The Curse of Size and Countries

Some months ago I wrote about the curse of size for companies. I’m convinced I saw more diseconomy of scale than economy of scale during my career. Plusses from scale come in the form of lower cost in things like manufacturing and greater brand heft. Minuses come from slow moving processes and loss of spirit. I believe that now the age of mass production is past the minuses usually outweigh the plusses.

Yet companies strive to get bigger and bigger, swallowing each other up and expanding ruthlessly. Most of this is because growth is usually good. Ideally, companies should grow and then sub-divide, like some sort of cell. But they don’t, mainly because bosses like the power and kudos that scale gives them and won’t voluntarily relinquish it. I am surprised that markets don’t more frequently force the issue.

Anyway, thinking about optimum size for a company got me pondering the same question for a country. What is the ideal population size for a country? Or are GDP or geographical size better measures?

There may be an optimum density of population, which is bigger than Russia’s and smaller than Singapore’s. In the former case, logistic and time zone costs are horrific and in the latter, growth is eventually constrained by land availability. Then again more land means more scope for natural resources, and less creates scarcity which can drive up rents. This is not simple.

The number of countries in the world is increasing. In the last 25 years, we have added all the states from former Yugoslavia and the USSR, and Slovakia too. Germany went in the other direction. East Timor split from Indonesia, and now it looks like Sudan will split too. Rumours persist that Belgium may be next, with what sometimes appear insurmountable problems in forming a sustainable government. Quebec might separate one day, perhaps even Scotland and Wales might as well.

The fissuring of states is driven by people, not governments. People of one ethnicity or religion want to divorce from those of another, usually when one side builds a grievance after decades of perceived discrimination. Driven to its conclusion, this trend could lead to a world with very many countries indeed. Working against the trend is the age of mass migration, where many countries become a hotchpotch of ethnicities learning to appreciate each other. Yet the trend may play out over more generations before stalling, as people exert more power. For example, if what we see in Egypt today spreads further in Africa, it could have longer lasting consequences than the break up of Sudan.

Over the centuries, size has implied military might, and countries have used this might to grow by acquisition of empires. There seems to be a point where diminishing returns set in, just as with companies. Remote provinces become costly and ungovernable, while people get spoiled from their years of superiority. It happened to Egypt, Greece, Rome, France, and England. Will the USA be next? They certainly show warning signs. The military ventures to ever less hospitable places. Obesity must be a symptom of being spoiled, as is a persistent trade deficit. Obama calling on the sputnik moment last week is unlikely to turn the tide on its own.

But there seems to be another way to win. Look at Hong Kong, Luxembourg, Monaco, even Switzerland. These are small countries which get away with parasite type behaviour, often in financial matters. Smallness is essential, as you have to be insignificant enough to not draw a reaction from others. But it is inherently risky, especially if they try to get too clever. Iceland and Ireland spring to mind. Much though the parasite model is a bit distasteful, you have to admire Switzerland especially for getting away with it for so long. You don’t meet many poor Swiss.

The very biggest can get away with bad financial behaviour too, of a different kind. Only because the dollar is the reserve currency of the world can the USA run the deficit it does. If China were smaller and less important, their currency policy would have come under more pressure as well.

What about at an individual level? Do we feel happier if we belong to a giant or a mouse? Here again the evidence is mixed. How the USA, with its scale and diversity, can maintain and exploit its national pride is a minor miracle. Then again, a country like Ireland can maintain an identity through its smallness. I know from experience that you are more warmly welcomed in almost every country in Europe when carrying an Irish passport compared with an English (British) one.

So, there seem to be a lot of pros and cons whichever dimension you choose. As with companies, the winning strategy must be to choose a positioning to fit your strengths and then stick with it. Perhaps someone could define a model. How about China as operational excellence, Finland as product innovation and Switzerland as customer intimacy? Instead of developing that, I’ll settle for making some predictions.

First, the number of countries will continue to grow, maybe at an accelerating rate. In one way, this is sad, as it will only be when we learn to live with each other that we can spend less global GDP on guns and more on innovation and facing global challenges like climate change. But more countries doesn’t have to mean more wars, so long as we become more educated and wealthy too, and learn the benefits of cooperation.

Second, the USA will struggle. Its politics become ever more dysfunctional, while its people fall behind in education, fitness and attitude. However, problems will emerge in China and India too, with sheer size becoming even more of a challenge as inequalities deepen.

Finally, if you were to be born today and have the luxury of choosing your country, you could do worse than choose Switzerland. Plus ca change.