This volume consists of 20 chapters altogether. They are divided into three parts. Part I, Theory and Evidence, contains seven chapters, and deals with the plight and special features of small states. Part II, WTO and Small Economies, includes only three chapters, and serves as a bridge between the subject matter of Part I and that of Part III. The latter, WTO Dispute Settlement, consists of ten chapters and is devoted to institutional aspects of the WTO operations in concrete cases in which small states – to a large extent, but not exclusively – have been involved.
A single book review cannot possibly do justice to a volume of such wide scope and of a so highly diversified set of issues. The present review will therefore be confined to the papers presented in Part I, which merit the attention of an audience whose interest extends beyond the institutional intricacies of the WTO. The papers which will be reviewed are thus:
Ch. 1:‘A Theory of Trade and Development of Small States’, by Roman Grynberg.
Ch. 2:‘Small Countries: A Survey of the Literature’, by Michael Weatherhead.
Ch. 3:‘When Comparative Advantage Doesn't Matter: Business Costs in Small Economies’, by L. Alan Winters and Pedro M. G. Martins.
Ch. 4:‘Can Small States Compete in Manufacturing?’, by Ganeshan Wingaraja and David Joiner.
Ch. 5:‘The Economics of Isolation and Distance’, by Stephen Redding and Anthony J. Venables.
Ch. 6:‘The Trade Performance of Small States’, by Roman Grynberg and Mohammad A. Razzaque, and
Ch. 7:‘Small Economies and Special and Differential Treatment: Strengthening the Evidence, Countering the Fallacies’, by Virginia Horscroft.
In the following, these contributions will be referred to by chapter numbers.
One major set of issues, discussed in several papers (Ch. 2, Ch. 5, and Ch.7) refers to the attributes of small countries that constrain growth of their national product and affect negatively their export performance. These are mostly: dependence on exports; high degree of export concentration; inhibition of the size of the manufacturing sector and, in particular, of the export of manufacturing; reduced ability of fending against foreign-originated shocks; high cost of governance; and vulnerability to a high risk of natural disasters, such as earthquakes. The latter issue, it should be pointed out, is really mis-placed (though addressing it in this context has precedents, such as in T. N. Srinivasan, Reference Srinivasan1986). It may be of concern to specific small states, such as island states on the Pacific Rim; but it is not a ‘small state’ attribute or concern.
Of these issues, the impact of small size on the structure of trade, and particularly the inhibiting effect on the export of manufactured goods, is a common thread in the volume. It is central in Ch. 3 and, in particular, Ch. 4; but is also addressed, explicitly or implicitly, in most other contributions.
An important issue, which is referred to only on one occasion (Ch. 3), is the potential impact of the openness of small economics on emigration to bigger (and more prosperous) countries – similarly for the desertion of parts of the land in a (geographically) large country.
A specific issue (discussed mostly in Ch. 6, but is in the background of other contributions as well) is the expected loss of small states from world trade liberalization and globalization (as a consequence, presumably, of the WTO activity) due to losses of trade preferences granted by the developed world. This is, again, not strictly a ‘small-country’ issue: preferences have normally been granted not as compensation to the small size of the exporting country as such, but to other misfortunes (such as poverty), or to historical relationships. Nevertheless, this issue looms large here; and it may be suspected as being a major motivation for having undertaken this volume.
I shall now address several papers that deserve, to my mind, special attention – or, on occasion, a special critical review.
I found most valuable the contributions of Ch. 3 and Ch. 5. Both present, in different fashions, concrete estimates of the impact of distance on transportation costs; and, through these costs, on the size and structure of trade (particularly exports). Note, though, that both papers address the impact of distance, and only partly, in Ch. 3, that of size. I shall present the essence of Ch. 3 in a somewhat different manner than the authors do – though not deviating, I believe, from what they suggest. Take a country with a list of goods which it may potentially produce (assume, for simplicity, a Ricardian world). With zero transportation costs, some of these goods will be locally produced and exported; whereas the rest will be imported. With positive transportation costs, on the other hand, some goods will be neither exported nor imported – they will become ‘non-tradables’; and the higher these costs, the larger the range and share of non-tradables, and the lower the share of tradables (of particular concern here are exportables). Moreover, transportation costs also change the order of the goods that are potentially traded. Thus, particularly high costs applying to a given good, which, in the absence of costs, would be high on the scale of comparative advantage, would make this good a non-tradable rather than an export good. Specifically, the authors' concrete estimates show that for a good whose production involves a significant component of imported inputs (that is, where the domestic value added is not an overwhelming proportion of total production costs), transportation costs on imported inputs and on the final product are likely to prevent the export of the good. Thus, transportation costs – at the concrete levels found in these estimates – are bound to discriminate against the exports of goods with relatively low value added – particularly manufactured goods – and in favor of goods with high value added – particularly primary goods (in addition, we recall, to lowering the share of aggregate exports in the national product). This analysis does not invalidate the principle that comparative advantage – qualified by transportation costs in trade – determines trade; and the authors stress this point. It is hence unfortunate that they chose to give their paper the title of ‘When comparative advantage doesn't matter’ – a title that would fit much better another contribution in the book, to which I shall turn later.
