Too Small To Fail

Warren Buffett, probably the world’s most successful investor, has attributed much of his good fortune to the lottery of life, tracing it to being born “in the right country at the right time” — namely, America in 1930. Some six decades later, in 1988, The Economist wholeheartedly agreed with a study finding that the US was the most desirable place to spend a lifetime. But as with all lotteries, odds change. Redoing the analysis in 2013, the magazine put the US in the humble 16th spot on the global roster, below Taiwan and just above the UAE. Surging into the top ranks this time around were small countries with populations of fewer than 20 million, such as Switzerland, Singapore, and Ireland.

The Economist had a point. Small countries now make up 11 of the top 15 advanced economies in terms of income per capita. They hold four of the top five spots in the World Economic Forum’s global competitiveness league. And, in 2016, they took 14 of the top 20 scores in the UN Human Development Index. What explains their remarkable ascendance?

Smaller Is Getting Better

According to a 2013 analysis by The Economist, in 1980 the US was considered the leading destination to spend a lifetime. Interestingly, it found that by 2013 the leading destination was Switzerland, with the US relegated to 16th
(Source: The Economist Intelligence Unit)


Crawling Between the Toes of the Elephants

Though there is almost infinite variety among the many small nations of the world, the most successful share certain common attributes, conduct their economies more openly, and rely heavily on foreign trade for their survival. Their economies are more exposed and thus sensitive to new opportunities and threats, making them more alert and adaptable. Their consumers are exposed to a greater variety of new products and their societies are more likely to attract talented immigrants. With this openness tends to come greater tolerance, enabling more level playing fields, often irrespective of gender, religion, or sexual preference, thus creating larger pools of talent.

Since it is their human rather than natural resources that determine their competitiveness, smaller states maintain education systems that better reflect the needs of industry. Teachers enjoy public respect and higher pay, and are better able to work in tandem with parents to develop student skills. The children, in turn, grow up to embrace meritocracy and egalitarianism, not privilege and elitism. They learn at an early age to place more value on the community over the individual, on collaboration rather than rivalry, and on social norms rather than regulations. Not just the universities, but also vocational schools and apprenticeship systems equip them with the skills they
need for a solid foothold in the middle class.

Small countries also draw strength from their historical status as underdogs bullied by larger neighbors. Fifty years ago, newly independent Singapore lost its mandate to host port facilities for Britain’s Royal Navy at a time when its industrial base was weak to nonexistent. Switzerland stood face to face with imperialist giants through most of its modern history, devising survival strategies such as neutrality to head off invasions. Denmark is but a shadow of its former imperial self, having lost vast swaths of territory through diplomatic mishaps and military defeats, but it has rebounded to learn how to do more with less. The Dutch found within themselves the ingenuity to deter the encroaching North Sea and applied it to building a global mercantile empire. The Finns lost more soldiers per capita in World War II than the Americans, the British, and the French combined, but in the decades since have turned this vulnerability into a source of vigilance, flexibility, and renewal.

The World’s Happiest Countries

Several of the world’s happiest countries are in the list of the top 12 destinations to spend one’s life as detailed on page 32. Norwegians are said to be particularly happy thanks to their access to education, enjoyment of cultural freedom, opportunities to attain wealth, and exposure to beautiful scenery
(Source: World Happiness Report 2017)


Along with resilience, these experiences have instilled useful modesty. Hardly a history lesson in Great Britain passes without children being reminded, for good or ill, of its past empire and the exploits of Admiral Nelson or Winston Churchill. France cherishes its legacy as La Grande Nation, while Bismarck embodied the mantra Deutschland über alles. The Chinese characters for “China” mean “magnificent” and “center”, reflecting their belief that the world revolves around Beijing and that countries like Korea and Japan are provincial satellites. In the US, Donald Trump’s potent battle cry “make America great again” helped pave the way to his election. In an increasingly competitive world, modesty often provides a distinct advantage. After all, people prefer counterparts whom they can like and trust.

Greater humility breeds fewer conflicts. Smaller countries have learned the advantages of avoiding geopolitical rivalry on the global stage, thus sparing themselves the hefty cost of military spending and the temptation to demonstrate its results. They have become the virtuosos of soft power, skilled at achieving their goals not by aggression but through negotiation — not coercion, payment, or government fiat. (One notable exception is Israel, a country that has arguably thrived because of conflict).

