Do big countries get richer (or more productive) faster?

The short answer appears to be “no”.

Much of the debate around the appropriate immigration policy for New Zealand seems to have as a sub-text (implicitly or otherwise) a sense that New Zealand population is just too small, and that if only we had more people we would be richer (per capita) and more productive.     Those who run, or rely, on this line rarely seem to engage with the estimates that New Zealand’s GDP per capita was at its peak, relative to incomes in other countries, at a time (around 100 years ago) when our population was about a quarter of what it is now.  (Of course, the population of other countries has also grown since then, but in most advanced countries the population growth rate has been much slower than in New Zealand –  the UK had about 45m people 100 years ago and about 65m now.)

In their recent report in support of New Zealand’s immigration policy, the New Zealand Initiative joined the group of those arguing that a larger population would be good for New Zealand’s per capita income and productivity.

I wrote about this point in a post back in 2015, in which I observed

I’ve long been fairly sceptical of that proposition. A casual glance around the world suggests no very obvious relationship. The United States and Iceland co-exist, and Japan and Singapore. At the other ends of the income spectrum, India and Bhutan, and Brazil and Costa Rica. There are all sorts of arguments advanced around the economics of agglomeration, and that analysis seems to work quite well in describing what happens within countries. But it does much less well in describing economic performance across countries. And as I’ve pointed out to people previously, if the real economic opportunities in big countries were so much superior to those in small countries, large countries would tend to have (more high-yielding projects and) higher real interest rates than small countries. But they don’t.

Over recent decades we’ve also seen many more smaller countries emerging, presumably because the people in those places concluded they wouldn’t pay too much of a price to be independent.

In the earlier post, I included some scatter plots suggesting that there was basically no relationship at all between the size of country and the subsequent growth in its real GDP per capita or productivity (real GDP per hour worked).    In this post I’m looking at much the same relationships, but this time just using the Conference Board’s Total Economy Database, which starts in 1950.

One of the challenges in any work in this area is that people tend to flow to rich and successful countries.  Indeed, plausibly in a successful fast-growing country, people might even be willing have more children on average.   The simplest way to correct for that is to take the population level at some historical point in time and then look at per capita growth subsequently.   Here is a chart for 33 relatively advanced (and relatively free) economies showing population in 1950 (in logs) and total percentage growth in real GDP per capita over the subsequent 65 years to 2015.

1950 popn and subseqeunt GDP pc

The simple regression line is still slightly downward sloping even if the very fastest growing countries (Singapore, Taiwan and South Korea) are excluded.  But note that I’m not arguing that higher populations are necessarily bad for subsequent growth, simply that there is little evidence (none in the simple bivariate relationships) that larger populations are good for growth.  Small and large countries seem able to successfully, and prosperously, co-exist.

What about more recent periods?  There has been a line of argument –  associated in the context of the New Zealand debate with Philip McCann –  that these issues have become much more important in recent decades as the nature of the global economy has changed (more reliance on ideas, trade in services etc).

Here is the same chart for the 25 years since 1990.

1990 population and real GDP pc

Take out the outlier (Singapore) and the bivariate regression line still slopes slightly downwards.

And for the same countries, here is the relationship between total hours worked in 1990 and subsequent growth in real GDP per hour worked.

1990 hours worked and subseqeunt productivity growth

And still no positive relationship.

My sample of countries in these charts excluded the countries of the former eastern bloc.  Most of them have relatively small populations, and most have –  not surprisingly –  done quite well in the last 25 years or so, once the shackles of communism were removed.   The quality of the data from 1990 might also be in some question.

But for completeness,  here are two charts from 1990 to 2015 with various of the eastern European countries added in (those now in the OECD and/or the EU).   This one for all the countries.

1990 hours etc - enlarged sample

And this one – as much for visibility as anything – just excluding Singapore, South Korea and Taiwan.

1990 hours etc - enlarged sample ex Sing, Taiwan, S Korea

There doesn’t seem to be any simple evidence that, across the relatively advanced world as a whole, a higher starting population has helped make for stronger subsequent growth in real GDP per capita or real labour productivity.

I concluded my earlier post this way

Charts of this sort are, of course, not conclusive. Lots of other things are going on in each country.  In an ideal world, one would want a much fuller and formal modelling of the determinants of growth. But equally, the absence of a positive relationship between the size of the country and its subsequent growth shouldn’t be surprising, and there have been previous formal research results suggesting a negative relationship.

Of course, perhaps New Zealand is an exception. Perhaps real per capita incomes would really be materially lifted if we had many more people here, even though there has been no such relationship across the wider range of advanced countries in history.  But in a sense we have been trying that strategy for 100 years and there is no sign that it has worked so far.   Very few relatively advanced countries have had weaker real per capita growth than New Zealand in the last 100 years (only places like Argentina and Rumania).

