I think its sort of obvious that the fewer players you have to choose from then the more limited you might be in general, so I don't think we can dismiss that. Obviously though, you can have every single youth playing lots of football, but if the coaching and facilities are shit then you're still going to struggle, regardless of population size.
For a long time we were doing ok at "unders" levels, then bombing at senior level. The thoughts then were that we were obsessed with competition and churning out big (aggressive?) athletes, which would carry you so far at younger levels... meanwhile the other countries were focusing on technique, such that their players would then catch up and overtake us at senior level. I think there's been a lot of emphasis on addressing that approach in recent years. How successful that has been is debatable... it's interesting that up until this year, the last time we were at a major tournament coincided with the introduction of the pro-youth system....
Personally I think there's a tension between a small country having a decent national team and having a decent domestic league. I don't have the stats, maybe I'm wrong... but I suspect that in order to have a decent national side then in general small countries have their better players playing in the bigger leagues. In an ideal world your Gilmours, McGinns and Tierneys would all still be playing up here, for example. I suppose we're aiming for the sweet spot whereby our bigger clubs up here are still able to provide a decent level of domestic football and be competitive in Europe etc... but recognising the better players will always move on. Fundamentally I think we've got that balance wrong for a number of decades now... to me the problem there is the massive gap in TV money, which allows fairly shit English teams to drain decent talent away from here and for those players to not fulfil their potential as a result.
So overall I think its trying to balance population (pool of players to choose from) vs development vs money. At one end of the spectrum you end up with very few decent players, a poor domestic league and a shit national team. At the other you have a couple of stronger domestic teams, but accept that most of your better players leave for leagues that will develop them further and hopefully benefit the national team.
That all said, fūck the SFA and SPFL. They do nothing for the good of the game up here.