Small populations make it harder to do what Nordic countries do

When you lay out the impressive economic indicators of the Nordic countries, naysayers come out of the woodwork to harp on their small size. These arguments never explain what small population sizes have to do with anything. Apparently it is supposed to be self-evident that smaller countries can do this kind of stuff more easily.

But the exact opposite is true. Small populations should make it way harder to do what Nordic countries do.

Smaller countries are much more reliant on the global economy than bigger countries. One easy way to see this is to look at a country’s exports as a percent of GDP.

Source: World Bank

The Nordic countries export 3 to 4 times as much as the US exports. They have to because their smaller domestic market means that the only way they can grow businesses to any scale is to sell on the global market. If their exports become uncompetitive because of their high taxes and labor costs, then that is a much bigger problem for them than it is for a country like the US, which is less dependent on exports for its GDP.

Additionally, the small size of these countries should also mean that it is a lot easier for people to avoid investing capital in the countries if the economic environment becomes too unfavorable. Companies or individuals looking for places to park their capital can easily afford to skip over the Nordic countries without missing out on much. But it is much harder to skip over the US, again because of its large market size.

Unrelated to its population size, the Nordic countries also face unique challenges owing to their integration into Europe and the EU. A rich person in a Nordic country who is fed up with high taxation can easily slip into lower tax areas elsewhere in Europe. Immigration from one country to another is not very difficult. The same is not true of the US where disgruntled rich people have a much harder time emigrating elsewhere than their Nordic peers.

What’s so remarkable about the Nordic countries is that they manage to pull off their systems despite the considerable handicap of small populations and small market sizes. Despite all the pressures being small puts on having lower wages and lower taxes in order to remain competitive, the Nordics consistently post the highest unit labor costs in Europe and highest taxes in the developed world. Yet they flourish.

Small Hacks

Of course, there are ways in which smallness can help countries take advantage of other hacks to boost their economic indicators.

For instance, if a country is nothing more than one big city (a city-state really), then that country will end up with juiced economic statistics because their country will lack the lower-productivity rural populations that bigger countries inevitably support. This is what you see in Singapore and Luxembourg, but this is not what is going on in the Nordic countries. All have very significant rural populations, with the exception of Iceland.

A small country can also wind up with inflated economic statistics if they happen to sit on a natural resource bonanza that, when divided across the small population, ends up juicing the per-capita economic indicators. This is what you see in the United Arab Emirates. But this is not what is going on in the Nordic countries, with the exception of Norway to some degree. Despite having no special natural resource bonanza, Finland, Sweden, and Denmark keep posting outstanding economic numbers year after year.

Finally, a small country can inflate their economic statistics by operating as a big tax shelter. This is what you see Ireland doing in the last few years, which allowed the Irish to post GDP growth figures of 26% in one year, almost all of which came from facilitating corporate inversions where companies take advantage of tax sheltering laws to technically relocate much of their activity in Ireland (this is a sham relocation in reality, as operations are not actually moved into Ireland in any meaningful way). None of the Nordic countries take advantage of this particular small country hack.

Overall, the Nordic countries, despite having smaller population sizes than the US, operate just like any other normal developed country. Their economies are dominated by service sector employment. Their countries have large urban, suburban, and rural populations. They aren’t generally exploiting natural resource windfalls or tax haven statuses. They really are for the most part just typical countries with typical economies.

The fact that the Nordic countries succeed year after year despite the handicaps their small sizes impose on them and despite not taking advantage of any of the small-country hacks is genuinely impressive. Their success suggests that the US, with its much bigger size, should be able to push the egalitarian envelope even further than the Nordics have without risking overall prosperity.