The Size of Nations

Published by EH.NET (February 2004)

Alberto Alesina and Enrico Spolaore, The Size of Nations. Cambridge, MA: MIT Press, 2003. x + 261 pp. $35 (cloth), ISBN: 0-262-01204-9.

Reviewed for EH.NET by Leonard Dudley, Economics Department, Universite de Montreal.

Nations tend to develop myths that attribute positive qualities to their founders and uniqueness to their political institutions. However, there is a quip attributed to Bismarck, “People will sleep better not knowing how their sausage and politics are made.” In this book, Alberto Alesina and Enrico Spolaore deconstruct the Bismarckian sausage factory in order to show us how states are made. They present their theoretical argument in eight steps, each beginning with a verbal outline followed by a formal model. Asterisks guide the non-technical reader around the algebraic danger zones. The result is a remarkable set of propositions that leaves little place for individual leaders, heroism, uniqueness, or even a subtitle.

The authors begin by discussing the simplest kind of law-making factory, a unitary state with pluralistic political institutions. They argue that in deciding where to place their political boundaries, voters trade off the advantage of a larger state in providing public goods at lower cost against the disadvantage of increased heterogeneity of preferences that would result. The authors show that total welfare is maximized when the world is divided into an optimal number of identical states.

Subsequent chapters add complexity to this initial core. A first modification allows for unilateral secession of border regions. Since residents of peripheral areas are more distant from the capital, where the public good is assumed to be produced, they receive fewer benefits for their taxes and therefore have an incentive to secede. As a result, under these more realistic assumptions, the equilibrium number of states is greater than the number that maximizes total welfare.

A second modification of the initial structure permits transfer payments that compensate potential secessionists in peripheral regions for the low benefits that they receive. If such schemes are feasible, then the equilibrium number of regions approaches the optimum. However, as the authors demonstrate in an elegant algebraic proof, if a border region agrees to join a larger state, there is a time-inconsistency problem. Once unification has occurred, since the median voter of the new state pays in taxes more than she receives in transfers, she will approve a decision to eliminate the transfer payments.

As Frederic Lane (1958) argued in a seminal paper, the vast majority of historical states do not fit the democratic model preferred by Western political economists. Rather, actual political decision-making has tended to be monopolized by a minority of citizens who provide protection in return for tax revenues. Alesina and Spolaore therefore devote a chapter to states ruled by a monopolizer of power. Their Hobbesian “Leviathan” is a ruler who need consider the welfare of only the fraction delta of his subjects. They demonstrate that when delta is equal to one-half, the result is the optimal number of states. More generally, with delta smaller than one-half, the outcome is a set of large states that are too few in number.

So far, the model predicts that actual democratic states will be too small to maximize the welfare of their citizens. How then can they account for evidence that the wealthiest states in terms of per-capita GDP tend to be small in terms of population? The authors devote a chapter to commercial policy, arguing that if trade barriers are lowered, it is easier for small states to be viable since they can reap scale economies by selling in foreign markets. As the authors recognize, however, trade policy is itself a function of country size, since smaller states will tend to favor freer trade.

The last three steps in the discussion deal with conflict, generalized war and federalism. The reader learns that there is also a two-way relationship between country size and conflict. For a given probability of conflict, a large country offers advantages to its citizens because it can produce the public good of protection more cheaply than a smaller country. However, since larger countries are less dependent on trade than smaller ones, a world of larger states can afford to have more frequent trade-disturbing international conflicts. As for the degree of decentralization, it depends on the extent of democracy. The higher the percentage of the population to be considered in political decisions, the greater is the optimal degree of decentralization.

An empirical chapter puts some of the authors’ principal hypotheses to the test. Are actual states too small for the efficient provision of public goods? Evidence that the public share is larger in small states than large states (with size measured by population), suggests that the cost of public goods is higher in the former. Does having too many states lower individual welfare? The higher per-capita GDP and faster per-capita economic growth in large states compared to small states in the postwar period again supports the theoretical result that the number of states is great than optimal from a welfare standpoint.