The analysis of Ch. 5 is partly similar, but also goes in different directions. It finds a strong (negative) impact of distance on trade and growth – particularly the former. One important quantitative relationship, though, appears to this reviewer to be intuitively unlikely. The study cites an elasticity of trade to distance at the level of −1.25; that is, doubling the distance (e.g., from 1,000 to 2,000 km.) between two trading posts would lower trade between the two by 60%. If this were true, an economy a few thousand kilometers from major trading centers would have a minute size of trade – which would seem to be an exaggeration of the impact of distance. One would also suspect that the negative correlation found between per-capita GDP and an index of ‘foreign-market access’ may be strongly influenced by trade relationships within Western Europe.
In Ch. 1, the author sets himself an ambitious task: to devise what may be called a ‘non-Euclidian’ economic analysis. As the chapter's title suggests, a special theory applies to small states. Trade patterns of these economies are ‘non-Ricardian’: they are determined not by comparative advantage, but by the existence of ‘rents’ or ‘quasi-rents’. Unfortunately, not only is a formulation of this alternative theory missing; even the terms used – like ‘rent’ – are not defined, leaving the reader quite bewildered. Probably the most reasonable interpretation which might be given to the argument of this chapter can be found in Ch. 7, whose author suggests that small states can compete in world markets only when able to sell at ‘premium prices’ – presumably, where the country has some monopoly power due to product heterogeneity.
In Ch. 6, the authors relate economic growth to ‘marginalization’ – meaning a declining share of a country in world trade. This reviewer could not refrain from recalling the concluding statement in Garrison Keillor's ‘Prairie Home Companion’ programs, that in Lake Wobagon ‘all the children are above average’. According to the analysis suggested here, falling below average is, by itself, a flaw of dire consequences: ‘It has been established that a 1 percent rise in export growth is associated with a 0.4 percent GDP growth in small economies [this is, most likely, just a reflection of the share of exports in product – see Michaely, Reference Michaely1977]. From this relationship it is quite straightforward to hypothesize that countries that have experienced rapid marginalization will have lower GDP growth rates’ (p. 194).
Overcoming this deficit (the ‘marginalization’) would thus increase substantially economic growth in the country concerned. One is left wondering: would this increase in exports accelerate economic growth also, when the country's share in world exports has not fallen, or is the beneficial relationship confined to situations of ‘marginalization’? Similarly, since the increase in one country's share implies necessarily a fall in the share of others – leading some other countries to become ‘marginalized’ (except in the ‘Lake Wobagon’ case) – does the increase in the former country's export volume and export share necessarily yield a net benefit to the world at large?
The literature on small states is voluminous, and I have neither the intention nor the capacity to put the present volume in the context of the many other contributions. I should just indicate that, to my mind, the volume advances our knowledge primarily in two directions. One – the most important – is in providing concrete estimates of transport costs and in the analysis of their implications for the size and structure of trade (particularly exports). The other is in the presentation of a variety of elaborations and specifications of elements (such as vulnerability or export concentration), which have been part of the discourse on the plight of small countries all along.
