In Praise of the Small States

FEATURES | June 17, 2013     

In Praise of the Small StatesStrategic coherence and ruthlessness are allowing many smaller countries – from Singapore to Israel – to succeed in turbulent times

Decision-makers in the 21st century should not be seduced by scale. With growing competition between the US and China and calls for tighter European integration, it is often said that the world is moving into an age of big powers. But this obscures as much as it reveals. The global process of 100 years of political-strategic fragmentation, which has issued in an ever-growing number of smaller countries, will continue. These smaller countries are likely to be better able to navigate the increasingly complex, turbulent global environment of this new century. And while new regional and other groupings will emerge, the ongoing lowering of the decision-making centre of gravity will, alongside the transfer of power from West to East, be a defining feature of the emerging global system.

To be sure, the performance and prospects of the US, China and the Eurozone have and will, for the foreseeable future, continue to have a substantial effect on the rest of the world. The decisions of Washington, Beijing and Brussels set the terms of the global debate on issues ranging from monetary and fiscal policy to progress on trade and climate change negotiations.

In the developing world, scale is a particularly dominant feature: consider China and India with their billions of citizens, and also the rapidly growing large countries like Indonesia, Brazil and Nigeria. The growth of these countries is changing the face of the global economic, political and strategic environment. Not surprisingly, scale is reflected in new international groupings, such as the BRICS and the G20, that convene the large economies on the premise that they are sufficiently – although, granted, imperfectly – representative of global problems, and therefore the proper locus for solutions to these problems.

Of course, scale has always mattered. In a G-Zero world in which classic multilateralism is fragmenting and weakening, and in which there is intensifying competition between new sets of major powers, smaller countries have less institutional protection. Claims are therefore regularly made to the effect that there is safety in numbers: President Barroso of the European Commission recently argued that “in a world of giants, size matters” – the implication being that tighter European integration is needed for Europe to succeed and to remain relevant this century.

So is ours necessarily a world of giants, with just a few nodes of economic and political decision-making? Do countries need to be big to survive and prosper? The short answer is no. Although it is certainly the case that large countries exercise considerable influence, a preoccupation with large scale obscures as much as it reveals. Large countries matter and can act to shape the global system, but it is small countries that are best equipped to adapt and prosper.

To see this, it is instructive first to consider some history. A century ago, on the cusp of WW1, there were fewer than 70 independent states. The global order was dominated by empire. Since then, there has been an ongoing process of increase in the total number of countries. The unwinding of colonial arrangements and then the end of the Cold War brought spikes in the number of countries. Today, there are close to 200 countries. (The UN has 193 member states.)

Small states, in the meantime, have been the clear beneficiaries of the relative openness and stability of the international system over the past several decades – including the absence of direct war between the major powers. The expansion of a global, rules-based order has helped to remove an important source of disadvantage for these small countries – the caprice of the powerful – thereby enabling them to access international markets. The result is that small advanced countries have been the manifest winners of globalization, and are well represented at the top of economic and social rankings.

To be sure, there are powerful economic and political forces at work that are changing the shape of the global economic and political environment. Frictions around globalization and the weakening of the multilateral system together create new challenges for small countries in accessing markets and advancing their interests. Such turbulence commends itself to the proposition that the larger states are better placed to absorb different species of volatility. The recent global economic malaise, for instance, has provided many examples of small states, from Iceland to Cyprus, that have been hit hard. Small states suddenly look particularly exposed relative to their larger counterparts. Indeed, history suggests that periods in which international openness retreats and instability increases favour the survival of a restricted number of larger economic, political and strategic units.

So will there be ongoing centrifugal pressure, resulting in an increasingly distributed world and a lower centre of economic and political gravity? Or will there be a process of agglomeration, with the balance shifting to the large countries and groupings?

To answer this, it is important not to over-interpret the implications of recent changes in the international environment. For one thing, globalization is not reversing. The global economy is more difficult to navigate – particularly for small countries – but there is no return to protectionism. Small countries are still able to expand beyond their borders in the context of a rules-based system. Similarly, the international political environment is changing, but remains recognizable. And war between major military powers – China, the US, Russia – while certainly not inconceivable this century, is far from an immediate concern. In the context of a ‘hot’ theatre like Syria, for instance, proxy projects and militias aside, these major powers are deliberately avoiding direct confrontation with one another.

