Volltext: Very small countries: economic success against all odds

To the best of our knowledge, a general assessment of public sector peculiarities of very small countries does not yet exist. Although it is a rather daunting task due to the great heterogeneity among very small countries, it is the aim of this contribution to find some common fea- tures or patterns of public sectors across very small countries around the world. However, we sometimes have to restrict our analysis to those very small countries with a sufficiently high national income in order to avoid blurring the effects of size with the effects of development status. We start by reviewing those concepts of size in Chapter 2 which we deem important for our further analysis. Chapter 2 is designed to single out an appropriate definition of size for our purpose, and, hence, arrives at a workable starting point for the empirical analysis of very small countries. It should furthermore briefly clarify some general concepts and some terminology. In Chapter 3 we focus on the size of the public sector and its rela - tionship to country size. Strictly speaking, we check empirically whether small countries actually have relatively larger public sectors in compari- son to larger countries. Thus, they would have to bear relatively higher costs. The main idea here stems from Gantner and Eibl (1999), who found astounding differences of relative government expenditure bet- ween Liechtenstein and adjacent countries and/or regions on a highly disaggregated level of expenditure. In order to be able to perform an eco- nometric analysis, we have to restrict ourselves to a far more aggregated level. We test for the influence of country size on public sector size by estimating multiple regressions for a set of more than 100 countries and obtain a relatively clear result, irrespective of the control variables in the regressions. There is a statistically significant negative size effect, in the sense that smaller countries have larger public sectors. Hence, small countries have to bear a cost disadvantage, which may be traced back theoretically to diseconomies of scale in the provision of public goods. Contrary to our expectations, the magnitude and significance of this – from the view of very small countries – negative size effect has been grow ing since 1960. The resulting puzzling question of, why secessions seem to have become more feasible in the same time is reconsidered in Chapter 5. Chapter 4 focuses on a set of 21 very small countries, all of them with less than 500,000 inhabitants. Based on a theoretical framework and given the evidence of Chapter 3, we investigate how they organize the 13 Introduction


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