Do small countries do it better?

In development circles, people talk about “countries that are too big to fail and too small to succeed”.  The jury may be out on the former but a new book by Shahid Yusuf and Kaoru Nabeshima, “Some Small Countries Do It Better” dispels the notion that countries can be too small to succeed.

Three small countries studied in the book - SIFIRE (SIngapore, FInland, IREland) – not only grew at high rates but were able to sustain them.

The book – which concludes with a section on implications for African countries – contends that growth recipes for SIFIRE were not tightly bound to the East Asian model of extremely high rates of savings and investment (although arguably, Singapore was in many ways the epitome of that model, thanks to its mandatory savings scheme which led to gross national savings in the neighborhood of 50 percent for decades).

The larger point is that these three countries augmented physical investment with healthy doses human capital and knowledge; by “opening their windows and letting it [knowledge in various forms, for example, that embodied in FDI] stream in”. And even though the book does not explicitly discuss it, they did so without massive infusions of foreign aid. Or perhaps it was the lack of aid that forced them to be nimble, agile, and forward-looking?

What precisely did SIFIRE get right? 

• First was the forging of a consensus on economic direction. 
• Second, learning was deliberately assigned a central role, with innovation as its equally deliberate by-product. 
• Third, SIFIRE harnessed the power of urban networks and creative cities. 

But how replicable are these factors in other small countries? 

Take the forging of a consensus on long-term economic strategies. Singapore and Finland achieved it by the early 1970s (and Ireland a little later). How did these small countries achieve consensus but not many others? In Singapore, it was the vision of literally one man - Lee Kwan Yew – who as legend has it, visited Rangoon in the 1960s and wanted Singapore to be like Yangon! In Ireland, the Fianna Fail government was able to achieve common cause with the opposition. Government played a strong coordinating role in forging links between universities and businesses (for example, Nokia in Finland), and responded to crises in ways that stimulated development: Singapore in the mid-80s, when it realized it wasn’t going to be competitive in low-cost assembly and processing; Ireland’s severe fiscal crisis in the late 1980s which forced it to adopt tax, welfare, and competition reforms. 

But what about the many other countries whose political leadership has bungled responses to crises? And is strong government critical for success? On this front, there is variation even among the SIFIRE countries.  Singapore ranks lowly in many measures of political freedom but Finland and Ireland don’t. And why – despite all the heavy investments made by the public sector in R&D and forging academic and business linkages – has Singapore failed in commercializing its products? I recall when I lived in Singapore in the early 2000s local firms had come up with the pre-cursors to the iPod (mp3 players) and USB flash drive. Yet no Singaporean firm was able to capitalize on these breakthroughs in electronics.

Second, there is no doubt that learning has played a critical role in SIFIRE’s success. As the book notes, that is one of the differentiating factors of SIFIRE: the focus on pervasive, quality education for all and at all levels. All the way from vocational to tertiary, without compromising on quality. In addition to getting teachers and incentives right (as an aside, see this fascinating review of educational outcomes between 1990 - 2010 in developing countries by the University of Minnesota), this begs the question of whether all small countries can be successful in providing quality education at all levels, when many are struggling to even provide basic primary school education. Perhaps the lesson stemming from the SIFIRE experience is that they were able to provide this education at low cost - 6% of GDP in Finland and 3.2% in Singapore (in contrast, many African countries spend as much or more). 

Third, let’s talk about the role of urban networks. As the book says, the “pathway to growth runs through industrial and networked cities”. SIFIRE countries upgraded their urban environments to make them “more appealing to footloose knowledge workers”. And as the book notes, even learning has a strong urban dimension –good universities flourish in principal cities. Singapore is a single thriving mass of dense economic activity. 1/3 of the population of both Ireland and Finland is located in Dublin and Helsinki, and there are thriving secondary cities as well. However these countries operated in environments where social distances were small, allowing for extensive networking.

But take the Pacific islands that are not just small but also distant and dispersed. By any measure, compared to other small countries, Pacific Island countries are far away from centers of populations and economic production. When weighted by population and GDP, the average Pacific island is about 11,500 km from any other randomly selected country (weighted by rest-of-the-world GDP), compared to about 8000 km for small countries in the Caribbean (which has easy access to the large US market) .  

So what can small island countries that cannot reap the benefits of density and proximity do? Some isolated islands have done reasonably well, for example, Mauritius, Maldives, Vanuatu. Perhaps learning more about how these small countries have achieved reasonable levels of growth and sustain development may offer relevant lessons.

Then there are other factors that benefitted SIFIRE: English as a common lingua franca and active diasporas which made it easier for their workers and citizens to plug into global networks. Compare that to the approximately 450 oceanic languages spoken among Polynesians, Melanesians and Micronesians in the Pacific. SIFIRE also benefited in an era of strong and stable global growth, which we can no longer take as a given, at least for the foreseeable future. And as the book notes, SIFIRE faced less competition from China and India. 

The book - deliberately and wisely - does not provide a detailed script or a screen play for all small countries. But the fact that it shows you an appealing, feel-good movie, and that it dispels some popular misconceptions about small countries, makes it more than a worthy read for anybody interested in small states specifically, or development, more broadly.