Larger nations with bigger economies have faster growth than smaller ones according to one study. By utilising increasing returns to scales and the division of labour, larger economies spur higher income levels, which leads to further growth. This puts smaller economies at a disadvantage however. This study finds that smaller economies can tap into the economic robustness of larger economies by engaging in trade.
The study concludes that contrary to protectionists’ beliefs, free trade benefits poorer nations. But it warns developing nations not to become too specialised, because this will cause problems for future growth.
Source: “Larger Economies Grow Faster,” Economic Intuition, Winter 2000. Based on: Alberto F. Ades and Edward L. Glaeser, “Evidence on Growth, Increasing Returns, and the Extent of the Market,” The Quarterly Journal of Economics, August 1999.
For more on Economic Intuition research summaries http://www.economicintuition.com
For more on Benefits of Trade
http://www.ncpa.org/pd/trade/trade1.html
RSA Note:
South Africa is on the right track in opening up trade by reducing tariffs. Other constraints on growth that need to be removed are:
Foreign investment and skilled immigrants will increase the growth rate of the economy. Exchange and other controls on capital movement and the deterrents to the entry of skilled immigrants should be removed. As far as South African consumers and unemployed are concerned, the nationality of suppliers of goods, services and jobs is of no consequence.
The inflation rate must be reduced to the levels maintained by our major trading partners. This will stop the decline in the value of the currency and make economic calculations more reliable creating a more business-friendly environment for potential investors.
Conditions for the poor will improve more rapidly in a low-regulation environment the plethora of laws that are intended to right the wrongs of the past slow down growth and harm the intended beneficiaries instead of helping them.
Eustace Davie
Director, FMF
