Small coun­tries’ big suc­cesses

Financial Mirror (Cyprus) - - FRONT PAGE -

Scot­land’s vote on in­de­pen­dence from the United King­dom has spurred wide­spread de­bate about the se­ces­sion of small states, such as Slove­nia and Croa­tia in 1991, or the in­de­pen­dence drive in Spain’s au­ton­o­mous re­gion of Cat­alo­nia. But nei­ther a nar­row fo­cus on the po­lit­i­cal and eco­nomic im­pli­ca­tions for Scot­land and the UK – nor, for that mat­ter, the ref­er­en­dum’s de­ci­sive pro-union out­come – should over­shadow the broader lessons of one of the more over­looked geopo­lit­i­cal trends of our time: the rise of small coun­tries.

Roughly 75% of to­day’s small coun­tries were formed in the last 70 years, mostly as a re­sult of broader demo­cratic tran­si­tions and in tan­dem with trade growth and glob­al­i­sa­tion. Their suc­cesses and fail­ures are more ger­mane to cur­rent dis­cus­sions than, say, the fis­cal im­pli­ca­tions of Scot­tish in­de­pen­dence.

The lessons to be learned from th­ese cases are use­ful not only to new and po­ten­tially new small coun­tries. Rel­a­tively young small coun­tries in Africa, the Caribbean, and the Mid­dle East can also ben­e­fit by ex­am­in­ing the se­crets of Sin­ga­pore’s suc­cess, the causes and ef­fects of Ire­land’s prop­erty bub­ble, and Den­mark’s decision to build strong counter-ter­ror­ism ca­pa­bil­i­ties, de­spite its rel­a­tive safety. In­deed, such con­sid­er­a­tions can help them to chart a path to eco­nomic pros­per­ity and so­cial co­he­sion.

Of course, in learn­ing from one another, coun­tries must al­ways be care­ful to avoid the “folly of imi­ta­tion.” The Nordic coun­tries, for ex­am­ple, have ben­e­fited sig­nif­i­cantly from deeply en­trenched so­cial, le­gal, and po­lit­i­cal char­ac­ter­is­tics that are not easy to trans­fer to their de­vel­op­ing-coun­try coun­ter­parts.

More­over, young small coun­tries must recog­nise that build­ing the in­sti­tu­tions and economies to which they as­pire will take time. In fact, age may well be the most im­por­tant fac­tor in small-coun­try per­for­mance, with per capita GDP in small coun­tries that were es­tab­lished be­fore 1945 some four times larger than in their newer coun­ter­parts.

More es­tab­lished small coun­tries also lead the rank­ings in other met­rics. For ex­am­ple, they oc­cupy nearly half of the top 20 po­si­tions in the United Na­tions Hu­man De­vel­op­ment In­dex.

In gen­eral, older small coun­tries out­strip medium-size and large coun­tries in terms of eco­nomic and so­cial per­for­mance, open­ness to in­ter­na­tional trade, and en­thu­si­asm for glob­al­i­sa­tion – fea­tures that younger coun­tries should work to pro­mote. But small coun­tries’ eco­nomic growth is of­ten more volatile – a ten­dency that younger states must learn to con­tain if they are to pros­per in the long term.

The ques­tion of “large” or “small” gov­ern­ment is less rel­e­vant, de­spite the im­pres­sion given by heated de­bates in large coun­tries like the United States. Over­all gov­ern­ment ex­pen­di­ture is only weakly cor­re­lated with the size of the gov­ern­ment. A bet­ter proxy would be pub­lic-sec­tor salaries – the only area where large coun­tries ap­pear to ben­e­fit from economies of scale. Smaller coun­tries spend more, as a per­cent­age of GDP, on ed­u­ca­tion and health care – another habit that new small coun­tries would do well to up­hold.

In­deed, there is a strong pos­i­tive cor­re­la­tion be­tween the pace of eco­nomic growth and “in­tan­gi­ble in­fra­struc­ture” – the com­bi­na­tion of ed­u­ca­tion, health care, tech­nol­ogy, and the rule of law that pro­motes the de­vel­op­ment of hu­man cap­i­tal and en­ables busi­nesses to grow ef­fi­ciently. Small coun­tries ac­count for seven of the top ten coun­tries for in­tan­gi­ble in­fra­struc­ture.

Add to that mea­sures like the qual­ity of in­sti­tu­tions, suit­abil­ity to thrive in a glob­alised world, sta­bil­ity of eco­nomic out­put, and level of hu­man de­vel­op­ment, and one can gen­er­ate a coun­try strength in­dex, in which 13 of the top 20 per­form­ers are small, with the most suc­cess­ful be­ing Switzer­land, Sin­ga­pore, Den­mark, Ire­land, and Norway. A clus­ter of larger coun­tries is led by Aus­tralia, the Nether­lands, and the UK. Other “re­silient” small coun­tries in­clude Fin­land, Aus­tria, Swe­den, and New Zealand.

To be sure, there is a clear “old Euro­pean” bias here. De­vel­op­ing small states like Croa­tia, Oman, Kuwait, and Uruguay may con­sider ex­hor­ta­tions to em­u­late coun­tries like Switzer­land and Norway to be im­prac­ti­cal.

But a use­ful set of pri­or­i­ties can be gleaned from their ex­pe­ri­ences. Specif­i­cally, small de­vel­op­ing coun­tries should fo­cus on build­ing in­sti­tu­tions, such as cen­tral banks and fi­nance min­istries, that ex­plic­itly seek to min­imise the macroe­co­nomic vo­latil­ity as­so­ci­ated with glob­al­i­sa­tion. They should also ad­vance the rule of law, de­velop strong and ef­fi­cient pub­lic ed­u­ca­tion and health-care sys­tems, and en­cour­age do­mes­tic in­dus­try to em­pha­sise re­turn, rather than cost of cap­i­tal, as their guid­ing metric.

Beyond em­u­la­tion, small coun­tries can help one another through di­rect al­liances. Sur­pris­ingly, very few such al­liances ex­ist, with many small coun­tries – es­pe­cially de­vel­op­ing ones – cul­ti­vat­ing close ties with “big brother” coun­tries or im­mers­ing them­selves in re­gional fed­eral struc­tures. The risk, of course, is that their voices be­come drowned out by larger en­ti­ties, im­ped­ing their abil­ity to do what is best for their own cit­i­zens.

In a fast-chang­ing geopo­lit­i­cal and eco­nomic en­vi­ron­ment – char­ac­terised by chal­lenges like in­ter­est-rate rises spurred by high debt lev­els; com­pet­i­tive cor­po­rate-tax re­duc­tions; chang­ing im­mi­gra­tion pat­terns; and a pos­si­ble slow­down in the pace of glob­al­i­sa­tion – small coun­tries must be able to iden­tify and as­sess risks, and ad­just their strate­gies ac­cord­ingly. In­deed, even with­out full in­de­pen­dence, this is pre­cisely what Scot­land, which has been promised even greater au­ton­omy within the UK than it al­ready has, will have to do if it is to suc­ceed.

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