Perhaps the next 25 or 100 years would be different. But I think the onus is now on the advocates of policies to bring about a bigger and more populous New Zealand to demonstrate where and how the gains to New Zealanders from a much larger population are occurring?

At that stage, I was putting less emphasis than I now would on two (probably related) factors that make it even less likely that such a beneficial relationship would exist for New Zealand even if it did –  and these charts suggest it doesn’t –  for other advanced countries:

  • our extreme distance from other countries (markets, suppliers, value-chains, competitors etc) in an era when, if anything, personal contacts seem more important than ever, and
  • our continued very heavy reliance on natural resources –  and ability to apply new and better skills to those resources.   Those resources are in fixed supply, our heavy reliance on such natural resources is now quite unusual (it isn’t so for most OECD countries), and there is little sign of the economy successfully gravitating away to any significant extent from a reliance on natural resources.

Playing to our strengths, and maximising the prospects for New Zealanders, looks as if it would be much better-served by an approach that didn’t seem determined to drive up the population, regardless of the 100 years (or 70 or 25 or whatever period you like) in which there has been no evidence that a larger population is enhancing the economic well-being, or productivity, of New Zealanders.

And here is one last chart, for completeness, including all the relatively advanced countries –  eastern European and Asian alike –  and showing population in 1990, and subsequent growth in real GDP per capita.

1990 population and real GDP pc extended sample

Still no sign of that vaunted upward-sloping relationship.

24 thoughts on “Do big countries get richer (or more productive) faster?

  1. Michael
    GDP/Capita can be distorted by extractive industries. Taranaki has the highest GDP/Capita of any NZ region thanks to oil and gas extraction. As NZ’s population has grown the benefits of extraction relatively fall.
    I very much doubt you can infer anything much from the graphs you have assembled as they don’t reflect such economic evolutions. I’m sure if there were only 2 million of us, our GDP per person would be on average higher, but so what?
    I note that Singapore is constantly the outlier and that have a strong paternalistic government. I recently read “The Italians” which attempts to explain all aspects of Italian character. Its explanation of the demise of the Italian economy since the 1990s is, in a word, corruption. Which in turn reflects the demise of the Christian Democrat party leadership of their Government. I suspect that good/strong Government can be good for GDP/Capita just as weak/bad Government is bad for GDP/Capita.
    NZ is presumably “mr inbetween” on this scale, perhaps with good/weak Government.
    But if the cause of our poor GDP/capita performance is weak Government, you would need to list the good things which a strong Government would have done, but our Government hasn’t.
    This has happened, the NZ Initiative (which does have a list of ways which NZ could lift its GDP/Capita) does seem to blame the Key Government for weak implementation.
    Politicians in NZ may be honest (ie not like the Italians) but they are weak and want to be reelected, so they don’t take the steps required to lift our economic performance.
    What do you think about that as an explanation of NZ’s poor economic performance?
    Tim

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    • Tim,

      I’m not sure I fully follow your point re natural resources. My best illustration is to contrast Norway and the UK. Over the last 40 years the two countries have each produced similar amounts of oil/gas. In norway, spread over 5m people that windfall – unexpected 60 years ago – produced a super high income country in what would otherwise only have been a high income country. In the uK, with 65m people, the same volume of windfall production wasn’t large enough to make that much difference per capita. Material living stds in norway are much higher than those in the UK.

      On your governance etc point, I don’t much evidence that NZ govts are any worse than those in most of the West. Singapore may well be better, altho remember that all those charts are showing growth rates and Singapore came from a very low starting point. Last time, i looked productivity levels in Singapore were still a bit behind the best of the West. I think the biggest challenge here has been the lack of an obvious agreed agenda of measures that would make a material difference. I’d prob agree with many of the NZI ideas, I was part of the 2025 Taskforce’s own list of proposals and I’ve written about that list here. But the more I looked at the issue the more i struggled to convince myself that those measures were enough. That is one of the challenges the OECD faces dealing with NZ – see my post last Friday. My own response to that is that most people are looking in the wrong place – they are focusing on measures that mostly make sense near the centre of global econ activity (northern Europe, north America, Italy even), but aren’t thinking enough about the distinctives of this economy – extreme distance, resource dependency etc. I might be wrong on my specifics, but my real point is that lack of a compelling agreed agenda from the elites (a situation quite unlike that in 84/85 say). Do I wish politicians would take some risks? Yes, I do. But not just any risks – after all, Muldoon and Birch took some rather big well-intentioned risks in the early 80s.

