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Advice on strategic issues for governments

A view from the edge

David Skilling
22 June 2012

Unsurprisingly, much of the global policy debate focuses on large countries and large country groupings. But the centre of the system is not the only place that offers a useful vantage point on global developments. Because of their acute exposure to global forces, small countries also have distinctive perspectives on emerging global trends. So this week’s Observer offer some thoughts on the emerging global environment from a small country perspective.

Life on the edge
Sitting on the decision-making edge of the global economy – and yet deeply exposed to it – gives small countries a distinctive, and highly useful, vantage point on the global economy. Small countries are not the global decision-makers: they are not in the G20 and do not have voting weight at the IMF. But small countries are deeply engaged in the global economy; for example, their share of exports or foreign investment to GDP is 2-3x higher than for larger economies. Because of this greater global engagement, small economies are more exposed to global economic developments; they experience greater cross-border mobility of people, capital, and companies; and changes in the effectiveness or functioning of the international rules of the game can have a major impact. And from a policy perspective, small countries have little margin for error in responding to global challenges and opportunities. Although many small countries have performed strongly, bad policies get punished quickly – as we have seen in several small European countries. In contrast, large countries like the US have more leeway (at least for a time).

So small advanced economies are the canaries in the mine of the global economy. Global forces are much more likely to manifest first, be observed more clearly, and have a bigger effect, than in larger economies. The ‘signal to noise ratio’ of global dynamics is higher in small countries. So the experience of small countries gives a sense of how global developments are likely to impact on larger countries – and the effectiveness of various policy responses to both structural dynamics as well as to shocks like the financial crisis. Even though small countries lack direct influence, they should be a key part of global policy debates because the experiences of small countries serve as a policy laboratory for the world. Indeed, the increasingly strong effect of globalisation on large countries – that is effectively making them smaller – means that the guidance of small countries in navigating this emerging world will be increasingly useful.

Reversing the telescope
So what does the world look like from a small country perspective? My overall observation is that small countries are perhaps a decade ahead of larger countries in terms of the global forces that are being experienced and the issues and policy responses that are being debated. As one example, small and peripheral states and regions were observing powerful agglomeration forces a decade and more ago, even while the flat world argument was being advanced. In terms of more contemporary debates about weakening multilateralism, a fragmenting global order, increased state competition, and greater volatility, these have been small country realities for some time. In response, small countries have been actively hedging the multilateral system by developing new regional and other arrangements for at least a decade; many small countries have been pursuing more prudent macro policies to build resilience against volatility; and many small state governments have taken on a more deliberate role in positioning their economies to prosper in a more competitive world.

Small countries are both more concerned and more relaxed about global developments. They are concerned because of their acute exposures to these dynamics, many of which are genuinely challenging, but also more relaxed because is not new. Changes in the global environment – such as the G-Zero, state capitalism, or increased turbulence – have been underway for some time and small states have been learning how to adapt. It is not an ideal world, but their experience is that it is manageable if it is approached seriously. The policy debate is pragmatic, focused on identifying effective responses to these emerging realities. The policy issues currently being debated in small countries that will likely be on the future global policy agenda include: the shape and scope of new regional networks that will sit alongside existing multilateral institutions; more active approaches to national risk management (such as managing exchange rate and capital market risk exposures); and an increased deliberateness in government economic strategy to strengthen competitiveness (the growth debate has moved beyond austerity v stimulus).

Seeing the forest for the trees
So small states offer a useful, distinctive perspective on global developments. But unsurprisingly the narratives on globalisation are established in the world’s economic and intellectual capitals of New York, Washington, and London – where policy-makers, think-tankers, and media agglomerate. Of courses, voices from these cities give real insight into the centre of decision-making. But it can become monochromatic. The Washington Consensus, Tom Friedman, or Paul Krugman, are not small state voices. And these large country perspectives are likely to have a degree of intellectual home bias, focusing on issues that resonate locally; US commentary about the new global order is commonly framed in the context of the debate about US decline, for example.

The centre is not the only place from which to usefully interpret changes in the global economy, particularly if changes manifest first at the edges of the system. And small countries have a degree of distance from the centre of decision-making, and to this extent may provide a more independent perspective that is less influenced by the conventional wisdom. To understand a rapidly changing world, we should look beyond the centre and consider the views from the edge. One part of this broadening process has been moving from the G7/G8 to the G20, to ensure perspectives from emerging markets. But I’d suggest that it should also involve developing platforms to systematically obtain the perspectives and insights from the small countries that are effectively responding to the challenges and opportunities of globalisation.