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Small States, Small Problems? Income, Growth, and Volatility in Small States

Posted: 24 Sep 2001  

William Easterly

New York University - Department of Economics

Aart Kraay

World Bank - Development Research Group (DECRG)

Abstract

Small states have attracted a large amount of research. In this paper we test whether small states are any different from other states in terms of their income, growth, and volatility outcomes. We find that, controlling for location, small states have higher per capita GDP than other states. This income advantage is largely due to a productivity advantage, constituting evidence against the idea that small states suffer from an inability to exploit increasing returns to scale. Small states also do not have different per capita growth rates than other states. Small states do have greater volatility of annual growth rates, which is in part due to their greater volatility of terms of trade shocks. This terms of trade-based volatility is in turn due to small states' greater openness. Their greateropenness on balance has, 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 international capital markets in order to better diversify risk, but the benefits 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.

Keyword(s): The Caribbean; Pacific Islands; growth; volatility; trade; small states

Suggested Citation

Easterly, William and Kraay, Aart, Small States, Small Problems? Income, Growth, and Volatility in Small States . World Development, Vol. 28, No. 11, November 1, 2000. Available at SSRN: https://ssrn.com/abstract=252873

William Easterly (Contact Author)

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

Aart Kraay

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-473-5756 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/akraay

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