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Credit Suisse: smaller nations can be more equal, but more vulnerable to economic volatility

Small countries can be more equal and efficient than larger countries but are also more susceptible to volatile economic growth, according to a leading international bank.

Small states "have been amongst the economic success stories of the past 20 years", a report by Credit Suisse to inform the Scottish independence referendum said.

Scotland would rank higher than the UK in the United Nations index of human development even without the income from North Sea oil, it found.

Small states tend be fairer with less of the wealth concentrated in the hands of the top 10%, lower individual taxes and higher spending on education and healthcare.

They can be more competitive through specialising in certain economic activities, but this can leave them more exposed to economic volatility in their specialised sectors with a knock-on effect for economic growth, the bank said.

"Small states have been amongst the economic success stories of the past 20 years," the Credit Suisse report entitled The Success Of Small Countries found.

"In a world of free trade, political borders are economically irrelevant and small countries can be as successful as some of the larger ones, that can benefit from a large domestic market.

"We found a negative correlation between size and GDP per capita. This is particularly true for high income countries.

"If we add education, healthcare or intangible infrastructure as measures of success, we find that small countries do proportionately very well.

"Increased specialisation helps small countries be more successful in an increasingly competitive environment. However, we also found that small countries tend to experience higher volatility in economic growth.

"In theory, large countries should benefit from economies of scale. We found that there is a weak correlation between government spending as a percentage of GDP and size.

"The only area where large countries appear to benefit from economies of scale is in public sector salaries, which are probably a good proxy for the relative size of the government.

"Smaller countries spend more on education and healthcare as a percentage of GDP.

"Contrary to expectations, large countries' economies of scale do not accrue to the population.

"Our research shows that large countries tend to have higher tax rates for individuals (by 5%).

"So the cost of funding public services for the individual is higher in larger countries than in small countries.

"This is true in theory also for corporate rates, which are higher in larger countries. But the ability of corporations and multinationals to minimise their global tax bill is evident when measuring corporate tax collections as a percentage of GDP: it is significantly smaller for larger countries.

"In terms of wealth per adult, small countries are just ahead of large countries on average.

"When we sharpen the analysis, we find that wealth concentration as highlighted by the proportion of total wealth held by the top 10%, large countries appear to be more unequal than small ones."

Both Catalonia and Scotland would rank higher than Spain and the UK in the UN's human development index, which measures life expectancy, education and wealth.

"Catalonia would rank 20th globally, while Spain ranks currently 23rd and would slip to 26th ex-Catalonia," the report said.

"Scotland would rank 23rd if we include a geographical allocation to Scotland's GNI related to the North Sea oil output, versus the current 27th place for the UK and the hypothetical 30th for the UK ex-Scotland.

"Note that even excluding any allocation of oil output, Scotland would still rank ahead of the UK, but just so."

SNP treasury spokesman Stewart Hosie MP said: "These comments are very welcome. Using academic data, the report sets out Scotland's potential and how our development rating would outperform the UK - even without oil - following a Yes vote.

"The report also found that smaller countries are better able to 'effectively' and 'cheaply' deliver public services, and most of the small countries mentioned do not have nearly as many of the resources we have here in Scotland.

"This highlights once again that Scotland is perfectly positioned to flourish as an independent nation. We would be able to concentrate on our talents, grow our economy and build a better and fairer society following a Yes vote."

A Better Together spokesman said: "The way to protect our public services is by saying no thanks to independence.

"The impartial experts at the Institute for Fiscal Studies have said that a separate Scotland would face an extra £6 billion in spending cuts in the first few years after a Yes vote. That is half our NHS budget and more than our entire schools budget. It's a huge risk to the future of our children.

"It is a risk we simply do not need to take. We can have what the majority of Scots want - more powers for Scotland guaranteed, without taking on all the risks of independence. It's the best of both worlds."

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