Eli5 Why do microstates (Liechtenstein, Monaco etc) have such high GDP per capitas?
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So most of these nations are set up as tax shelters. For example, Lichtenstein income tax tops at 8%. Monaco doesn’t have a personal income tax at all. That’s your reason.
Another interesting observation, however, is that even if not for this microstates would still probably occupy the upper echelon of GDP per capita. Why? Because the lower sample size you have, the higher a distribution you’ll get. America used to give funding incentives to schools based on test performance until they discovered both the highest and lowest performing schools were the districts with the least amount of students. Not because they were necessarily doing anything right or wrong, but because their natural variability was much higher. You see this with all sorts of statistics, such as crime rates. Or suicide rates. Or lottery winners. Or population with a PhD, etc.
They are tax havens, meaning that ultra-rich people and corporations tend to park their money there for financial reasons. The micro-states can pull this off exactly because they are small, so even with almost no taxes they can basically live off the money-parking business and associated activities for rich people and corporations. Larger countries can’t do it because they have too many people living in them, so they really need those taxes.
Also many micro-states that for various reasons didn’t become tax havens are actually quite poor, like a lot of island nations in the Pacific and the Caribbean.
First off there is no need for an expensive military. A single company is going to do as much against a real army as a single squad so why bother with even a company? That saves a fair chunk of taxes and workforce which can more effectively in the economy. Similarly there is less need to invest in infrastructure like highways or railroads. When most destinations are within walking distance you do not even need a car. As for long distance transport you only need to connect to the boarder and have the neighboring country spend all the money building the infrastructure.
This is just the start though. We have established that micronations have less government expenses per capita which means less tax and more money being circulated in the economy. But that lower tax rate then make it an attractive place for people wanting to avoid taxes. If a wealthy French business man wants to avoid taxes he can just move from say Nice to Monaco and only pay half as much tax. But this have the effect of increasing the Monaco GDP and even tax income without actually changing anything. In fact having the businessman move to the city means that he spends money building a house and hiring servants and such which increases the economy. Suddenly the wealth generated by the labor of French workers are being spent in Monaco instead of France. This also allows Monaco to reduce their tax rates even further as they get more tax income. And that attracts even more people who want to avoid paying tax.
Because of their size, much of their output is exported, they don’t need to spend government funds on things like military. Monaco specifically is a tourist destination and place that attracts wealthy people to live there for the lifestyle (and tax purposes).
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