Finally, in an historical chapter, the authors apply their theoretical model to explain systematic changes in state size since the mosaic of small political units in medieval Europe. After 1500, they argue, the number of states declined, because an increase in trade restrictions and a greater frequency of international conflict made small states nonviable. Outside Europe, the movement to large empires was excessive, owing to the dictatorial nature of political power in these regions. In the late eighteenth and nineteenth centuries, rising external threats and a desire to have more weight in commercial disputes led to unification in the United States, Italy and Germany. Then, increasing protectionism in the late nineteenth century caused the industrialized countries to search for colonies as a vent for surplus production. Finally, a movement to free trade after World War II favored the breakup of colonial empires, including that of the Soviet Union, into a large number of small, open economies.

This book is a tour de force, offering a highly original synthesis of political science, economics, contemporary statistics, and historical facts. The argument is crystal-clear. And the authors succeed in building an inexorable momentum as they proceed step by step from the simplest model to the complexities of the real world. Their thesis that first, voters trade off the lower cost of public goods against increased heterogeneity in determining their state’s borders and second, this decision is sensitive to the probability of conflict and the cost of exporting to foreign markets, provides a powerful tool for explaining historical change.

But do the primary forces that determine state size lie on the demand side? For William McNeill (1982), it has been primarily military technology — a supply-side factor — that has determined state size. When military scale economies increased, he argued, it became less costly for centralized rulers to put down revolts in outlying regions. While the authors cite McNeill’s work, they fail to take into account that it implies a completely different vision of international conflict from the one they model. When military technology is stable over long periods, state borders will tend to remain in equilibrium and major conflicts should be the exception. Such was arguably the case for long periods of Chinese and Roman history, for the first part of the nineteenth century and for the last half of the twentieth century. Systematic conflict will then arise when the cost of providing protection changes, as occurred in the early modern period and between 1850 and 1950. In short, if we drop the assumption that the probability of conflict is exogenous, we need a theory that deals explicitly with changes in the cost of providing protection.

Moreover, on the demand side, can we assume that the willingness to trade. Too, is essentially exogenous? In his 1948 Beit lectures at Oxford University, Harold Innis (1950) argued that the size of nations was determined by the relative costs of storing, decoding and transmitting information. With the diffusion of standardized Latin and Carolingian script in the centuries preceding the high Middle Ages, he suggested, the cost of storing information in multiple copies fell. As a result, European states declined in size, and there arose considerable trade across political boundaries. In the early modern period, the diffusion of printing in the vernacular led a movement in the opposite direction, with the formation of large nation states and growing barriers to trade across linguistic borders. More recently, with a return toward the medieval pattern in many parts of Europe, can we ignore the decentralizing effects of the microelectronics revolution?

These considerations of military and informational technology suggest an alternative interpretation for the authors’ statistical results from the most recent period. The negative correlation between country size and the public share could reflect not the cost of public goods but the formation in the past of linguistic zones of different sizes. Voters today in large, heterogeneous states may simply be less willing to share their income than those in small, homogeneous states. If so, the negative correlation between the public share and country size need not be a sign that small states are inefficient.

The positive sign of country size in the income and growth regressions is also problematic. Here the effect of low income on the diffusion of military innovations is important. In the nineteenth century, the poverty of Africa and Asia made these regions easy prey for the colonial powers that conquered them in bits and pieces. When these powers subsequently retreated under pressure from nationalist movements, they left a large number of poor, small states whose boundaries bore no relationship to voter choice as modeled by the authors. Yet these states arguably dominate the authors’ regressions. Might causality not go from poverty to state size?

In short, by the end of the tour of the Bismarckian sausage factory, the reader will have satisfied her immediate hunger to understand how states are formed. Nevertheless, she will likely put the book down with the feeling that there is more to the question of the size of nations than the standardized frankfurters cranked out by Alesina and Spolaore. Of course, provoking the reader in this way may be precisely their intention. They have provided us with what will surely become a standard reference point for speculation about historical change.

References

Innis, Harold A., Empire and Communications (Oxford: Clarendon, 1950).

Lane, Frederic C., “Economic Consequences of Organized Violence,” Journal of Economic History, 18 (December 1958), pp. 401-417.

McNeill, William H., The Pursuit of Power (Chicago: University of Chicago Press, 1982).

Leonard Dudley is the author of The Word and the Sword: How Informational and Military Technology Have Shaped Our World (Oxford: Blackwell, 1991).