success» of very small countries
5.3 VSC versus autonomous regions of larger countries
In order to obtain a finer-grained picture of the effects of autonomy and its benefits, we require a comparison across regions with different levels of autonomy or sovereignty. The central question concerns the degree or the kind of autonomy of a region necessary to achieve prosper ity and the necessary degree of law-making authority to successfully pursue niche strategies. Fortunately, there are a lot of regions in the world with different levels of autonomy, and this allows us to investigate this issue of sovereignty in greater detail.
Actually, we would be interested in «effective» autonomy or «effec-tive» sovereignty. Using such a concept we would find for example that the U.S.A. has greater autonomy or sovereignty than Switzerland that Switzerland has more autonomous scope of action than Belgium, a member of the EU; that Belgium clearly has greater autonomy than the
Baha mas; and finally, that the Bahamas are able to solve more issues auto nomously than Liechtenstein or San Marino. We are not aware of such an international index of effective autonomy. Therefore, we refrain from distinguishing between different levels of effective autonomy of countries, which are fully recognized internationally.
Besides the fully sovereign VSC there are a lot of territories or re -gions of similar size which are part of larger countries but exhibit various degrees of autonomy, from almost full sovereignty to constrained levels of autonomy like the Länderor Kantonein Germany and Switzer land, respectively. Examples of regions within the EU territory with signi -ficant economic autonomy but not full sovereignty would be the Canary Islands (Spain), the Isle of Man (U.K.), which even has its own curren-cy, though at par with the British Pound Sterling, and the Channel Islands (Jersey and Guernsey; U.K.). EU regions with a little less econo-mic autonomy would be, for instance, Gibraltar (U.K.), the Azores (Portugal), the Faroe Islands (Denmark) or South Tyrol (Italy).
5.3.1 Theoretical expectations
What should one expect, theoretically, when autonomous regions and VSC are compared? On the one hand, we conjecture that integra tion in the larger economic structure of the country to which the autonomous region belongs (equivalent to a very high degree of openness) reduces the disadvantages of small size, especially all the disadvantages asso ciated with a small home market. If, however, the degree of trade integra tion does not differ qualitatively between VSC and their adjacent countries and autonomous regions and the country they belong to, this argument would be of limited validity. At least for the European high-income VSC, we suppose that the difference should be minor.
On the other hand, the limited sovereignty of autonomous regions might constrain them in pursuing strategies to occupy economic niches or to implement policies to promote growth (Armstrong and Read, 1995). We are especially interested in this latter argument in order to ob-tain a more clear-cut picture of the degree of sovereignty or autonomy necessary as a prerequisite for high levels of welfare.
5.3.2 Data and first results
Fortunately, we do not have to gather data for an investigation of these arising issues – given the fact that data are very scarce for such examina-tions, this is a considerable advantage – because we can follow the lines of the studies of Armstrong and Read (1995) and Armstrong et al.
(1998). The first step is to examine how VSC and small autonomous regions (henceforth, SAR) fare in comparison to other regions. It is then possible to compare VSC and SAR in a further step. As a consequence of the diversity of VSC and SAR with regard to remoteness, geographic location and so on, it is not meaningful to compare, e.g. Andorran figu-res with the average of EU figufigu-res on the NUTS 2 level.119Arm strong and Read (1995) therefore decided to compare economic indicators of VSC and SAR with the average for adjacent regions, although this approach comes with the problem of choosing appropriate adjacent re-gions, which is especially problematic for islands.120
The results of the comparison are striking and not very difficult to interpret. They rely on data from 15 European VSC and SAR121 and compare their per capita GDP and unemployment rates with those of adjacent regions. We supplement the qualitative results of Armstrong and Read (1995) by applying non-parametric statistics. With regard to per capita GDP, the majority of the 15 VSC and SAR clearly outperform adjacent regions. The difference is especially pronounced for Andorra and Liechtenstein. Note that there are however several VSC and SAR with lower per capita GDP than in the adjacent regions, namely the Azores, the Isle of Man, Madeira, Malta and San Marino. The Faroes are a special case, since their GDP is higher when per capita GDP is con-verted to the former European currency unit ECU, but smaller when purchasing power parity is applied. Although per capita GDP is, on average, higher in VSC and SAR than in adjacent regions, a
Wilcoxon-119 NUTS 2 is a level of geographic aggregation of regional statistics issued by Eurostat and part of the Eurostat REGIO database. There are about 170 NUTS 2 regions in the EU.
120 See Armstrong and Read (1995) for their choice of adjacent regions. Note that their choice is rather arbitrary in the case of island VSC and SAR, but it is difficult to ima-gine how to arrive at a «correct» choice.
121 Note that the choice of SAR is also arbitrary, and there are numerous other candida-tes, which Armstrong and Read omitted (1995).
signed rank test and a simple sign test do not yield significant results for both per capita GDP measures, especially due to the much higher stan-dard deviation of the VSC and SAR group.
The picture changes when we take a look at unemployment figures.
With the exception of Ceuta and Melilla (Spain) all VSC and SAR have lower unemployment rates than the chosen adjacent regions. Not sur-prisingly, the results of a Wilcoxon-signed rank test (p = 0.002; two-si-ded; N=15) and a sign test (p = 0.001; two-sitwo-si-ded; N=15) are highly nificant. This means that unemployment rates in VSC and SAR are sig-nificantly lower than in adjacent regions. Moreover, nine out of 15 VSC and SAR fare better with regard to per capita GDP and unemployment ratios than their adjacent regions, which can be viewed as a clear result.
