Volltext: Very small countries: economic success against all odds

rationale – at least as far as we know – for the correlation between openness and population density. The only straightforward argument would run along the following lines: Smaller countries are more open and, generally, have higher population densities, so that there is a high correlation between openness and population density. A partial corre - lation controlling for country size (logpop) does, however, not con - vincingly support this notion, and the bivariate correlation between the logarithm of population and population density is rather low. The reason for the high correlation is therefore not clear. In model (7) we rely on another data source for trade openness in order to have more observations. It should not matter that data from the Penn World Tables for openness stem from 1985, because countries’ openness indices should not change dramatically over time, and if they do change, the developments should, on average, be rather parallel across countries (with the notable exception of former Eastern European coun- tries). Indeed, results change only slightly, which indicates that the ef- fects described above are sufficiently stable. With regard to country size, we can conclude that it does not determine 
welfare.111 5.2.2 Determinants of welfare in VSC We know from Chapter 3 that smaller countries bear a disadvantage in providing and producing public goods mainly due to diseconomies of scale effects. Having additionally obtained relatively solid empirical re- sults in the previous section that country size is not a determinant of welfare, it would be desirable to get a more thorough knowledge of the sources of welfare in smaller countries. It is of great interest in a further step to analyze whether these welfare-inducing sources, be they specia- lization or other possible advantages of smaller countries, crucially rest on national sovereignty or whether they have little to do with the eco- nomic consequences of law-making and sovereignty. To be able to investigate these questions, we proceed along the fol- lowing lines: The first step is designed to single out a set of VSC, where 144 
The economics of sovereignty: «secrets of success» of very small countries 111Note that the same result holds for a dynamic view. Armstrong et al. (1998) and Milner and Westaway (1993) find that country size does not have a significant influ- ence on a country’s growth rate.


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