Latest Articles

Economic Lessons From Small Countries

A recent Credit Suisse study explains, why big countries should learn from small developed countries like Switzerland, Denmark or Singapore. According to the authors, small countries provide a clearer, sharper sense of the economic and political pressures building in the system.

Since the abandoning of the EUR/CHF floor, some calm has returned to markets, though Switzerland may well still have the impression that the world is focused on it. A glance at other small developed economies in the world shows that Switzerland is not alone when it comes to deal with economic challenges, which are caused by big countries or market unions.

The Canaries in the Coalmine

Consider Denmark's repeated moves to drop interest rates into negative territory, Ireland's battle to achieve growth again and surprise rate cut by the monetary authority in Singapore. These moves show that many small countries 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, as is demonstrated in the recent Credit Suisse Research Institute Report. 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.

Globalisation Becomes More Managed

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.

Second, a more flexible approach to international economic integration. Here the small country experience suggests that bottom-up approaches that take context seriously and allow for local experimentation work better than universal, one size fits all approaches.

New Zealand to the Baltics, many small countries managed well through the initial stages of the crisis, responding with fiscal consolidation and structural reform. 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.

We also dare to suggest that large countries like the US and China can learn from the seriousness and deliberateness with which successful small advanced economies are facing up to the challenges they face.

The Advantages of a "Small Countries Club"

A potentially bigger shift in thinking relates to how small developed states regard each other. Historically, the small developed nations of the world have not clubbed together for a range of good reasons – geography, the attraction of large multi-national platforms like the EU, and importantly a lack of awareness of the extent to which international forces affect small countries (this has changed post the financial crisis).

Now much of this is changing and the costs of coordination between small countries are falling. In addition, while many small states are competitors for tourism, FDI and in the area of technology, there are many areas of potential collaboration as well. Vitally, small states and their constituent actors (i.e. central banks, immigration officials, NGO's) increasingly face the same challenges and need to swap notes on how best to deal with these.

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, two avenues open up.

Small Countries Are Losing Weight in the EU

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. For instance, 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.

Second, small states need to invest in contributing to the global debate – both individually and collectively. Small countries need get organised, and develop an agenda for discussion and action at institutions like the OECD and the IMF. Importantly, this would involve small country think-tanks, academics, business organisations and so on, not just small country governments. The focus would be on idea generation, to provide some market competition for the large state voices that currently dominate. Switzerland, uniquely, is home to many world institutions and has a reputation for innovation and leadership in this area. It is thus well placed to play a role in promoting the 'small country voice'.