Indeed, we might say that the strong performance of small countries over the past decades has not been due principally to the particular features of the prevailing international environment, and is therefore not particularly sensitive to changes in this environment. Rather, the performance is due, above all, to the distinctive characteristics of small countries, which we take up below. And these characteristics will likely again be determinant in the ability of many small states to negotiate the challenges and opportunities of the emerging environment – even if the challenges may appear to disproportionately impact the small states. As a result, in this early 21st century, for every Cyprus, there is a Singapore, Switzerland, Finland and Israel – small, advanced states that continue to excel and impress.

To understand this success, we have to look to three distinctive aspects of small state composition and behaviour: their largely consensual political economy; their strategic coherence; and, finally, their competitive discipline.

Political economy: Small countries tend to have higher levels of social capital and trust, which enable them to reach political consensus around a strategic policy direction. There is commonly a greater sense of shared purpose in small countries, which makes it easier to set policies in a way that reflects local preferences. Social consensus allows governments to make the required actions to respond quickly and flexibly to shocks, and also to take the actions that are required to sustain competitive advantage. Witness the nimble response of many small countries to the effects of the global financial crisis: in many cases, they demonstrated a superior capacity to make hard decisions involving the allocation of losses and risks across society. In contrast, the more complex, heterogeneous large countries often struggle to deliver the sustained political consensus required to achieve structural reform and fiscal consolidation (witness the ongoing fierce, divisive and, for now, indecisive debates in this regard in the US, Britain and France).

Of course, it is worth noting that political decision-making in small countries also tends to be more streamlined and less complex than in large countries – not least because the overall machinery of government is smaller and simpler – allowing for quicker and better integrated decision-making.

Strategic coherence: Casual examination of small-country policy approaches shows that there is no single policy template at play in every country. Successful small countries deploy a wide range of policy models – compare, say, Singapore and Hong Kong with the Nordics. Outside of a preference for conservative macroeconomic policy, a stronger external orientation, and investment in knowledge, there are few systematic differences with large countries. However, small countries tend to be characterized by a sense of deliberate, coherent national positioning aimed at identifying a distinctive competitive posture and aligning a range of policies and a structured portfolio of relationships in support of this posture.

The strong performance of small advanced economies over the past few decades is, as such, due less to policy specifics than to this ability to position themselves effectively in response to the challenges and opportunities of globalization. The successful countries are those that have a clear sense of their specific competitive advantage, and invest deliberately in support of this advantage. This clarity – on occasion, ruthlessness – of strategic focus is much easier to obtain in small countries than in larger countries that are more diverse and complex, and that tend to focus on broad macroeconomic policy rather than on delivering a coherent competitive strategy.

Similarly, in the political space, small countries in increasingly contested environments – for example, in East Asia – are responding by investing in regional institutions, as well as by deliberately (promiscuously) developing and maintaining relationships with a variety of partners. At the same time, small countries can sometimes benefit from being ‘below the radar,’ because they have little ability to threaten or directly shape the regional or institutional order.

Competitive discipline: Small countries have a demonstrated capacity to adapt quickly to changing circumstances in ways that enable them to maintain competitive advantage. This is partly due to the greater exposure of small countries to the external environment: the much more limited margin for error creates both a need and a pressure to respond quickly. This competitive discipline can be uncomfortable, and can on occasion lead to spectacular blow-ups. However, it also means that poor policies are less likely to be sustained in small countries. Small countries face pressure to adapt to new opportunities and risks in a timely manner. They have to be serious, as it were, because the felt consequences of failure may, in the extreme cases, be existential in character and magnitude. In contrast, large countries have greater ability to continue with poor policies, as the consequences of such policies may take a long time to acquire an existential character or magnitude – if they ever reach this threshold in the first place.

The exposure of small states may look like a weakness, but over time is a source of advantage that leads to better outcomes. Small countries recognize that they need to adapt to the world, rather than expecting the world to adapt itself to them – a mindset that is sometimes seen in large countries (what George Kennan called “the hubris of inordinate size”). As a result, small countries are far more focussed on the international environment, and on doing things as well as possible. This leads to a greater degree of policy experimentation and innovation – policy promiscuity, as it were – in small countries. Indeed, it is the smaller economic and political units that set the standard in terms of policy innovation in many areas, from central bank independence and public sector management reform to free trade agreements.

Overall, of course, small countries are confronted with a more challenging and complex international environment. This much is uncontroversial. Small countries have exposures that are typically more acute than those of larger countries. However, the characteristics of small-country political economy, the strategic coherence of policy-making in small countries, and the responsiveness of small countries to external changes and shocks, together give them an ability to respond effectively. Small countries have economic and political systems that allow them to be purposeful, responsive and flexible. In a world of turbulence and complexity, this small-country strategic agility is likely to be increasingly valuable – and hard for larger countries to replicate.