      Liked by 1 person

  2. As an alternative scenario, I wonder what the NZ economy would be like if we had a population of 100m. I’m going to completely ignore how that might happen and what issues might arise getting there.

    But if we did have that population then I think it’s safe to say we would no longer have an economy that was focused on natural resources. Our biggest city would probably have a population of 10m and there would be some agglomeration benefits from that. The distance to market, NZ to Asia, I’m guessing is similar to Americas to Asia. So I don’t see the scenario as being impossible to be successful.

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      • A 100 million people is a large local market. With a large domestic market, the risk of building a business is reduced, with market knowledge, less travel distance and lower cost of production due to scale, also the margins required to turn a profit is less. In a small market in NZ, the risk to a business is higher because the margins required are much higher in order to turn a profit. Also Cost of production is higher without scale.

        Find the right product in a 100 million market which a profit margin of $1, you make a $100 million profit. In a small market like NZ with 4.5 million people, you need a profit margin of $22 in order to make a profit of $100 million. It is easier to add $1 to a product than it is to add $22 to product to make an equivalent profit.

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  3. The path we took to get to such a number would matter hugely. It couldn’t happen by natural increase alone in several centuries, so would have to be by immigration. Lets assume we adopt “open borders” and 100m people come. Mostly, presumably, they’d come from Asia – not the successful parts, since they already near enough to match us – and to lesser extent perhaps Africa. Even allowing for energy and enthusiam of the movers, on that scenario NZ ends up as a rather disappointing heavily populated Asian country – a Malaysia or Thailand perhaps. We’d then still suffer from distance, not size, but also fairly weak institutions – whereas the institutions we have now are still among the best in the world.

    Recall the Alesina et al paper i linked to a couple of weaks ago. Immigration from countries culturally similar or richer than you appears to be most likely to be helpful. Perhaps if one could think of 100m Brits, Canadians, Americans, with some Singaporeans thrown in for good measure, we get the picture you envisage. But why would they come?

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    • They would certainly come but without the industries available to provide careerand wealth development, they leave. We have a high churn rate. We still receive a significant number of migrants from the UK. Due to The Trump effect, we are seeing more Americans. However because Maori generally view white migration as a threat of recolonisation we are seeing more migration from other countries.

      But in reality we are a boring country. Our tightly controlled regulatory controls put fish and bird habitat ahead of economic or human needs. Project after project of significant economic value has been discarded. Todd developments just recently had their multiiple 10 level building proposal turned down by council in a area zoned high rise and high density. The Unitary Plan is a lie. Anything more than 2 houses has to go through Council discretion. They don’t like it they reject the project.

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  4. Our NZ economists get really lost in their productivity numbers. It’s not about the numbers of people because we can always train or bring in people that have the relevant skills for the high productive jobs.

    It is about having the correct industry mix that would deliver the high productivity but also to keep our population busy and gainfully employed. Not much point having all robots and people doing nothing and twiddling their thumbs all day.

    Therefore the real question is, ” What industry should we focus on that will deliver us the high productivity that is required and how much investment and time is required to develop such industries?”

    One thing I am certain, it is never about primary industries. Previously we had 70 million sheep and NZ economists lament about how productive our country is??? Now we have 10 million cows producing wastes equivalent to 15 to 20 people per cow and we believe a farmer is more productive than a Aucklander.

    10 million cows generate $10 billion in GDP compared to 1.5 million Aucklanders that generate $75 billion in GDP and economists think that cows are more productive than humans?. Goes to show we need Chartered Accountants in the RBNZ and reduce the number of economists totally lost in their numbers.

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  5. What is more important?
    GDP as per Aucklanders buying and selling houses, lawyers, real estate agents, school teachers, bus drivers taxi drivers, drivers going nowhere fast, car salesmen, super market and warehouse importers (you get my drift) or Cows that earn us export income.?

    That 10 million cows are looked after by oh I don’t know several thousand farmers, tanker drivers Fonterra employees and a few that assist all that.
    The 1.5 million in Auckland really add up to not much more than consumers using the credit that is obtained by those few thousand the are the Dairy Industry. ( and of course other exporters.)
    Not that hard to see where the real productivity is. GDP per person that creates exports. The rest are just bludgers on the exporters.(that’s why we have to borrow so much from overseas.)

    Perhaps if Auckland had to account for its own export earning and their spending was in line with those earnings we would see a big different picture.

