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Global macro & geopolitics from a small economy perspective

Messages from the magic mountain

David Skilling
2 February 2018

The annual Davos meetings were held last week under a deluge of snow. These discussions high up in the Swiss Alps – in Thomas Mann’s ‘magic mountain’ – are always worth following to get a sense of the consensus narrative, as well as what is shifting beneath the surface.

The IMF set the scene with upbeat forecasts for the global economic outlook. Forecast global GDP growth was marked up (again) to 3.9% for 2018 and 2019. Although Ms Lagarde was also quick to urge ongoing reforms, and the IMF Chief Economist noted that ‘the next recession may be closer than we think’, the Davos conversations started with a warm economic glow.

But there was a clear tension between this positive economic story and a complex political environment. A Credit Suisse report prepared for Davos discussed the various political challenges facing liberal democracies. And from Mr Modi and Mr Macron to Ms Merkel and Ms May, leaders delivered speeches on the benefits of openness and the need for policy reform to ensure that gains were more broadly spread (part of the agenda to keep populism at bay, as well as to signal points of difference from Mr Trump).

Mr Trump’s Friday speech at Davos was largely a salesman’s exercise, focused on the strengths of America. He made slightly more positive sounds on trade, to the extent of opening up the possibility of the US joining the TPP agreement. Although, as with much of what Mr Trump says, it would be wise not to take this at face value (as with Mr Xi’s speech on China’s commitment to open globalisation at Davos last year).

Indeed, despite more measured political rhetoric, there is ongoing concern about the rules-based system. During Davos week, we saw both good news and bad. On the positive front, and coinciding with the first anniversary of Mr Trump’s inauguration, an agreement was struck among the 11 remaining TPP members, with final signing expected in March. But then the US took its first meaningful trade action, imposing trade sanctions on solar cells and washing machines. South Korea has already pushed back on this at the WTO, lodging a complaint. And there are several more trade flash points ahead.

So the goal of ‘Creating a Shared Future in a Fractured World’, the theme of the conference, remains work in progress. But in addition to the headlines, another useful set of messages comes from the avalanche of reports that accompany the meetings.

The annual Edelman Trust Barometer is a good place to start. Worldwide, there is still no recovery in trust in a wide range of institutions; and the report documented a collapse in trust in the US over the past year. This matters. As Ian Bremmer picked up from the discussions, ‘Social cohesion has become at least as important as economic and military might in the 21st century’. To this extent, small countries are likely to have a competitive edge. On a wide range of social trust and cohesion measures, small countries score better than many of their larger counterparts.

The Forum also released its Inclusive Development Index, a scorecard designed to broaden out measures of national performance beyond GDP to explicitly include inclusion and sustainability. Of the top 10 countries on the 2018 index, nine were small economies (and 15 of the top 20): Norway, Iceland, Luxembourg, Switzerland and Denmark topped the rankings. In addition to strong economic performance, these countries have low levels of income inequality, high levels of intergenerational equity, and robust environmental performance.

This Index is a useful supplement to the Forum’s benchmark Global Competitiveness Report, which is also routinely dominated by small advanced economies. In the latest edition, released in September, Switzerland, Singapore, and the Netherlands were in the top five (again).

Bloomberg released its Innovation Index to coincide with the meetings. Of the top 10 ranked countries, six were small countries: Singapore, Sweden, Switzerland, Finland, Denmark and Israel. These small countries invest heavily in R&D and human capital, are deeply integrated into global markets, and over-produce innovative firms.

I wrote in a recent op-ed that small advanced economies were well-positioned to capture economic value from disruptive technology and to manage the associated risks. This is an assessment that is consistent with several recent analyses, including some prepared for the Davos meetings, which point to the advantages that small economies have in responding to changes in the nature of industrial production.

So if the world is looking for guidance on how best to manage the economic, social and political pressures associated with globalisation, technological change and other disruptive forces, Davos reminds that we could do worse than look for guidance to small advanced economies. Small countries are deeply exposed to globalisation and, as a consequence, many have done more to position themselves for the challenges and opportunities ahead.

Indeed, small advanced economies continue to out-perform their larger counterparts. Small economies grew at over 3% in the year to Q3, the fastest rate since 2011. They have demonstrated resilience in a challenging post-crisis environment.

For sure, the large countries of the US and China (as well as India this year) got a lot of attention at Davos and are shaking the world. But there is a lot of innovation at the other end of the size spectrum terms of adapting to a changing world. Looking behind the headlines, that is perhaps the message from the magic mountain.

Dr David Skilling
Director, Landfall Strategy Group
twitter: @dskilling

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