All of this suggests a more complicated story than the inexorable shift in the global system toward larger countries. Many small countries seem to be adjusting and performing well. Although there have been some high-profile small country failings – most recently, for instance, Greece and Cyprus – these instances should not be overplayed as evidence of a systemic small-country problem. Instead, the balance of evidence suggests that small countries are continuing to get their fundamentals into shape, investing aggressively (often counter-cyclically) in research and innovation, growing into new export markets, and positioning themselves in the vanguard of new trade arrangements.

If anything, it seems that large countries are struggling to adapt themselves to new economic and political realities. Large countries are finding that they have less policy autonomy and marge de manœuvre. Established powers are experiencing the need for a measure of power-sharing with emerging large countries. And globalization is reaching further inside large economies, impacting many more people and sectors, and ultimately leading to fewer degrees of domestic policy freedom. Larger states are under ever-increasing pressure to decentralize or even federalize: the number of federal states in the world today numbers between 25 and 30, representing about 40 percent of the global population. Decentralized or federated policy units then begin to assume some of the vaunted characteristics of smaller states.

As mentioned, the failure of large countries to fully adjust may take some time to manifest, because problems can remain hidden longer in large countries, and these countries have more policy levers – particularly in fiscal and monetary policy – at their disposal to compensate in the short-term. But without adapting to this new world, the medium-term performance of larger countries may be compromised.

For their part, the attributes of small countries suggest that there is good reason to expect that many small countries will continue to perform well. The international system is not on the verge of a reversal of the century-long process of decentralization. Being small, with policy autonomy, will continue to be an attraction. This continuing attraction is evident in many contemporary debates, such as the debate in Europe about retaining domestic policy autonomy rather than moving to a more integrated, federal model, as well as in the ongoing independence movements in Scotland, Catalonia and elsewhere.

To be sure, there are certain dimensions according to which scale matters, and matters a great deal – perhaps increasingly so: consider security, foreign market access, exchange rate arrangements, and global negotiations on trade and climate change. Of course, in war, large countries are more likely to survive strategic onslaught than their smaller counterparts, and are more likely to dictate terms post bellum. Still, for most small countries, the advantages of scale can be adequately achieved through participation in regional groupings (and alliances) – all the while retaining local policy autonomy on other issues. Indeed, smaller countries are some of the most active participants in these regional groupings: consider the small countries in Europe continuing to line up for Euro membership.

Small-state activism suggests that regional groupings may well grow and strengthen over time. A reduction in the number of independent currencies seems likely before long. Yet while the large groupings will not disappear, the number of effective decision-making units will continue to increase. This will make for a more distributed system of decision-making, with a diversity of policy approaches, rather than a model comprised of just a few nodes of decision-making. This may lead to a messier international system, but it has some advantages: greater competition, more policy experimentation and innovation, and more resilience precisely because of the diversity of national policy approaches. As such, the pressure for universal global solutions should be tempered by an appreciation of the benefits of a distributed model.

Of course, what large countries do will continue to matter – for better or worse. The behaviour and performance of large countries has a major impact on all countries, and it is the large countries that exercise overwhelming influence on the shape of the global system. Being at the table, and being in a position of power, is a source of national advantage. Small countries in Asia can do little directly when their interests are threatened by China’s expansion – just as small economies are limited in what they can do in response to the massive monetary easing in the US, and smaller regional states, from Georgia to Armenia, are easily buffeted, in strategic terms, by decisions made in Moscow.

Nevertheless, national decision-makers should not be seduced by scale – for, alongside the benefits of size, there are important diseconomies of scale that impact negatively on the outcomes that large countries are able to generate. Even as countries try to project a larger presence internationally, care should be taken to fully capture the benefits from distributed policy-making at home in order to ensure economic dynamism and political sustainability. The decision-making that drives competitive advantage and quality of life will best be undertaken at a more granular level.

There is much talk of the shift of power from West to East, and from the state to various non-state actors. But the shift of influence from large countries to small countries should not be underestimated. Small countries may not wield raw strategic power, but as an organizational form that is well-suited to this new world, they will become increasingly influential nodes of leadership in the international system as a consequence of the superior outcomes that they generate.

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David Skilling is Director at Landfall Strategy Group, a Singapore-based research and government advisory firm.

(Illustration: Gary Taxali)

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