Undersized: Could Greenland be the new Iceland? Should it be?

Anne Sibert Print Email 10 August 2009 Comment Republish As Greenland moves away from Denmark and acquires more autonomy, this column asks whether it might be too small. In assessing the relationship between country size and economic performance, it warns that small states have more volatile GDP, more volatile consumption, and more incompetent civil servants.

Greenland’s population of about 60,000 make it as about the same size as Bismarck, North Dakota. It is blessed with natural resources such as rich deposits of minerals, and oil and gas reserves are believed to lie below its ice cap. It is protective of both its fishing industry and its long tradition of killing appealing marine mammals. Greenlandic, an Eskimo-Aleut language, is spoken by few outside its borders. On 1 May 1979, this miniscule country began its move toward autonomy when the Danish parliament granted Greenland home rule. Greenland swiftly distanced itself from Europe by exiting the EU in 1985 – the only country ever to have done so. The goal was to avoid the EU’s Common Fishery Policy (the ban on seal skin products also played a role). Greenlanders approved a referendum on greater autonomy on 25 November 2008 and on 21 Jun 2009 Greenland expanded its sovereignty by assuming authority over its judiciary, policing, and natural resources, leaving only finances and foreign affairs in Danish hands. The Danish queen attended a celebration at the parliament in Nuuk, and Greenlandic became the country’s official language.

Can a country be too small?
Although it is not yet heavily involved in international banking, Greenland’s progression toward independent statehood is strikingly reminiscent of Iceland’s experience (especially its desire to maintain its own culture and protect its natural resources at the cost of isolation from the rest of the world and its wish to limit its economic relationship with Europe). This raises questions – does the recent experience of Iceland suggest that a country can be too small to be a nation state, and what are the costs and benefits of being isolated from the rest of the world? The answer to these questions is relevant not only for Iceland and Greenland but also other tiny countries that have gained sovereignty in recent decades; since 1990, 33 new countries have been formed and, as seen in Figure 1, many are very small.1 Figure 1. Country size (population in millions)

Easterly and Kraay (1999) find that. however. See Armstrong and Read (2002) for a discussion of this literature. the existing empirical literature finds that the effect of country size on growth is inconclusive. Do smaller countries enact better economic policies and grow faster? It is usually claimed that the benefit to small size is social homogeneity which leads to cohesion and an ability to build a consensus. I argue that there is little economic justification for preferring small size and that there can be significant costs. Easterly and Levine (1997) find a strong negative correlation between ethnic diversity and indicators of growth-promoting public goods such as the number of telephones and paved roads and the amount of schooling. Iceland are widely viewed as paragons of economic virtue. Formal empirical evidence linking small size to growth-promoting policies appears to be lacking. some small economies such as New Zealand. However. and. This may promote flexibility in the face of changing circumstances and make it easier to enact policies that promote growth. in many respects. This may be because country size has an insignificant effect on growth or it may be due to limited data. . after controlling for location. small states are wealthier than large states but do not have significantly different growth rates. While many small economies have grown rapidly. there is a lack of consistent data sets that include a large number of small countries. Indeed. I also argue that Iceland’s small size was probably a key factor in Iceland’s failure to stop its financial crisis. Easterly and Kraay (1999) assert that a lack of consistent data makes it hard to test whether small size is associated with growth-promoting public goods.In this column.

they do have more volatile growth rates. In addition. not output. Percentage change in GDP at constant prices Smaller countries have more volatile consumption Output volatility is not necessarily costly. Residents of a country with variable output can smooth their consumption across states of nature by holding a diversified portfolio of home and foreign equity. However. while there is no clear evidence that small countries experience higher average growth rates.Smaller countries have more volatile output The recent experience of Iceland suggests that. countries care about smoothing consumption. most countries hold relatively small amounts of net foreign assets. a country could use its current account to smooth its consumption – borrowing in states where output is low and lending in states where it is high. Iceland’s output growth is less smooth than that of either the UK or the US. or banking sector has a major effect on Icelandic output. such risk sharing is partial at best if it is not possible to hedge against adverse shocks to the return to human capital. shocks to different sectors in much larger economies tend to average out. fishing. As shown in Figure 2 below. . Figure 2. Iceland is far less diversified in endowments and production than the much larger UK or US. As a small country. Unfortunately. The reason for this seems clear. A shock in the aluminium. If shocks to a country’s output were purely transitory.

Canada. In a study of 56 countries over the period 1950 – 1985. smaller countries tend to rely less on relatively efficient income taxation and more on relatively inefficient taxes. Germany. Other problems in small countries A small population has other costs. Japan.from the point-of-view of smoothing consumption. detrended annual data for 1950-1985. If an American city is damaged by a hurricane. As a result. Moreover. France. UK. New Zealand. such as customs taxes (see Easterly and Rebelo 1993).2 Figure 3. but there is also an important cost associated with small geographical size. First. as the provision of many public goods has an important fixed cost component. Luxembourg. Sweden. this effect is especially pronounced in high-income countries. I will mention three here. Consumption volatility and country size (in millions) Countries included: US. Switzerland. I have focused on costs associated with small populations. residents can move to another American city. Luxembourg). Finland. Netherlands. Denmark. the per capita cost of public good provision is likely decreasing in country size. Iceland. Third. Many countries are vulnerable to natural disasters and environmental damage and self-insurance against these sorts of shocks is easier for larger countries. Second. Thus. most shocks appear to have a large permanent component. it is also likely that the per capita administrative cost of income taxes is decreasing in country size. Australia. it seems likely that a country with relatively variable output will have relatively variable consumption as well. Italy. Trinidad & Tobago. Head (1995) finds that the variances of both output growth and consumption growth are indeed negatively correlated with population size. Source: Head (1995). Belgium. Norway. While some small countries have very low consumption volatility (Norway. If global warming causes sea levels to rise . and Iceland). a lack of competition in the provision of non-traded goods in small countries can lead to inefficiency. Figure 3 shows the relationship between population size and (detrended) consumption volatility for 20 relatively high-income countries. Austria. many have very high volatility (New Zealand. Trinidad and Tobago.

