Volltext: Very small countries: economic success against all odds

to diseconomies of scale in the provision of public goods. Contrary to our expectations, the magnitude and significance of this negative size effect has been growing since the 1960ies. –Given the cost disadvantage of very small countries (theoretically and empirically), the organization of the public good provision pro- cess is especially interesting. The main question is how VSC cope with the problems arising from the diseconomies of scale effect. We can show for a set of publicly provided goods in 21 very small coun- tries that international outsourcing (which is the least expensive al- ternative in most cases) is widely used in VSC. Furthermore, there are some public goods which are normally provided in larger coun- tries that VSC simply do not provide (without leaving citizens ap- parently worse off), and some which are «tailored» to the needs and the size of the country. –Although international outsourcing may reduce the cost of public good provision in some cases, the result of larger public sectors (and hence, higher costs) in VSC still remains valid. Even more signi - ficantly, economic theory provides evidence that VSC are not opti- mal economic units because of some arguments that touch upon their private sector constraints. In face of these facts, one is forced to ask why the number of VSC in the world is growing and why some of the VSC have a very high living standard. We find, contrary to standard economic theory, that VSC do not have lower welfare levels than larger countries. General sources of welfare in VSC are not easy to detect, but size should not be a hindrance 
per se. Interestingly, sovereignty and/or law-making authority seem to play an important role in enabling VSC to achieve high levels of wealth and in leveling out the negative size effect from the public sector. It is however noteworthy that a very limited kind of sover- eignty, which ensures the possibility to shape the legislative frame- work for the private sector, seems to be sufficient. As mentioned above, theoretical assessments of VSC are scarce in eco- nomics. Moreover, the impact of size on economic activity is ambiguous or little explored in public economic theory. Economists nevertheless share a few presumptions on the economic possibilities of VSC, some of 178A 
new view on very small countries


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