Among the less successful elements of this volume, I shall focus on the following. First, a set of problems which might be classified as editorial issues:
(i) To start with, the reader is not made aware of the origin of this volume, and the context in which the contributions have been made. The reasons for undertaking it are not entirely obvious. In a few introductory lines, the Editor states that ‘how the large and more powerful WTO members address the legitimate trade concerns of the poorest and most vulnerable members will shape the perception of the institution throughout much of the century’ (p. 1). But even if one puts in this category all small states (using the size definitions mostly applied in the volume) – not just small distant island states, which is a minute group – the aggregate population of ‘small states’ (somewhat over 30 million) is equivalent to that of just one metropolitan area in Asia. As a determinant of the perception of the nature of trade policy patterns, the ‘small state’ yardstick should not be exaggerated.
(ii) Authors grasp with the definition of a ‘small state’ individually, and come out with a variety of definitions. This is legitimate; but a unified discussion of this critical element – leading, hopefully, to a uniform framework – seems to be asked for.
(iii) In a similar vein, it is not entirely obvious what are the common criteria of the group of countries analyzed in the volume. Is it size – ‘small countries’? Is it distance from major trading centers? Being small and poor? Being an island? Or is it any partial combination of several criteria?
(iv) In a volume of contributions on a uniform subject matter, one would normally expect a prevalence of cross references. Indeed, this appears very often to have been required. On occasion, an author of one contribution refers to earlier works of other authors; but not even once (asking forgiveness for a potential oversight) does one find a reference to other contributions in this volume.
My other queries refer to points of substance. I shall indicate here my criticisms, or reservations, suggesting on occasion the manner in which these could be overcome in further studies. The order of listing these issues here does not necessarily indicate their importance.
(a) A multitude of a-priori grounds is presented to suggest that small size of nations should contribute to slower growth and lower income levels. Yet, this expectation is not supported by empirical evidence in this volume; nor, indeed, is it borne out by other studies of the relationship of growth to size of nations (see, for instance, T. N. Srinivasan's Reference Srinivasan1986 survey). This must imply that other attributes of small nations are conducive to growth. This was pointed out as early as in Simon Kuznets' seminal analysis on the subject (1960), where attributes such as low inside transportation costs, or stronger social cohesion of small nations, were suggested. Such balancing of factors is sorely missed in the volume.
(b) Similarly, much emphasis is put in the volume's contributions on the vulnerability of small states due to high export shares (which should indeed be expected). On the other hand, it is argued – just as convincingly – that large distances should lead to low trade shares. The reader may be left bewildered – mostly due to the aforementioned blurred distinction between the impacts of size and of distance. Be it as it may, concrete empirical evidence on the impact of size on trade would have been of much benefit.
(c) Being an ‘island’ and being a ‘landlocked’ country are both suggested as constraining growth and trade. But one must wonder: are these two attributes not antipodes? Is being completely blocked from the ocean similar, in its impact – ceteris paribus – to being completely surrounded by it?
(d) The essence of much of the analysis is that size and distance have a fundamental impact on the structure of trade, particularly of exports, which, in turn, leads to losses to the economy. This is convincing, and most probably true. Yet, one expects in vain to find in the volume some empirical evidence, or even an illustration, apart from one or two short empirical references to the shares of manufacturing vs. primary goods in exports.
(e) High (proportional) costs of ‘governance’ of small states are presented in the volume as self-evident. Could this relationship really be taken for granted? Analyses of the firm suggest that costs of management – the private-sector equivalent of ‘governance’ – increase (proportionately) with size; indeed, the optimal scale of a firm would be achieved where increasing costs of management start to outweigh other (production) advantages of increased size. Intuition would suggest that, in a roughly similar way, there might be a U-shaped pattern to the costs of governance in the national economy: that these costs are indeed very high in very small states, that they first keep falling with size, and that they then start rising. That is, that the cost of governance is higher in a large than in a small state, except where the latter is very small – below a certain threshold. Whether this is indeed the pattern should be a matter of investigation; but that this may be a possibility should be sufficient to make one hesitate in taking as a fact the existence of high costs of governance in small nations.
(f) Finally, a policy issue. It is often stated, or implied, in the volume that liberalization, or globalization, brings losses rather than gains to small states. Where the policy change involves losses of preferences enjoyed by a small state, this seems to be a reasonable expectation. But is global liberalization per se a source of net losses to small economies? Most probably not, whereas the impression left often in this volume is that it is.
Some of the elaborations and verifications may probably not be expected in a volume containing just seven papers (in the part reviewed here). But indicating the need for them may hopefully suggest some channels for further studies of the important issues analyzed in the present volume.
