Why do so many small economies perform better?

In advanced economies across the world, there is a need to strengthen economic growth and competiveness – at the same time as restoring the social compact.

The economic and financial crisis has made visible several structural deficiencies in the policy models of many advanced economies. The impact of policy choices, globalisation, and technological change, were covered over by growth and debt accumulation over the past couple of decades.

But many advanced economies now face lagging productivity and competitiveness, substantial fiscal and macro imbalances, and poor employment, social mobility and income distribution outcomes.  Addressing these structural issues will require a new generation of policy thinking and action.

Unfortunately, however, much of the current policy debate is limited to short-term growth measures.  Little systematic progress has been made on recasting the economic and social models of advanced economies for the emerging global economy.

Part of this is due to the immediacy and seriousness of the crisis, which requires urgent attention.  But more worryingly, it also appears to reflect a sense of policy fatalism; that the best days for the advanced economies are behind them and that there are few available policy responses.

This sense of fatalism is both dangerous – the risk is that it becomes self-fulfilling – but, more importantly, wrong.  Indeed, there is a group of advanced economies that provides some confidence about the future.

Many small advanced economies – say those with populations of less than 20 million – have performed strongly over the past few decades; they have held their collective share of global GDP constant, have sustained a competitive position that has enabled them to expand into global markets, and have responded effectively to the crisis.  And measures of income distribution and social mobility are commonly better in small countries.

So what have they done?  There is no one model.  But the successful small countries develop deliberate national strategies to engage with the world, build strong public sector capacity, and pursue inclusive growth models.  And the intense competitive realities small countries face mean that they are more likely to continuously adapt and innovate as the world changes – and less likely to run unsustainable policies.  Small countries behave with real seriousness of purpose.

Large countries can learn from this experience; getting the fundamentals right, sustaining international competitiveness through innovation, and emphasising inclusion. Small countries demonstrate that fatalism is not the right response to the challenges faced.  It may not be comfortable, but there is a positive future for those advanced economies that act deliberately.

Leadership is also required from large countries – individually and through institutions such as the G20.  But small advanced economies can provide the ideas, the innovation, and the confidence to move the developed world forward.  It is time to think small to restore growth and competitiveness.

Author: Dr David Skilling is the founding Director at Landfall Strategy Group, a Singapore-based research and advisory firm that works with small country governments.  He was named a Young Global Leader by the World Economic Forum in 2008.

Photo credit: Singapore Skyline, Flickr/Str1ke