Country size and freedom of international economic exchange

Abstract

Small countries, because their lack of land, population, and natural resources make attempts at restricting international economic activity less feasible, will tend to allow a greater degree of openness to international trade and capital flows. In contrast, larger, more populous, and more resource-rich countries will tend to restrict cross-border economic activity to a greater degree because they can do so without great and immediate pain. Using panel and cross-sectional regressions, I find very strong evidence for a positive association between smallness and trade share of GDP. This holds for both EU and non-EU states, indicating that it is not just the small states of the EU driving the result through their ability to negotiate trade deals as one large bloc. Moreover, I find strong evidence of an association between smallness in terms of surface area, population, and lack of natural resource wealth, and policies open to free trade. Similarly, there is evidence to suggest that physically larger countries and those with the most natural resources have more restrictive capital controls.