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Landfall

Advice on strategic issues for governments

A voice for small countries

David Skilling & Michael O’Sullivan
Singapore Straits Times, 25 April 2015

It has been a challenging, turbulent start to 2015 for many small countries around the world. As just a few examples, consider the shock decision by the Swiss National Bank to remove the peg of the CHF against the euro in January, Denmark’s repeated moves to drop interest rates into negative territory, and Sweden’s fight against deflation. In Singapore, the Monetary Authority of Singapore made a surprise announcement in January to weaken the Singapore dollar. And sluggish global growth was cited in the Budget in March as one reason for lower growth in Singapore.

These are not unrelated events. Across the world, small advanced economies are in the vanguard in dealing with the latest macroeconomic challenge of falling inflation and spillover effects from the actions of the major central banks. More pointedly, they confirm the sense that small open economies are the canaries in the coalmine of the world economy. In this respect their experiences and reactions have much to offer big countries like the US and China, as well as institutions like the IMF and the G20 in terms of lead indicators and policy approaches.

With the world economy still in uncharted territory – globalisation giving away to multipolarity, unprecedented monetary policy and uncertain growth prospects, and geopolitics exerting a greater influence over economics – there are at least three ways in which small countries offer a valuable perspective on what is to come.

First, a more managed globalisation. Increasingly, successful, small open economies – from Singapore to Hong Kong and New Zealand – are being more deliberate about the way in which they engage with global flows. We observe restrictions on migration, capital controls/exchange rate management, and innovation with macro-prudential policy, as a response to challenges from volatile global capital flows, a low interest rate environment and exchange rate pressures. This emerging small country experience is an indication of how other countries will begin to act. This is not a return to protectionism, but it will be qualitatively different from the past two decades.

Second, a more flexible approach to international economic integration and coordination. Although international integration is vital for small countries, the small country experience suggests that universal, one-size fits all policy approaches work less well than approaches that take context seriously. We see that small countries often have different perspectives than large countries on current policy debates such as the nature of banking regulation or tax competition (Ireland), the limits to fiscal stimulus (most small European countries), and on macro-prudential or exchange rate policy (Switzerland, Singapore). Small countries can provide insight into how to balance international cooperation and appropriate policy diversity.

Third, the political challenges of sustained low growth and austerity. From New Zealand to the Baltics (and Singapore), many small countries managed well through the initial stages of the crisis, responding with fiscal consolidation and structural reform – often with broad acceptance from the public. But recent experiences in Ireland, and elsewhere, show that there are social and political limits to this approach – even with the strong institutions and trust that characterise many small countries. These political pressures will become more acute through 2015, and small country responses will offer guidance in how to balance economic, fiscal and political imperatives.

We also suggest that large countries like the US and China can learn from the seriousness and deliberateness with which successful small advanced economies like Singapore are facing up to the challenges they face. Large countries sometimes have the temporary luxury of kicking the can down the road, but small countries show that a greater level of ambition is possible.

In sum, small countries provide a clearer, sharper sense of the economic and political pressures building in the system. Unfortunately, however, many global policy debates are dominated by large country voices. We believe that small countries need to be a more prominent part of the global debate. In this respect, we believe that two things are required.

The first is that existing institutions and platforms deliberately open themselves to small country views. Our sense is that international institutions are moving in the opposite direction. The G20, the self-appointed premier international economic forum, is explicitly based on large countries and is occupying space that was traditionally the place of the multilateral institutions. And as the EU has expanded, the influence of individual small states has waned and in particular the response to the Eurozone crisis has been run out of the major capitals.

Organisations like the OECD and IMF, who do much excellent economic work, could usefully incorporate small economy analysis in a more central way. Deputy Prime Minister Tharman Shanmugaratnam, who has recently concluded a 4 year term as Chair of the IMF’s International Monetary and Financial Committee, noted that he had “tried to create a culture that allowed big and small countries to speak with an equal voice”. More of this type of small country leadership in multilateral institutions will be needed.

Second, small states need to invest in contributing to the global debate – both individually and collectively. Small countries need to demonstrate that they can add insight and value to large country challenges and to global policy debates. They need to get organised, and develop an agenda for discussion and action at institutions like the OECD and the IMF. By generating new ideas and perspectives, a small country voice can provide some market competition for the large state voices that currently dominate. Singapore has a world-leading reputation for policy innovation and leadership in this area. It is well placed to play a role in promoting the ‘small country voice’.

Big countries may make the world go around but small countries have distinctive perspectives on how best to do this. In 2015, the world should be listening to the voice of small states. Singapore – along with other successful small advanced economies – should be continuing to make efforts to engage in the public debate.