Weingast B.R., Wittman D. The Oxford Handbook of Political Economy
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772 international political economy
From a welter of competing approaches, IPE has now centered on, if you will, a
hegemonic approach that structures knowledge, generates puzzles, and identifies
areas likely to yield profitable future research. Despite its successes, OEP is not
perfect. Many refinements and extensions are possible and, indeed, can be expected
in the years ahead. Nonetheless, OEP is a powerful approach that promises future
rewards.
The sources of this success are threefold, and may be usefully emulated by other
sub-fields and approaches. First, OEP is disciplined by a strong empirical foundation.
From its inception, IPE has focused on historical trends in the international economy,
both political and economic. Analysts have generally been careful not to mistake a
single cross-section for all possible states of the world, but have mined the rich history
available to them to test their theories. In turn, considerable attention has been
devoted to developing appropriate indicators of trade protection, non-tariff barriers
to trade, exchange rate regimes, and so on. Where IPE was originally constrained
to case studies or, at best, statistical tests based on very limited data, some of the best
new research employs very large time series data-sets and powerful econometric tools.
Whatever the method, however, IPE remains a strongly empirical science.
Second, OEP emphasizes deductive rigor. Political scientists, especially, have bene-
fited from powerful theories developed in economics. Economists, in turn, have been
prompted to take politics and political institutions seriously, and to integrate realistic
understandings of political processes into their models. Scholarly debate has forced all
to clarify the assumptions they make, revealing strengths and limitations, and to state
propositions in clear and falsifiable ways, thereby opening arguments to empirical
test. By working within agreed standards of scientific enquiry, scholarly interactions
and cumulative knowledge are facilitated.
Finally, OEP draws upon and is integrated into broader bodies of theory. Theorists
have grounded their analyses in the pure theory of international trade, theories of
collective action, and theories of political institutions—all developed in larger disci-
plines and for other purposes. This not only links OEP to broader research programs
and facilitates cross-fertilization, but prevents analysts from reinventing the wheel
each time they sit down at their computers.
Norms of theoretical rigor disciplined by empirical facts are now deeply inculcated
in scholars of IPE. For the same reasons that substantial intellectual progress has
occurred in the past, I remain optimistic about the future of this emerging inter-
discipline.
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chapter 43
..............................................................
NATIONAL
BORDERS AND THE
SIZE OF NATIONS
..............................................................
enrico spolaore
1 Introduction
.............................................................................
The formation, consolidation, and break-up of states has been at the center of human
history for thousands of years, from Hammurabi’s unification of Mesopotamia to the
recent collapse of the Soviet Union and Yugoslavia. Currently in the world there are
almost 200 nations, some as large as China or India, others as small as San Marino or
Tuva lu.
1
Questions on the number and size of states have been debated for almost as long
as states themselves exist.
2
Plato in The Laws even calculated the “optimal size” of
a polity (5,040 heads of family), although he also pointed out that “the number
of citizens should be sufficient to defend themselves against the injustice of their
neighbors.” Aristotle in The Politics argued that a state should be no larger than a
size in which everybody knows each other, and claimed that “experience has shown
that it is difficult, if not impossible, for a populous state to be run by good laws.”
Montesquieu in The Spirit of the Laws wrote that “in a small republic, the public good
∗
I am grateful to the University of Munich’s Center for Economic Studies (CES) for its hospitality
while I completed the first draft of this chapter. I thank the editors, and seminar participants at George
Mason University, for useful comments. The usual disclaimer applies.
¹ By “nation” in this chapter we mean internationally recognized “sovereign state,” as commonly
understood in English when one speaks of international trade or United Nations.
² For a discussion of the older political literature on the size of states see Dahl and Tufte 1973.
Historical studies of nationalism include Hobsbawn 1990 and Anderson 1991.
enrico spolaore 779
is more strongly felt, better known, and closer to each citizen.” Issues of “optimal” size
and centralization were at the core of the debate during the American Constitutional
Convention in 1787, when Madison and the other Federalists provided celebrated
arguments in defense of a large federal polity against the objections of the Anti-
Federalists.
