Very Small Countries: Economic Success Against All Odds

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The main aim of this study is to analyze public sector organization and public sector problems in very small countries. Economic theory predicts considerable economic disadvantages for very small countries. We can show empirically that smaller countries have on average higher public expenditures. Especially very small countries have however developed strategies to cope with this disadvantage. We analyze these strategies thoroughly for a set of high-cost public goods and detect «international outsourcing» as a workable organizational choice. Furthermore, we try to single out factors that can explain the growing number of small and very small countries in the world. Indeed small countries are – contrary to theoretic predictions – not worse off in terms of per-capita income. The benefits from sovereignty and law-making authority combined with a certain extent of international neglect are promising economic explanations for the success of very small countries. Beyond very small economies our results provide general insights on the organization of public good provision and on regional integration.