Small countries are the canaries in the coalmine of the world’s economies

Some will argue that Ireland's recent aloof attitude to Greece has been misplaced in that it squanders an opportunity for a stronger, collective push for debt restructuring for small, peripheral states. However, while "not being Greece" is the central tenet of the Government's strategy on the euro zone, perhaps the near-term risk is that Ireland misses an emerging trend that is engulfing other small, developed states.

Consider Denmark's repeated moves to drop interest rates into negative territory, Switzerland's breaking the ceiling between the euro and the Swiss franc and a 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.

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 in terms of lead indicators and policy approaches.

With the world economy still in uncharted territory – globalisation giving away to multipolarity, unprecedented monetary policy and uncertain growth prospects, and geopolitics exerting a greater influence over economics – there are at least three ways in which small countries offer a valuable perspective on what is to come.

First, a more managed globalisation. Increasingly, successful, small open economies – from Singapore and Switzerland 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.

This emerging small country experience is an indication of how other countries will begin to act. This is not a return to protectionism, but it will be qualitatively different from the past two decades.

Second, a more flexible approach to international economic integration. Economic and political integration is increasingly important for small countries given economic turbulence and geopolitical risk. But 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.

Perspective

The small country perspective will become increasingly distinctive in the debate on the future of

Europe

, as well as in other global policy debates such as financial market regulation.

Third, the political challenges of sustained low growth and austerity. From New Zealand to the Baltics, many small countries managed well through the initial stages of the crisis, responding with fiscal consolidation and structural reform – often with broad acceptance from the public. But recent experiences in Sweden 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. These political pressures will become more acute through 2015, and small country responses will offer guidance in how to balance economic, fiscal and political imperatives.

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.

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 multinational platforms like the EU, and importantly a lack of awareness of the extent to which international forces affect small countries (this has changed since the financial crisis).

Now much of this is changing and the costs of co-ordination between small countries are falling. For instance, the EU was a useful vehicle for the likes of Ireland and Denmark when it was smaller and more focused but its expansion to 27 or so states means that they have less power.

In addition, while many small states are competitors for tourism, foreign direct investment (FDI) and in the area of technology, there are many areas of potential collaboration as well.

So while 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, we make two related proposals.

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. The G20, the self-appointed premier international economic forum, is explicitly based on large countries and is occupying space that was traditionally the place of the multilateral institutions.

And as the EU has expanded, the influence of individual small states has waned and in particular the response to the euro zone crisis has been run out of the major capitals. Organisations such as the OECD and IMF, which 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 to demonstrate that they can add insight and value to large country challenges and to global debates. They need to 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.

Big countries make the world go around but small countries have distinctive perspectives on how best to do this. In 2015, the world should be listening to the voice of small states.

David Skilling is director of Landfall Strategy Group in Singapore and Mike O'Sullivan is author of Ireland and the Global Question.