Sovereignty, independence, and border redrawing have been paramount issues
throughout the nineteenth and twentieth centuries, and remain very prominent
today, from Quebec to the Basque countries and Catalonia, from Ireland to Belgium
and Corsica, from the Middle East to Kashmir and Indonesia.
While these issues have traditionally been the preserve of political philosophers and
historians, in recent years they have also been addressed by a growing analytical litera-
ture within political economy. Understanding the formation and break-up of nations
is a natural development of political economy’s research program. A central goal of
contemporary political economy is the endogenization of political institutions, and
sovereign states are perhaps the most important political institutions in the world.
2 Literature on Size of Nations and
Related Areas of Research
.............................................................................
In this chapter I will briefly review some ideas and results from the political econ-
omy literature on the size of nations. Earlier contributions are Friedman (1977)and
Wittman (1991). More recent analytical work includes Alesina and Spolaore (1997,
2003, 2005, 2006), Alesina, Spolaore, and Wacziarg (2000, 2005), Bolton and Roland
(1997), Bordignon and Brusco (2001), Casella (2001), Casella and Feinstein (2003),
Dagan and Volij (2000), Ellingsen (1998), Findlay (1996), Goyal and Staal (2004),
LeBreton and Weber (2001, 2003), Haimanko, LeBreton, and Weber (2005), Spolaore
(1995, 2004), and Wittman (2000), among others. An earlier discussion of the litera-
ture is provided by Bolton, Roland and Spolaore (1996). Alesina and Spolaore (2003)
cover most of the materials discussed in this chapter and also provide discussions of
the empirical and historical evidence, which must be omitted here because of space
limitations.
Recent contributions have studied the determination and change of political bor-
ders in different political and economic environments, and using various concepts
of solutions and equilibria. For example, in his pioneering paper Friedman (1977)
studied the formation of borders as set by rent-maximizing Leviathans. Bolton and
Roland (1997) studied the break-up of nations by direct majority vote, when income
distributions differ across regions, and median voters in different regions have differ-
ent preferences over redistribution policies. LeBreton and Weber (2003) among others
have analyzed equilibria when groups of individuals can secede unilaterally and form
their own country. Wittman (2000) has focused on efficient (i.e. welfare-maximizing)
780 national borders and the size of nations
solutions. In Alesina and Spolaore (1997, 2003) the number and size of countries
have been derived and compared under different solution concepts: efficient borders,
voting equilibria, equilibria under unilateral secessions, and equilibria in a world of
rent-maximizing Leviathans.
The recent political economy literature on national borders is connected to other
related bodies of research. An important link is to the literature on local public goods
and clubs, pioneered by Tiebout (1956) and Buchanan (1965).
3
In Buchanan’s analysis,
clubs are modeled as voluntary associations in which individuals have identical tastes
for both public and private goods. The optimal club size is determined where the
marginal cost of an additional member from crowding equals the reduction in the
other members’ dues from spreading the fixed costs of the public goods over the extra
club member.
4
In Tiebout’s analysis, different bundles of public goods are offered
at different locations, and people sort themselves in homogeneous local “clubs” by
voting with their feet. A necessary condition to ensure global optimality in a Tiebout
world is the absence of economies of scale in producing the public good.
There are many points of contact between the literature on clubs and local public
goods and the literature on nations: in a way nations, from a global perspective, do
provide “local” public goods. However, national public goods—unlike local public
goods—have high economies of scale from sharing the costs with a large population.
Moreover, in the traditional theory of local public goods local jurisdictions are not
completely autonomous, while the analysis of nations explicitly focuses on sovereign
states that can impose direct barriers to economic exchange and/or use force in
settling disputes with their neighbors.
5
The literature on the formation of nations is also linked to the large literature on
customs unions, trade blocs, and preferential trade agreements.
