The number of nations has almost doubled in the past 50 years, to 191 independent states. The usual explanations for this multiplication, which invoke nationalism and ethnic conflicts, overlook a major reason: The economic cost of independence has been sharply lowered by the rapid growth in post-World War II international trade.
Since 1950, world imports and exports have grown at the remarkable rate of about 10% a year. Even during the economic slowdown of the 1980s, international trade continued to expand at 5% a year. The result has been that prosperity no longer depends on a large domestic economy--even tiny nations can hawk their wares in the world market.
In fact, small nations now have advantages in the competition for international markets. Economic efficiency requires them to concentrate on only a few products and services, so they often specialize in niches that are too small for large nations to fill. Because small economies are more homogeneous, they tend to suffer less from internal clashes among special interests. Their goods and services tend to be less exposed to trade quotas and other restrictions, since they don't amount to enough to affect producers in large countries. Similarly, economic alliances such as the European Union are usually willing to accept a smaller nation as a member since its production would not pose much of a competitive threat.
There are many examples showing that smallness is no handicap. Mauritius, a 720-square-mile island nation in the Indian Ocean, has prospered by concentrating on clothing exports and tourism. Hong Kong and Singapore began their striking economic development by specializing in importing goods from all over the world and distributing them to other parts of Asia. The volume of imports and exports in both still greatly exceeds their gross domestic product because so many of their combined 7.3 million inhabitants are active in trading goods and financial instruments.
The tiny principality of Monaco has 5,000 citizens and about 30,000 residents squeezed into 368 acres. It has carved out several specialized niches of international trade, becoming a gambling center and tax haven for tennis stars, businesspeople, and others with high incomes who move there to escape income and estate taxes. Outsiders have bid up land values to more than six times comparable property on French soil only a few yards away.
Hong Kong, Singapore, Monaco, and Mauritius are not just isolated examples of the advantages of being small. Since 1950, real per capita GDP has risen somewhat faster in smaller nations than it has in bigger ones. I believe that the economic success of many small economic entities has contributed to bringing into the open some of the festering ethnic conflicts that already existed around the world--between Kurds, Serbs, and Croats, as well as English- and French-speaking Canadians. Many of these groups concluded that they can do better economically by becoming separate nations and concentrating on producing specialized goods and services for the world economy.
SUCCESS STORY. Less than two years ago, the former state of Czechoslovakia split into the Czech Republic and Slovakia. Both have had problems adjusting to independence--they had been closely linked by a common currency, trade, and interrelated production networks. But the Czech Republic is already booming: It has low unemployment, rapid growth, and a reorientation of exports toward Western nations. Many Czechs opposed the breakup, but their economy became stronger when it was separated from a poorer Slov-akia. That new nation will also thrive after privatization forces its entrepreneurs to learn how to compete in world markets.
The Czech experience can be duplicated in many other nations with ethnic and cultural differences. For example, it is commonly believed that French-speaking Quebec will decline economically if it separates from the rest of Canada. That view ignores the role international trade plays in economic success. After perhaps a severe adjustment period, Quebec could find a prosperous place in the world economy by trading with Canada, the U.S., and Mexico as well as the rest of Latin America. That separation could also help the economies of English-speaking Canada because it would reduce cultural battles and eliminate the confrontations with Quebec over the allocation of tax revenues and government expenditures.
Smallness can be an asset in the division of labor in the modern world, where economies are linked through international transactions. Nationalism is merely riding the crest of world trade to forge new nations.