It is moreover very likely that the advantages of VSC and SAR are the result of the economic consequences of sovereignty and/or auto-nomy. Based on a discriminant analysis, Armstrong and Read (1995) find that the advantages of VSC and SAR are primarily based on a well developed financial service sector, abundant natural resources and on tour ism activity (in this order of importance). Especially for the first source of welfare, the financial service sector, which is the single most important variable, a considerable degree of law-making authority is a prerequisite. Our conclusion above concerning the benefits of jurisdic-tional power therefore seems to be corroborated.
5.3.3 Very small countries versus small autonomous regions
The next step is to distinguish between VSC and SAR in order to get a better impression of the effects of autonomy. It is not surprising that we did not find statistically significant differences between the two sets.
This is firstly due to the small number of observations, but it seems to be the case that it would also be true for a larger sample size. VSC charac-teristics and performance measures are very diverse, and it would there-fore be astonishing to find a clear statistical difference. Note that we are less interested in actual economic figures than in the potential of VSC versus SAR in exploiting autonomous rights in order to promote their economies.
Ranking VSC and SAR results in VSC leading the list, which is a slight indicator for a higher potential of economic performance. With
re-gard to per capita GDP (purchasing power parity; based on Armstrong-Read data) Liechtenstein fares best, followed by Jersey, Andorra and Iceland. Taking unemployment figures, again Liechtenstein takes the lead together with Andorra, slightly in front of Guernsey and Jersey.
Another reason for this result, which makes it impossible to discrimi nate between VSC and SAR, might be the relatively high level of autonomy which all of the selected SAR enjoy. Although they have a less pro -nounced political autonomy in comparison to VSC, the autonomous scope of action of VSC and SAR in economic issues seems to be very si-milar. Note that indeed many formally sovereign VSC do not rely on their political sovereignty, but give up rights to adjacent countries. Recall that such an abandonment of sovereignty has been labeled «internatio-nal outsourcing» in Chapter 4.122
It is, however, important to have a considerable extent of lawmak -ing authority in economic decisions in order to promote niche strategies.
Both VSC and SAR seem to be very active in defending these parts of sovereignty.123A good indicator for the VSC’s and SAR’s policy of pro-tecting special parts of sovereignty is the fact that their economic niches are a major hindrance to EU accession. Think for instance of Ice land, where the most prominent argument against EU membership is the loss of sovereignty in fishing. This conclusion might also be an explanation for the fact that nearly all VSC and SAR have treaties with the EU, but these treaties do not encompass all relevant issues. They always exclude small parts of the economy, especially in those areas where the economic niches of VSC and SAR are concerned.
Armstrong et al. (1998) extend the European view of Armstrong and Read (1995) to a much larger set of VSC and SAR worldwide.124 Although data restrictions become more severe with such an approach and harmonized data are often unavailable, they are able to compare the economic performances of VSC and SAR with regional averages. The re-sults are, as anybody who has read so far would expect, very diverse. On a highly aggregated level (their Table 2) they find that VSC and SAR do
122 Take the inexistence of military defense in most European VSC as an example.
123 We will come back to that issue in the following sections.
124 Again, we have to note that the choice of SAR is somehow arbitrary, and one could discuss the inclusion of further SAR. Note that most of the highly autonomous re-gions are, however, included.
even better than larger countries in economic terms, but it goes without saying that this result has to be interpreted with great caution for se veral reasons, data availability and harmonization being only two. Remember that we were unable to find a significant negative relationship between country size and GDP per capita in the much more reliable multiple re-gression approach in Section 5.2.
In Table A.17 in the Appendix we display those VSC with fewer than 500,000 inhabitants and all the SAR listed in Armstrong et al. (1998) and evaluate them again with regard to our focus of comparing VSC and SAR. The regional classification, which is also the basis for regional aver-ages, follows World Bank standards.
The compilation in Table A.17 confirms our regression results.
There does not seem to be a disadvantage for VSC, but overall, there is also no advantage with regard to per capita GDP. We obtain 16 VSC which have lower GDP per capita than the regional average, and 11 VSC which have higher GDP per capita than regional average (the difference is not significant). Exactly the same number of SAR’s GDP per capita fi-gures are above regional averages as are below (11 versus 11). All in all, 27 VSC and SAR are below regional averages and 22 are above. Needless to say, there is no statistical difference between VSC and SAR in terms of relative per capita GDP.
5.3.4 Regional differences
As can easily be verified from Table A.17, there are some noteworthy regional differences. The Sub-Saharan African VSC and SAR as well as the South Asian and the VSC and SAR in the Middle East and North Africa fare quite well. The picture is also relatively satisfying for the Latin American and Caribbean, Western European and North American VSC and SAR, although the results are characterized by a certain degree of diversity. The region with most of the VSC and SAR, the Pacific re -gion, comes out very badly, with nearly all territories having a lower per capita GDP than regional average. Of course, it is not fair to compare Pacific island economies with some of the Asian «tiger» economies, but the performance of Pacific VSC and SAR is poor in any case.
Remoteness and disaster proneness play a vital role in determining the results for this region, but there are several «home-made» problems, like
bad governance, which are at least as responsible for the outcome as the natural ones.125
Our results change when we exclude East Asian and Pacific VSC and SAR, but the difference between VSC and SAR is again insignificant.
Now 20 out of 31 VSC and SAR beat regional average GDP per capita figures. The disaggregated results are: ten versus seven for VSC and ten versus four for SAR. We can conclude that – excluding East Asia and the Pacific region – VSC and SAR tend to have higher GDP per capita than the regional average figures, where SAR seem to fare even a little bit better than VSC. Finally note that the results remain qualitatively un-changed if VSC and SAR are compared to adjacent countries instead of regional averages (see Armstrong et al., 1998). We do not go into the de-tails of the relevant findings, because they seem to be based on much more arbitrary decisions than in the European case.126