6
Modern national
states tend to promote free trade within their own borders, while all their regions tend
to face the same barriers to trade with other countries. In that respect, countries can
be seen as “trade blocs” of regions. On the other hand, countries are much more than
trade blocs: they are not only economically integrated, but also politically integrated.
In fact, one could think of free trade areas, customs unions, supranational associa-
tions, and sovereign states as points on a continuum of increasing coordination and
integration of political functions. Hence, while the study of nation formation and
break-up benefits from a close connection to the analysis of trade blocs, the study
of trade blocs could also benefit from using some of the tools, concepts, and results
³ This literature studies public goods that are jointly supplied but excludable either through some
technological device or because of spatial distance. For a survey see Inman and Rubinfeld 1997 and
Scotchmer 2002. Schmidtchen 1994 explicitly studies national borders in the context of Buchanan’s
theory of clubs and constitutional rules.
⁴ The stable distribution of club sizes and benefits was studied in classic contributions by Pauly 1967,
1970. Formally, this approach to voluntary clubs is analogous to the study of the core with externalities.
⁵ An interesting approach to jurisdictions based on voluntary association has been proposed by Frey
and Eichenberger 1999, who have stressed voluntary mechanisms for the creation of clubs of public
goods (their “functional, overlapping,and competing jurisdictions,” or FOJC). Issues of legal monopoly
of coercion and free riding are usually not addressed in this context.
⁶ The classical reference is Viner 1950. For a survey of the literature see, for instance, Baldwin and
Ve n a bl es 1995.
enrico spolaore 781
developed in the study of nations. The European Union, with its intermediate nature
between a free-trade area and a fully-fledged political union, represents a promising
case study.
7
A third body of research that is highly relevant for the study of nations is the
economic analysis of conflict and appropriation, developed by Boulding (1962), Tul-
lock (1974), Hirshleifer (1989, 1991, 1995a, 1995b), Grossman (1991), Skaperdas (1992),
and others. This work is also related to the formal study of conflict by international
relations scholars (see Powell 1999). Links between this formal literature on conflict
and the study of the size of nations have been developed by Wittman (2000)and
Alesina and Spolaore (2005, 2006).While in most formal work on conflict and wars
the identity and number of agents and groups engaging in conflict have to be taken
as given, the fundamental objective of the literature on nations is to endogenize those
collective organizations. In this respect, the literature on nations is related to the
literature on the formation of military alliances, from which it differs for its focus
on centralization of defense in sovereign institutions (nations).
8
The mechanisms
through which governments manage (or fail) to establish an effective monopoly on
the means of coercion within their borders is an important area of enquiry that is
likely to receive increasing attention in the future.
3 Benefits and Costs of National Size
.............................................................................
When considering the equilibrium size of nations, a natural starting point is the
trade-off between benefits and costs from a larger size. There are several benefits
from a larger national size. A key role for nations is the provision of a set of public
goods to their citizens. The per capita cost of many public goods is lower in larger
countries, where more taxpayers pay for them. Economies of scale can be expected
in the provision of general-policy coordination and administration, defense and
foreign policy, a legal and judicial system, police and crime prevention, a monetary
and financial system, infrastructure for communications, public health, and so on.
Empirically, the share of government spending over GDP is decreasing in popula-
tion (smaller countries have larger governments).
9
Larger countries can also better
internalize cross-regional externalities, a point extensively studied in the literature on
decentralization and fiscal federalism.
10
An additional benefit from size comes from
insurance via interregional transfers. When international capital markets are imper-
fect, larger countries can better provide insurance to regions affected by imperfectly
⁷ On European integration see, for example, Alesina and Wacziarg 1999;AlesinaandSpolaore2003,
ch 12. See also the chapter on the political economy of European integration by Eichengreen in this
volume. For a discussion of the effects of European integration on European nation states and regions,
see Drèze 1993.
⁸ A classic reference is Olson and Zeckhauser 1966. A survey is provided by Murdoch 1995.
⁹ See Alesina and Wacziarg 1998; Alesina and Spolaore 2003,ch 10.
¹⁰ For a survey see Oates 1999.