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24 February 2018

Small States

Tag(s): Foreign Affairs, Politics & Economics
My wife and I have just returned from holiday in the United Arab Emirates. We visited five of the seven Emirates, staying in four. Our purpose was primarily sun and sand rather than culture and history, but it is difficult not to be impressed with their success in creating an international business cluster in the desert.

The United Arab Emirates used to be the Trucial States, protectorates but not colonies of the British Empire. In 1958 Abu Dhabi discovered oil followed by Dubai in 1966. Abu Dhabi’s reserves proved immense and still account for 89% of its economy. Dubai’s were more modest, now accounting for only 5%, and perhaps its progress is more remarkable as its leaders realised early that limited and relatively modest reserves would not guarantee long lasting wealth unless some of their proceeds were reinvested in sustainable businesses.

So, somewhat like Norway used its North Sea Oil to create the largest sovereign wealth fund in the world, Dubai has become a regional leader in many business circles. What these states have in common is that they are comparatively small, that is in their native population. Their GDP is minor in world terms, but their GDP per capita is world leading. And that is why they can make such strong progress, at least in economic terms, though arguably in many other fields as well.

Again this week I heard some clown on the radio describing Britain as rich because it was a member of the G8 and should therefore have outstanding public services and infrastructure. Britain is not rich in GDP per capita terms and squandered its North Sea windfall on revenue accounts, rather than capital expenditure. Its Imperial history means it feels it must maintain the trappings of a powerful country with nuclear weapons, a space programme and so on. But such expenditure means that there is not enough for public services and infrastructure. The problems of being large countries also affect the new comers on the world stage. China and India also have their nuclear weapons and their space programmes even though both countries are extremely poor in GDP per capita terms.

The top ten countries ranked by nominal GDP per capita are
  1. Luxembourg
  2. Switzerland
  3. Norway
  4. Iceland
  5. Ireland
  6. Qatar
  7. United States
  8. Denmark
  9. Australia
  10. Singapore
Of these only the United States could really be described as large. All the rest have populations of below 20 million; most well below. The United Kingdom comes in at 22nd. The United Arab Emirates is 24th but this covers the poorer Emirates with no oil as well as Abu Dhabi and Dubai. It also includes the large immigrant population which is not permanent but mainly migrant workers. When only the Emirati are considered they rocket up the table.  China is 72nd, below Kazakhstan and above Nauru. India does not appear on this list which is the latest from the IMF for 2017 but on the United Nations List is 144th sandwiched between Sao Tomé and Principe, and Moldova.

GDP per capita is sometimes taken as a measure of the general standard of living. This is clearly rubbish as these big powerful states use much of their GDP on their vanity projects at the expense of the general standard of living. There is no doubt that millions have been lifted out of poverty in China and India but there is also no doubt that many more millions remain in abject poverty.

Britain also suffers in this league table because of its excess centralisation of power and economic activity. Its regions are mainly much poorer. Germany by contrast has little centralisation. Its political capital is a minor town, and its business and cultural centres are well distributed.  While parts of Britain seek independence there is little evidence that they would benefit from this. At present under the Barnett formula there are vast transfers of money from the centre to the regions, particularly Scotland. These would cease if Scotland were to leave the UK.

But in other parts of Europe it might be a different story. One of the reasons for the failure of the EU is it restricts the natural growth of its smaller members. They are trapped in a web of protectionism and idiotic monetary policy that prevents them from growing. The recent moves in Catalonia for independence have been very clumsily managed by both sides politically, but if it were more intelligently managed it could lead to significant economic advancement. So far the Catalan secession makes Brexit look well –planned.

But if this were looked at differently it could be the way forward for much of Europe. Note that in the list above the top five are all European small states, three in the EU and the other two in well-developed trade agreements with the EU. But the larger EU nations are all well down the table: Germany 17th, France 21st, UK 22nd, Italy 25th and Spain 27th. And just to be clear, GDP per capita in Luxembourg is four times that of Spain.

If Europe were based on more powerful regions, and perhaps more nations as well, it could be much more successful. The EU has been centralising power for several decades now and there is not much to show for it.  These regions are already among the richest: Catalonia in Spain; Bavaria in Germany; Lombardy and Veneto in Italy. With goodwill and flexibility in providing access to markets rather than the bad will and revolting protectionism of today’s EU such secessions could benefit everyone.

Lots of smaller states would also encourage diversity, innovation, competition and more experimentation. It is not a coincidence that the richest countries in terms of GDP per capita are all small. Their leaders can focus on the issues that matter to them. Look around the world at the big countries and they are all ungovernable unless autocratic measures are used as in China and Russia.

I started by showing how natural resources had been used in Dubai and Norway to promote wider economic growth. But Luxembourg, Switzerland and Singapore had no such advantages. Some countries in the world complain that they are land-locked and demand access to the sea. Luxembourg and Switzerland are land-locked, have few natural resources and are the two richest countries in the world in GDP per capita. What they are very good at is focusing on industries where they are strong, building great trading relationships; and creating the kind of deregulated, low-tax, free trading economies that are well suited to the 21st century. In a small country it is easier to unite behind a single goal. In big countries the politicians cannot make decisions and therefore do not progress. They fundamentally get in the way.

Matthew Lynn, distinguished financial commentator, put it this way:
“Europe has had half a century of progressively centralising power, and the results have hardly been impressive. It’s been stuck with a moribund economy, mass unemployment, and a dysfunctional currency. It is hard to see how regions splintering away could make it much worse, and they might make it a lot better – by allowing more cohesive states to emerge, and new policies to be tried out.” [i]   

[i] “Europe should let its regions break free” Matthew Lynn MoneyWeek 3 November, 2017

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