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Landfall

Advice on strategic issues for governments

Managing globalisation: a small economy perspective

David Skilling
21 February 2017, T20 Germany/German Development Institute

There is much to discuss as leaders gather in Germany for G20 meetings: from the sluggish global recovery, to the potential for protectionism and threats to globalisation, and the economic and social challenges and opportunities of technological disruption. Reinforced by changing political sentiment over the past year, there is a growing consensus that the global economy is not delivering the benefits that it needs to across the developed world.

Globalisation in its many forms (flows of goods and services, capital and migration) as well as technology disruption has had a significant impact on labour markets in many countries, in terms of employment, job quality and certainty, as well as the income distribution. These issues need to be addressed with a sense of urgency in order to ensure that the benefits of globalisation are more broadly shared and that the risks are better managed.

The G20 has an important leadership role in providing a platform for developing and sharing policy ideas that respond creatively and effectively to these emerging pressures. In order to fulfil this role it is important that the G20 looks beyond its core membership for ideas to countries that have been deeply exposed to these global dynamics for decades. Specifically, to better understand how to manage the pressures of globalisation, the G20 should look to small countries: the world’s most globalised economies.

Larger economies may sometimes think that small economies are too small to be relevant to them. But as globalisation increasingly makes larger economies smaller – constraining their domestic policy autonomy – the experience of small economies becomes even more relevant. Small advanced economies have been active participants in the intense process of globalisation over the past 25 years, and have been responding to the pressures created by global engagement for some time.

Indeed, small advanced economies, from the Nordics and the Netherlands to Singapore, have been in the vanguard of policy innovation. These countries demonstrate that it is possible to capture significant value from deep international engagement, to ensure that these benefits are relatively well distributed, and also to appropriately manage economic risks and build resilience. These countries have very high export and direct investment shares, have generated strong growth rates, but commonly have low unemployment and good income inequality scores.

The participation of Singapore and the Netherlands, two small open economies, in the German G20 meetings is therefore particularly timely and valuable. These two economies also clearly make the point that there is no single small country model: these two economies have very different tax rates and structures, different economic models, different sectoral mixes, different economic geographies and histories, and so on. And yet they share some common attributes: a commitment to openness and integration, significant investments in human capital and knowledge, and a commitment to ongoing upgrading process (from adult education to supporting the adoption of Industry 4.0).

These two economies – and their small economy peers – provide a clear sense of the challenges and opportunities that come from an acute exposure to the global economy. So what are the lessons from small open economies such as the Netherlands and Singapore?

First, the mode of engagement is a highly deliberate act. These countries recognise that a hands-off approach to globalisation will not be sufficient to generate economic and social outcomes or to ensure ongoing domestic political support for globalisation. Responding to globalisation is at the core of the strategic policy agenda in these countries.

Second, small countries invest significantly in knowledge and human capital at all levels (compulsory education, vocational and university education, as well as lifelong learning). This investment enables more people to participate in the opportunities provided by globalisation and also leads to higher productivity and wages.

Third, small countries have a range of measures around economic risk and resilience – reflecting their high exposure to external shocks at both a macro and sector level. There are a few common themes in the small economy approach to managing economic risk and building resilience: well-developed social insurance, flexible labour markets, active labour market policy, as well as fiscal space to allow for counter-cyclical policy (small economies tend to be fiscal conservatives, partly for this reason).

Fourth, small economies have deliberately set policy to develop positions of competitive strength in the global economy that can support growth. This is done in a variety of ways (low tax rates, high quality infrastructure, human capital, sectoral policy). But the common theme is that small countries invest to ensure that they remain near to the productivity frontier in key internationally facing clusters.

Lastly, small economies place priority on strong institutions, to enable sound, responsive policy-making. Significant investment is commonly made by small country governments in understanding external developments and developing policies to respond. This investment reflects the strong competitive discipline that small economies face, but the agility and foresight that it supports contributes to sustained strong performance.

G20 members clearly have differences from small countries; and some of these policies are hard to scale up (just as large country policy orthodoxy does not scale down to small countries). But this small country experience provides guidance nonetheless. The key insights is the importance of deliberately managing the process of globalisation – policy should not be seen as a binary choice between open and closed, but an intelligent choice in terms of how best to engage.

The Netherlands and Singapore deserve to be at the G20 table on their own merits as successful economies. But the G20 will also benefit from their perspective as small economies that, along with their small country peers, have effectively managed the opportunities and challenges of globalisation.