Volltext: Very small countries: economic success against all odds

5. The economics of sovereignty: «secrets of success» of very small countries Recalling our analysis in Chapter 3, we know that VSC have a disadvan- tage due to their size. This is true for the private sector, where the size of the internal market is supposed to limit economic activity and growth95, as well as for the public sector, where we detected a negative relation ship between public sector size and country size. As to the private sector, it is obvious that openness and international can trade reduce this disadvan - t age. The high risk of exposure to economic shocks and/or natural ha- zards, which poses a threat to the whole economy of a VSC and not only to parts of it like in larger countries, still remains as a theoretical disad- vantage.96Regarding the public sector, we had to conclude from Chapters 3 and 4 that there is higher public expenditure in smaller coun- tries which may mainly be due to diseconomies of scale, but the diffe- rence between VSC and larger countries with regard to the ratio of pub - lic expenditure to GDP is surprisingly small. Chapter 4 offers some prom - ising explanations for this latter fact, among which internation alization and international outsourcing seem to be the most important. Especially landlocked countries surrounded by peaceful neighbors are able to keep the costs of the negative size effect low. Nevertheless, we have clear theoretical presumptions that when considering the economic system of VSC – including the private sector and the public sector – very small countries should, in theory, have a dis - advantage and should not be able to reach similar welfare status or growth rates as larger countries.97Although this disadvantage may be 126 
95See Section 5.1 for theoretical rationales of this disadvantage. 96Larger countries may also suffer from high dependencies on certain branches in the case of economic shocks, but, on average, VSC are more vulnerable. 97See Section 5.1.2 and Table 5.1 for a rather comprehensive list of theoretical argu- ments of VSC advantages and disadvantages.


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