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    • The most visited city in New Zealand is Auckland with 2.8 million direct flights into Auckland. 18 million inbound and outbound passengers every 12 months out of Auckland. 80,000 international students reside in Auckland together with tourists will spend $10 billion in Auckland. Oh wow 10 million cows with export earnings of 10 billion compared with Auckland with $10 billion of export earnings plus another $65 billion in all other activities. Cows sure do not cut it. Economists sure do not understand what they are measuring.

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      • You miss the point really. At what cost to other NZer’s do we suck all these people thru Auckland?
        You might also like to tell us what the real net benefits are. Most tourists pay for their trips in another country and students become net consumers in NZ. The problem now is that if we stopped that rort then we would have a lot of unemployed useless people who are currently filling in time imparting their wisdom to these students. The quality of a lot of that wisdom is very suspect and mostly it appears the end game is to get a residency here in NZ.
        Take that chance away and most would not come here.
        Why do they buy dairies etc? Got a job Mr Immigration so please can I stay forever>

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      • You miss the point that 10 million cows generate the equivalent waste dung of a city of 200 million people. Considerable damage to our rivers and lakes, leaching to coastal waters damaging fish habitats and also coastal algae bloom. The methane gas from our cows also damage the ozone layer causing skin cancer in population with hospital and medical costs.

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      • What I am saying, is that immigrants are a consequence of uncontrolled tourism. The issue is not about migrants because it is the result of not the cause of. Therefore don’t blame migrants. You can’t solve a problem by focusing on the symptom rather than the actual problem which is Tourism. Too many tourists.

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  6. Whilst I agree that there is no deterministic correlation between population size and a nation’s wealth, I strongly suspect that a certain critical mass is needed to render any economy viable.

    There will, of course, be situations in which the required critical mass is quite small. The cherished colony of the world’s richest empire (i.e. New Zealand a century ago) really didn’t need much of a critical mass. But the same is probably not true of an independent nation such as New Zealand has become.

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      • If you put 3.5 million tourists and 125,000 international students into Iceland and see what happens to your little highly productive iceland?

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      • Actually Iceland had more tourists than we did last year (and i suspect that if they “subsidised” export education as we do – offering immigration residence points – they could probably get as many students)

        But my point in this comment was simply that smaller countries than us seem to survive and function quite effectively – some of those in my list are richer than us, some are poorer.

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      • The total number of foreign visitors was around 1.3 million in 2015, a 29.2% increase from 2014, when foreign visitors numbered around 998,000.

        http://www.ferdamalastofa.is/static/files/ferdamalastofa/Frettamyndir/2016/juni/tourism_-in_iceland_in_figures_may2016.pdf

        1.3 million visitors to Iceland is nowhere close to the 3.5 million visitors we are receiving. Clearly your statement is wrong that Iceland has more visitors. It’s about critical mass. At some point your local population is not able to provide the services required by tourists. A tipping point occurs which then requires foreign workers to provide the services.

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      • Sorry, I misread a number which was in fact total foreign visitor nights. But the point remains: if Iceland has more than a third the total number of visitors NZ has, and a tenth the population, tourism currently – and it has increased hugely in recent years – plays a very large role in a very small (cf NZ) and productive/prosperous economy.

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      • Tourism and international students no doubt has injected $20 billion directly into the local economies but at a substantial cost to productivity as you have clearly pointed out. It is like a shot of heroin. Feels great but the result is an army of chefs, waiters, prostitutes, baggage handlers and cleaners as our most sought after skills in NZ.

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  7. More population has never been important. Take England in the 19th century it had the biggest most efficient cotton mills in the world, it imported raw cotton from India and exported it to the rest of the world. It destroyed the Indian cotton added value industry because of technology advances in the UK. Absolutely nothing to do with population of the UK. In turn as the UK did not invest in technology in the cotton industry it was supplanted.

    Love your graphs Michael, I used to love playing around with that stuff when I did Econometrics at Akl University. Now I realise that most of that stuff is crap, like the graphs above They prove what ever you want to make them prove.

    New Zealand, Singapore and Hong Kong have roughly the same population, 5.0, 5.5m, 7m yet the last 2 countries probably appear well up the productivity tables. Why, probably as their populations are agglomerated in an area the size of Lake Taupo, not in one of the roughest geographic countries in the world. They of course sit astride world trade routes as well.

    If you and your readers have not already read “Waves of Prosperity” by Greg Clydesdale,then you are short an important historic background, would follow up with “Why Nations Fail, then read the autobiograpgy of US Grant (Ulysses S Grant, civil war General, President of the US, highly intelligent man and acute observer of pre industrial America.

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      • It is written by a Lincoln University lecturer, did not know that when I bought it at the airport. It is a great book, really should be compulsory txt in all NZ schools from 3rd form to 7th or whatever :). Cant recommend it highly enough, suberb.

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