Small states, small problems? Income, growth, and volatility in small states

Small states have attracted a large amount of research. In this paper we te st whether small slates are any different from other states in terms of the ir income. growth, and volatility outcomes. We find that, controlling for l ocation, small states have higher per capita GDP than other stales. This in come advantage is largely due to a productivity advantage, constituting evi dence against the idea that small slates suffer from an inability to exploi t increasing returns to scale. Small states also do not have different per capita growth rates than other states. Small states do have greater volatil ity of annual growth rates, which is in part due to their greater volatilit y of terms of trade shocks. This terms of trade-based volatility is in turn due to small states' greater openness. Their greater openness on balance h as, however, a positive net payoff for growth. The one differential policy measure that might be relevant for small states is to further open up to in ternational capital markets in order to better diversify risk, but the bene fits of even that are still unresolved in the literature. We conclude that small states are no different from large states, and so should receive the same policy advice that large states do. (C) 2000 Elsevier Science Ltd. AU rights reserved.