growth processes observed in other times and places.

If the U.S. government were to support the right of secession in some other part of the world, such as the Soviet Union, then it might seem indirectly to be challenging the basic premise of the Civil War. Why is it desirable for Soviet republics to have the right to secession when it was undesirable for U.S. states to have the same rights? We would then force ourselves to reconsider whether the enormous cost of the Civil War was worth it. Instead of being the greatest of American presidents, as many people believe, Abraham Lincoln may instead have presided over the largest error in American history.

Everyone would have been better off if the elimination of slavery had been accomplished by buying off the slaveowners -as the British did in the West Indies in the 1830s-instead of fighting the war.

Whether the blacks would have been better or worse off if the North had accepted the secession of the South requires a forecast of how the institution of slavery would have fared in an independent South. Some relevant information is that slavery was abolished without war in the other parts of the Western hemisphere where it had existed (except for Haiti in the 1790s ) and that the last country to act, Brazil, began the process in 1871 and finished it in 1888. Thus, the experience of the rest of the hemisphere suggests that slavery in the U.S. south would have been eliminated peacefully in not very many years.

If we put the experience of the Civil War behind us and also abstract from the transitional problems of redrawing borders-that is, the stability issue-then the evaluation of a secession depends on whether, starting from scratch, reasonable borders would have been drawn very differently from those that currently prevail. Some of the arguments that have been used in this context to criticize the breakup of states are wrong.

For example, it is often said that a potential new state is too small to be economically viable: Soviet Georgia or Croatia-or Quebec or Catalonia-could not make it on its own. The empirical evidence about the economic growth of countries conflicts sharply with this view. There is no relation between the growth or level of per-capita income and the size of a country, whether measured by population or area. Small countries, even with populations of as little as a million, can perform well economically, as long as they remain open to international trade. In fact, smallness tends to encourage openness because the alternative really would be a nonviable economy.

A related specious argument is that a state cannot prosper if it lacks a key natural resource, such as oil or fertile land. The experience with economic growth across countries reveals little relation between economic performance and the presence of natural resources. Japan and the Asian tigers, as well as most of Western Europe, have done fine without domestic sources of oil. With access to international markets, a country can specialize in what it does well and then trade its goods for the commodities, such as oil or agricultural products, that it lacks domestically. A characteristic that does promote economic growth is good government in the sense of maintenance of property rights, avoidance of trade barriers and absence of other market distortions including excessive tax rates and regulations. Thus, in evaluating a change of international borders, a key issue from an economic standpoint is whether the new government would be better or worse in terms of these growth promoting traits. In the case of the Baltics, Croatia or Kurdistan, there is little question that secession would lead to improved government.

Although it may be an unpleasant commentary on human nature, a central driving force in defining a state is the desire to have a reasonably homogeneous population within its borders. It is clear from observing the places where secessionist movements tend to occur, such as Yugoslavia and the Soviet Union or Spain and Canada, that ethnic identity is a central driving force. There are cases in which governments have dealt more or less successfully with sharp ethnic diversities, such as Switzerland and even the U.S., but problems are easier to pinpoint than triumphs.

Political economy explains some of the benefits from having a homogeneous population within a given state. If diversity is great--measured say by the inequality in potential earnings-then there is a strong incentive for people to spend their energies in efforts to redistribute income rather than to produce goods. In particular, a greater dispersion of constituent characteristics leads to the creation of interest groups that spend their time lobbying the central government to redistribute resources in their favor.

We can think of a country's optimal size as emerging from a tradeoff: A large country can spread the cost of public goods, such as defining a legal and monetary system and maintaining national security, over many taxpayers, but a large country is also likely to have a diverse population that is difficult for the central government to satisfy. The reason that small countries perform reasonably well in practice is that the public-goods argument may not be so important. For instance, a larger country has more property to protect from foreign aggressors and therefore requires larger outlays for national defense than a small country. Empirically, the ratio of defense expenditures to gross national product is uncorrelated with the size of the country: If the public-goods argument were compelling, then larger countries would tend to spend less on defense as a share of GNP. No doubt, it is inefficient for sovereign states to be too small, but the minimum size for a viable state seems not to be very great.

The bottom line is that political separation is sometimes a good idea: The benefits can outweigh the losses, including the transitional costs of changing borders. We can usually judge whether the benefits from change exceed the costs by relying on self-determination. After all, most of the costs from changing governments and establishing institutions are borne by the secessionists--if a clear majority of residents in an area indicates their desire to become independent, then they are saying that the benefits exceed the costs.

Mr. Barro, a Wall Street Journal contributing editor, is a professor of economics at Harvard.

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