What Small Countries Can Teach the World

By Frankel, Jeffrey | Business Economics, April 2012 | Go to article overview

What Small Countries Can Teach the World


Frankel, Jeffrey, Business Economics


In the past, various great powers have taken the stage as models of economic and social development. Examples such as Great Britain, the Soviet Union, Japan, and the United States have had their time in the spotlight that has come and gone as flaws were exposed; and other countries have learned what they did well and what they did poorly. The great powers are not the only models, however. Much can be learned from small countries which are often free to experiment with new institutions and new policies. This paper describes lessons that can he learned from such countries though no one size fits all.

Business Economics (2012) 47, 97-103.

doi:10.1057/be.2012.7

Keywords: economic development, comparative systems, economic policy, economic growth

Why would one look to small countries when in search of good ideas for policies or institutions? It is because history shows that big countries do not have all the answers.

In the past, countries would look to the big powers for inspiration when choosing social systems, development strategies, or specific institutions. In the nineteenth century, for example, Great Britain and its industrial revolution was the model that other countries sought to emulate. Some of its innovations, such as the joint stock company and free trade, are still with us today. Others of its institutions, however, such as the gold standard, did not long survive the end of the century.

1. Large Countries as Models in the Twentieth Century

For some countries that gained their independence in the twentieth century, the Soviet Union became the country to emulate. Toward the end of the century, of course, the socialist model lost its appeal. It became evident to all that Russia and the other members of the Soviet bloc had failed miserably. At the same time, east Asian economies had ridden capitalism to prosperity.

Although the issue of market economics vs. socialism had been settled by 1990, there remained competing models of capitalism. At the time, many thought the lesson of the 1980s had been that Japan's variant of capitalism was the best model and that other countries around the world should and would follow it. The model was said to include such institutions as: strategic trade policy, administrative guidance, relationship banking, life-time employment, collusive industrial groupings (keiretsu), and corporate governance that seeks to maximize the capital stock and long-term market share rather than short-term profits. (1)

As it turns out, there is indeed such a thing as accumulating too much capital. The Japanese model quickly lost its luster in the 1990s as the speculative bubbles of the late-1980s burst and the economy sunk into two decades of stagnation. From this, many drew the lesson that the U.S. variant of capitalism had been the best model all along. The touted institutions included American-style corporate governance: securities markets, rating agencies, accounting standards, generous compensation for CEOs (tied, for example, to options), and pursuit of profitability and share prices rather than sheer size. The United States began the 1990s with military triumph in Kuwait and ended it with the longest economic expansion in its history. Other countries should and would follow the American model.

The American model in turn lost its attractiveness in the decade of the 2000s. Its reputation for competence and integrity took some heavy blows, including the Enron-type accounting scandals of 2001, failing incomes among blue collar workers, the subprime mortgage crisis and ensuing recession, massive budget deficits, the occupation of Iraq and associated failures, and disasters in the Gulf of Mexico.

Where should countries look for a model, now? Some will respond, "China." It is undeniable that the rate of growth sustained by China over the last three decades is a miracle of history. But I find it difficult to think of many Chinese institutions that I would recommend that other countries try to copy [Williamson 2012].

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