Large countries tend to approach competition — be it in sport, war or business with a winner-take-all mindset. Yet mutuality brings greater rewards. Small countries have realized the value of mutual respect and collaboration in a changing world, compared with hard-nosed rivalry. To take just the most obvious example, reciprocity is fundamental to trade, allowing both sides to benefit from their dealings. Cooperation rather than domination becomes the key to success.

Counterintuitively, smaller countries often shun the perceived advantages of economies of scale, opting instead for more decentralized systems that instill a greater sense of self-reliance and empower people at the subsidiary level, where costs and benefits of government services are more readily ascertainable. These systems give voice to their citizens, foster the sense of shared community, and even spur domestic competition among government agencies.

There is an even more fundamental grassroots advantage to living in a smaller state. Notwithstanding their propensity for earning higher incomes, citizens of these countries tend to be less avaricious. In fact, the qualities of greed and self-interest are currently undergoing a major re-evaluation by economists. Since as early as the mid-18th century, thinkers — most notably David Hume — have argued that such impulses drive economic progress. But new evidence shows that citizens of smaller nations place less value on money for its own sake than their counterparts do in larger nations, which strengthens societies and economies on the whole.

They also seem to be more willing to sacrifice for the sake of tomorrow. Rather than kicking the can down the road, smaller countries have shown more willingness to embrace long-term problems today in order not to mortgage their children’s futures. Debt levels tend to be substantially lower and concern for the environment stronger. Switzerland leads the world in clean energy production, and Denmark is working toward becoming CO2-neutral by 2025.

We vs. Me Societies
Since the 1960s, traditionally cohesive institutions such as family, marriage, military, and religion have weakened. Harvard political scientist Robert Putnam argued in Bowling Alone in 2000 that we have become increasingly disconnected from one another and social structures — whether the PTA, church or political parties. These loosened or, in many cases, broken bonds have been accompanied by a proliferation of new identities with regard to gender, generation, race, sexual preference, and ideology. It has been popular during the past few decades to celebrate diversity with the steady beat of the old slogan — E pluribus unum, or “out of many, one” — as though its benefits were infinitely linear. But recent events suggest that identity has been blurred, which ultimately begs the question: Who exactly are “we the people”?

Towards Smaller, Nimbler Nation States
These models will only grow in relevance. For most of the past century, many nations enjoyed a win–win environment and grew wealthier from a more efficient global market and the easing of trade barriers. Now, however, according to Gideon Rachman, the foreign affairs commentator at the Financial Times, nations face a more zero-sum world where self-interest assumes far greater importance.

Societies will have to cope with slower growth and do more with less. The haves will come under greater scrutiny and criticism from the have-nots. Studies show that we are far more likely to feel empathy toward those with whom we feel a sense of belonging. In these instances, policies that redistribute wealth find more ready acceptance, as Scandinavia demonstrates. The Danish, for example, believe that taxes are a necessary investment in a better society. Yes, individuals have rights, but in order for the collective to be cohesive, they also have duties. When a sense of belonging wanes, societies might begin to view taxes as an annual punishment for creating wealth and thus an infringement to be avoided — or at least minimized through myriad loopholes. Citizens may polarize themselves between “those who do”, and “those who mooch off those who do”, making it an unwieldy task to devise policies that redistribute income to reduce inequality.

Supranational governance structures like the EU, as well as societies that feel uncomfortably placed in regional groupings that are legacies of an obsolete epoch, may find it more difficult to stay together under these circumstances. If smaller, nimbler, and less heterogeneous societies confer competitive advantages, then there will likely be more of them in the future. Legacy nation groupings burdened with incompatible ethnicity, language, and traditions could experience deepening fault lines, as recent crises in the EU already provide a hint of things to come. The likes of Catalonia, Quebec, Scotland, and an array of ethnic and national groups in the Middle East, for example, will be tempted to push for autonomy or to use such recalibrations to bargain for better social contracts under existing structures.

To stretch the point somewhat, why couldn’t the six million people living in the Miami conurbation join forces with Cubans and Puerto Ricans to create a Novo Havana as a proud vestige of the Spanish empire at its zenith? Why shouldn’t Californians seek independence? Indeed, a vote on Californian state sovereignty has already been slated for 2019. Proponents argue that California is subsidizing other states and would be better off as a separate, nimbler, empowered entity.

While these ‘Davids’ may prevail over ‘Goliaths’, they are by no means utopias. On the contrary, they too are laboratories struggling to deal with complex and challenging problems affecting us all, from climate change to immigration, inequality, pollution, obesity, and terrorism.

Changing Dynamics of State Formation

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