Into the next decade for small economies
Morgan Stanley’s Ruchir Sharma had a recent piece in the New York Times arguing that small is ‘the new big thing’ in the coming decade. Specifically, he argued that ‘If the 2010s were a golden age for the world’s largest economy and its mega-corporations, the 2020s are likely to be remembered as the decade when smaller was beautiful again’. Although his definition of small is more expansive than mine, the basic point is that there is a lowering of the centre of gravity in the global economy – including from large to small economies.
This is a marked contrast from gloomier commentators, such as the FT’s Janan Ganesh, who have argued that the ‘belle epoque of the small state’ is over because of a weakening of globalisation and resurgent big power geopolitics. This argument rests on a view that strong small economy performance was contingent on an unusually supportive global environment over the past few decades – and that because this environment is changing, we should expect weaker performance from small advanced economies.
However, my assessment is that the strong performance of small advanced economies has been due to good management (good policy choices) as much as it has been to the good luck of a supportive global environment. Small economies over-invested in skills and innovation from the mid-1990s, as well as creating strong business environments, enabling them to capture economic value from globalisation, technological progress, and so on. And they have frequently done so in a way that has allowed for the benefits of growth to be broadly distributed (note Borge Brende’s recent piece on the Nordics).
Even small economies like Singapore and Ireland that are used as poster-children for the benefits of intense globalisation have prospered because they have made high quality strategic policy choices with respect to positioning of their economies. They were not simply passive beneficiaries of globalisation.
The institutional and intrinsic strengths of small advanced economies position them well to out-perform even in a more challenging and complex global environment. Indeed, the historical record of the past two centuries indicates a high measure of small state resilience to meaningful economic and political shocks.
But although the claims of the death of the small economy model are much exaggerated, neither do I think that there is anything much new in Sharma’s claim that small is beautiful. Small economies have had a relatively strong decade since the global financial crisis. Despite the deep crisis experience of many small advanced economies, from Singapore to Ireland, many small economies recovered strongly. Small economy GDP growth rates have consistently out-performed those of large advanced economy groupings such as the G7 and the OECD over the past decade (and indeed, the past few decades).
Of course, some small economies have had a bad decade – perhaps most obviously Greece. This was largely due to poor policy choices over a sustained period. Indeed, Greece is now recovering strongly on the back of better policy choices.
This strong small economy growth was despite sluggish word trade growth, as well as the headwinds from QE in large economies that has placed sustained upward pressure on small economy exchange rates. This out-performance has continued over the past few years of more intense trade frictions, geopolitical tension, and so on. Although small advanced economies are deeply exposed to these global dynamics, they have not been disproportionately impacted. So the notion that the past decade was dominated by larger economies and that small is only now becoming beautiful again is not quite right.
Large powers are certainly throwing their weight around much more, and the open, rules-based multilateral system is weakening. This will likely continue, with strategic rivalry between competing political blocs becoming more apparent.
But while a focus on the large powers – the rise of China, the post-crisis behaviour of the US and Eurozone – is understandable, but these are not the economies that have generated the best outcomes. Indeed, many larger economies face a range of significant economic and political challenges.
In contrast, many small economies have strong political and social institutions, have firms with strong competitive advantage in global markets, and have been investing to respond to emerging challenges and opportunities from disruptive technologies to climate change. There is variation, and some will do much better than others. But as we look ahead into the 2020s, many small advanced economies are well-positioned to perform.
From a policy perspective, the answers to many of the pressing political questions – inequality, social cohesion, the future of work – will not come from the G20, as much as from the leading small advanced economies (the ‘g20’), as well as new small state groupings such as the ‘Hanseatic League 2.0’. The competitive discipline imposed by their deep external exposure creates an imperative for innovation: indeed, small economies lead in integrating open, flexible economic models with inclusive growth.
And from an economic and markets perspective, expect small economies to generate stronger outcomes on a sustained basis. If my 13-strong small advanced economy group were regarded as a single economy, it would be larger than Japan at around 6% of global GDP – only behind the US and China. It is this part of the global economy that has strong social and political institutions, high-quality policy-making capacity, and a track-record of agility and flexibility that has contributed to dynamism and resilience. From Taiwan and Ireland, to the Netherlands and Switzerland, put your money on the Davids rather than Goliaths of the world.
Of course, the behaviour of large economies will have an impact on smaller economies. But it is better to be a well-managed small economy in a more challenging external environment, than to be a large economy that is facing deep domestic challenges. Across geographies, from Asia to Europe, smaller economies will be better able to respond to a disruptively changing world. Small will continue to be beautiful.
Dr David Skilling
Director, Landfall Strategy Group
twitter: @dskilling