Tuesday, December 4, 2012

Breakup and Optimal Size of Countries

Gary Becker and Richard Posner develop stimulating analyses here.

Becker notes that:

“Political interest groups tend to be less able in smaller countries in distorting political decision in their favor. This is partly because smaller countries are more homogeneous, so it is harder for one group to exploit another group since the groups are similar. In addition, since smaller nations have less monopoly power in world markets, it is less efficient for them to subsidize domestic companies in order to give these companies an advantage over imports. The greater profits to domestic companies from these subsidies come at the expense of much larger declines in consumer well being.”

But there is another, more important, economic reason for that. In small countries the ratio of lobbying expenses to the market access that regulations control is much higher than in very large countries. In Europe, for instance, as centralized regulations replace national ones, the cost of lobbying the regulatory authorities is divided by 27 (the number of countries in the European Union). With such a fall in the lobbying costs, the volume of lobbying at Brussels can explode. Interest groups that previously could not be created and run efficiently and lobby (because of the cost implied; see Olson) now can enter the lobbying market profitably. Rent seeking increases accordingly as I explain in my recent book "Euro Exit". 

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