it has been alleged that personal animosity may have played a role in the central bank denying Glitnir a loan in October 2008 and that the Independence Party played an unseemly role in the privatisation of Landsbanki with agreements made to offer plum executive positions to Independence Party members. Despite its miniscule size. finance. health. been a theatre director. the producer of a comedy radio show. In addition to Oddson’s apparent acquiescence in the face of looming disaster. In extreme cases. a political commentator. Prime Minister Johanna Sigurdardottir has already adopted this strategy by hiring a Norwegian expert to be the acting central bank governor and a Norwegian-born French magistrate to investigate the possibility of criminal activities by Icelandic banks. he appears to have had no expertise in economics and banking and was ineffective at either averting the financial crisis or playing a positive role in its aftermath. the foreign minister. if supervising the banking system requires more expertise than can be acquired locally. This suggests that a significant cost of small size is the burden that it places on senior government officials. Iceland has ministries of business affairs. In an interesting article. communications. nor the finance minister or financial regulator seems to have made any serious attempt to stem the growth of the Icelandic banks. and social security. Island officials should get out more . but it has its costs. Problems for civil servants in small economies In October 2005. and the co-author of several plays. for a brief period.” In Iceland. the widely held belief that they might be is damaging to social cohesion and the state’s legitimacy. Such multi-tasking can be demanding and makes it difficult to build up expertise in a particular area. industry and tourism. close personal and family connections lead to nepotism and corruption. In the long run. In a tiny nation. social affairs. Unfortunately. science and culture. it is difficult for such a small country to find enough talented civil servants. “Many necessary decisions and actions can be modified. First. foreign affairs. Even if such suspicions are untrue. He had previously been the mayor of Reykjavik. environment. neither the prime minister. everyone knows everyone. each civil servant is forced to play more roles than he would in a more populous society. and second. adjusted and sometimes totally neutralised by personal interventions and community pressures. Farrugia (1993) suggests that very small countries may also suffer because of their high degree of interpersonal relations. This causes two problems. The multi-talented Oddsson had studied law. David Oddsson was appointed chairman of the board of governors of the Icelandic central bank. fisheries and agriculture. Iceland should hire supervisors from abroad – the banks can be taxed to fund them.sufficiently. justice and ecclesiastical affairs. the consequences for the residents of Tuvalu are likely to be less favourable. a long-time prime minister and.3 A sensible policy solution to the problem of filling sufficiently important posts when there is limited local talent or to filling a politically sensitive post where the independence and impartiality that is required cannot be found at home is to hire foreigners. Farrugia comments that. This can facilitate things getting done quickly.

“Iceland Warms to Europe. “Fiscal Policy and Economic Growth: and Empirical Investigation. “Africa’s Growth Tragedy: Policies and Ethnic Divisions.” Canadian Journal of Economics 28. 417-57. and thus isolated.” References Armstrong.” VoxEU. William and Aart Kray. It is thus important that senior officials in out-of-the-way locations make an attempt to attend conferences and other professional gatherings abroad. The World Bank. It is more difficult for senior officials to travel to a neighbouring country if they live on a remote island than if they live in Luxembourg.” Quarterly Journal of Economics 112.” World Development 21. William and Sergio Rebelo. United Nations. published for the United Nations Human Development Programme. “Iceland applies for EU Membership.” Journal of Monetary Economics 32. 2002.org. “Iceland is a clan-based society more heavily permeated by politics than any other in Northern or Western Europe. 1993. 1993. “The Special Working Environment of Senior Administrators in Small States. 21 July 2009. Aggregate Fluctuations. Charles. 1999. Thorvaldor. 1203-1250. 1096-1119. 1997. 1995. Joh. 221-226. William and Ross Levine. 21 July 2009. Gylfason. Easterly. This leads to a danger that policymakers in small and far away locations might become insular in their thinking and that they might not have access to advice that their counterparts abroad might offer. Easterly. .Many very small countries are islands. “Small States. 435-458. “The Phantom of Liberty?: Economic Growth and the Vulnerability of Small States.. “Country Size. Head. 2 A caveat is that the extreme variances for some small countries in the sample make matters seem somewhat worse than they are as the consumption data includes durable goods. Farrugia. Harvey and Robert Read.” Journal of International Development 14. Allen C. Danielsson. Small Problems?” Policy Research Paper 2139. Footnotes 1 At least Pitcairn Island – with its 48 inhabitants – remains a non-self-governing territory. 3 Gylfason (2009) comments that. Human Development Report. 2007/2008.org.” VoxEU. and International Risk Sharing. the Outcome is Uncertain. Easterly.

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