Size Matters: Why Economic Growth Multiplies Faster in Large Countries
My research team has been studying economic growth for a number of years now. Bryson Bassett, Jose Morales, Madison Poe, Yilin Li and I have been looking at a generally neglected determinant of growth – the size of Leontief multipliers. You can read a fuller description of Leontief multipliers on this very website at: www.samuelcohn.net/multiplier-based-economic-growth
Leontief multipliers identify all sorts of cool determinants of what makes nations rich or poor. They pick up on things that are missed using traditional approaches. We have gotten a number of unexpected findings that I will be sharing on this website. The first finding is in this essay. But first we need to do some setting up.
When most people think about economic growth, they think about the big famous highly conspicuous industries that countries are known for.
How did Britain originally get rich? They had an Industrial Revolution with textile factories. So we stereotype Victorian Britain as being all spinning mills or weaving mills.
How did France get rich? High fashion, wine and culture.
How did Germany get rich? Originally, coal mines and steel. Nowadays, engineering and luxury automobiles.
How did America get rich? We actually got dealt a whole handful of aces. In every historical era, we have had at least one extremely successful industry. We had our own Industrial Revolution with our very own textile mills. Later on, we had steel. When Henry Ford came along, we had automobile factories. If you ask Texans, they will remind you about the importance of oil. Nowadays, we have Silicon Valley, the computer industry, coding software, and providing services on the internet.
All of those stereotypes that people have about growth are basically correct.
All of those super-duper fantastic industries really did bring vast amounts of prosperity to their countries.
But there is another factor that everyone misses.
There is always a second wave of growth that accompanies every development of a successful industry.
Countries differ in how much extra kick they get from the success of their base industries.
This extra kick is called the multiplier effect.
Multipliers were discovered by a Soviet-American economist named Wassily Leontief. Multipliers come in two forms, named appropriately, Type I and Type II – I.
Type I multipliers come from the supplies a growing industry buys from other firms in the economy. In the Great American Automobile Boom of the Twentieth Century, automobile factories needed a lot of supplies. They needed steel and glass for the cars themselves. They needed rubber for the tires. They needed a vast amount of energy to run all of the assembly lines. They needed fabric for the seats. And of course, they required huge amounts of industrial machinery. American corporations provided all of those raw materials and all of that equipment to auto companies. This created substantial spillover economic growth for the American economy. And of course, the suppliers themselves needed supplies. And THEIR suppliers needed supplies. So, the effects of growth kept multiplying and multiplying.
Type II multipliers come from the consumption expenditures of workers working in the new industry. The autoworkers get nice fat paychecks. They use that money to buy food for their families. They use it to get better housing. They use it to buy clothing and cover medical expenses. They might even think of going on a vacation. Since the new hot industry pays better than the old mediocre industries did, the wages the workers get are attractive. Plus, because the new hot industry is expanding, it is employing a vast number of people. All those people spending all those paychecks produces a boom in consumer industries. The grocery stores, clothing stores and local landlords are all getting rich.
Add to that the fact that the grocery stores have to buy groceries; the clothing stores need to buy clothes etc. etc. The increase in consumer purchases produces its own multipliers. So, all of the firms that are either consumer goods makers themselves and providing inputs to consumer goods makers are experiencing a business boom.
Economists can calculate the size of these effects. You would think that looking at the size of multipliers would be something that economists would do – since they tell you which economies are capable of growing or not growing once they get a base industry.
Strangely, very few economists actually do that. This is what led our team to start collecting multipliers, mapping out which countries had big multipliers and which countries had small multipliers, and starting to figure out what caused multipliers to be big or small.
So What Did We Find?
One of the most surprising things we found was that large countries have a natural multiplier advantage over small countries. We statistically adjusted for other factors, following many of the standard arguments in the economic development literature.
After we did that, we found that most of our countries with very small multipliers were very small themselves. Luxembourg had small multipliers. Singapore had small multipliers. Israel had small multipliers. Ireland had small multipliers.
In contrast, Russia had huge multipliers. Brazil had huge multipliers. The United States had huge multipliers. Canada had huge multipliers. Australia had huge multipliers. China had huge multipliers.
It wasn’t a matter of rich and poor. Nor was it a matter of educated versus uneducated. Singapore and Israel are both rich and educated. They both had terrible multipliers. Brazil has average GDP and education. It had huge multipliers. England’s multipliers were about the same as those of Peru. France’s multipliers were about the same as those of Colombia.
It turned out that the issue really was size – as in occupying lots of physical space.
Big countries require a lot of transportation. Small countries use a lot less transportation. The United States, Canada, Brazil, Russia … these are all countries with wide open spaces. If you want to take a product from Chicago to Los Angeles, the truck is going to have to drive across a whole lot of empty prairie. The same applies for taking goods from Moscow to Volvograd. It applies dectuple for taking goods Moscow to Vladivostock. Soybeans grown in Brazil have to be trucked all the way across the Amazon jungle or all the way from the western frontier to the Atlantic coast if they are to be put on a boat to be sent to China.
The big countries all had gigantic multipliers associated with the transportation sector. Every increase in manufacturing or every increase in agriculture required an equivalent increase in trucking or railroading or barges or air transportation to move the goods from their origin to where they would be sold.
Now to be sure, products travel in small countries too. Luxembourg sends whatever products it makes all over Europe. Israeli goods travel to the Middle East, Europe and America.
But most of that travel is outside the borders of the manufacturing country. Luxembourg provides a lot of work for French truckers, Dutch truckers or German truckers. Israel may be putting its products on Greek ships or American airplanes. The transportation work done on behalf of small countries is only partially done by the small country itself.
No German trucker is going to be driving General Motors cars from Detroit to Miami. Travel within American borders tends to be covered by Americans. Trips from the soybean fields to the ports in Brazil tend to be made by Brazilian truckers.
So, in large countries, the transportation companies all make money. This money gets fed into the economy. Furthermore, large countries employ vast armies of truck drivers, airline pilots, railroad engineers, barge captains plus all the loaders and assistants necessary to support truck traffic, air traffic, rail traffic and river traffic. This is a lot of workers earning paychecks. This is a lot of paychecks going to support consumer goods industries.
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So size really does produce economic growth, so long as the growth that is being discussed is of the multiplicative kind.
What else produces high national multipliers?
Watch this website for further developments.