Wednesday 20 February 2019

Dan O'Brien: 'Is the post-1945 golden era for small economies now drawing to a close?'

'Donald Trump's anti-multilateralism is a clear and present danger to the global rules-based order, with the WTO system particularly vulnerable.' Photo: AFP/Getty Images
'Donald Trump's anti-multilateralism is a clear and present danger to the global rules-based order, with the WTO system particularly vulnerable.' Photo: AFP/Getty Images
Dan O'Brien

Dan O'Brien

For states and economies, being small has downsides and upsides. Historically, there were more cons than pros for the world's minnows. When raw power determined relations between states, the law of the jungle pertained in international affairs. The bigs called the shots. The smalls got squashed, or darted out of the way if they could.

An argument against Irish independence a century ago was that the new state would become a minnow, vulnerable and alone after exiting the British empire. Then, the rule of international law was in its infancy. There were few rules-based arrangements in international system. The Hague Conventions of 1899 - on the conduct of war - were one of the first agreements to bind countries to rules-based arrangements which curbed their absolute sovereignty.

The catastrophe of the First World War eroded faith in the national sovereignty-based international order. International law would need to expand if there was any chance that such calamitous conflagrations were to be avoided in the future.

The League of Nations - a forerunner of the United Nations - was founded in 1920. The newly independent Irish state was an enthusiastic member, joining almost immediately after attaining statehood. But it all came to nought. Events spun out of control in the 1930s and an even bloodier conflict occurred.

The year 1945 marked a turning point. Globally, the Bretton Woods agreement established the International Monetary Fund and the World Bank. The forerunner of the World Trade Organisation (WTO) was set up. The League of Nations became the United Nations, and though it has always had its problems it has been more effective than its predecessor in enhancing global security and cooperation.

Europe, the epicentre of the wars of 1914-45, went further than anywhere else in expanding the rule of non-national law. An unprecedented era of sovereignty sharing began in the 1950s.

Europe's law-based order has been a win-win for all countries, but small states have benefited most. The Europe of laws has done more to level the playing field between big and small countries than anything else before or since.

Globally, the playing field has also been levelled, via such arrangements as the WTO system. That has led to a lessening of the downsides of small size for states, one reason why there has been a threefold proliferation in the number of states in the world since the 1940s.

The upsides of smallness have also increased. For instance, nabbing just a small slice of the vast and growing amounts of footloose capital sloshing around the world can be transformative for a small economy, as Ireland proves, arguably better than any other country on the planet.

These changes in the pros and cons of being small and relatively powerless show up in measures of prosperity. Among the advanced economies globally, small ones are richer than big ones on average.

But could all this go into reverse? Is the post-1945 era coming to a close? Donald Trump's anti-multilateralism is a clear and present danger to the global rules-based order, with the WTO system particularly vulnerable. A very important moment for that order, incidentally, would be if the Geneva-based system to resolve trade disputes ceases to function because the US refuses to allow new appointments to be made to it, something that could be just months away.

For an Irish and European perspective, the implications of Brexit on Europe's rules-based order needs little elaboration.

But it is not all doom and gloom. Michael O'Sullivan, a Corkonian based in Switzerland, and David Skilling, a New Zealander based in Singapore, know a thing or two about small economies.

Last week they gave a presentation on this very subject at the Institute of International and European affairs (where I work). The Kiwi and the Cork man are more upbeat about the prospects of the world's small and highly globalised economies, arguing that many of their strengths will continue to stand to them and that changes in how the world works may not be as bad as feared.

While they accept that global export growth has been slower in recent years than has historically been the case, foreign direct investment in the world has continued to surge.

The accumulated stock of FDI globally is heading towards 40pc of world GDP, an increase of around one-third over the past decade (see the accompanying chart).

As FDI represents a deeper form of internationalisation for companies than exporting, they are right to highlight it as the indicator to watch on where globalisation is going.

Small economies, many of which have based their economic models on attracting such investment, continue to attract it disproportionate amounts. Ireland, Hong Kong and Singapore stand out in this regard.

On the strengths of small advanced economies, O'Sullivan and Skilling point out that they tend to rank better than big economies in the various measures of competitiveness that exist. Their investment in plant, machinery, IT and human capital also tends to be higher.

All of this is reflected in economic growth-rates. The smalls continue to outgrow the bigs, and they were front-runners in the recovery from the Great Recession and euro crisis of 2008-12.

Small countries are better than the lumbering giants at identifying change, the two economists argue, and as they are more nimble they can adapt more quickly to take advantage of the opportunities and mitigate the costs.

The pair of pro-globalisation globetrotters gave a much-needed dose of optimism amidst the gloom of recent weeks and months, and there are certainly plenty of reasons to be optimistic.

But for this small open economy it is hard to be as upbeat. The US, which is Ireland's biggest single trading partner, is threatening trade wars with friend and foe alike and anti-trade attitudes have hardened across the political spectrum in that country. Britain is drifting into isolation in the North Atlantic. It was confirmed last week that Italy is in recession and another step closer to going Greek, while anti-globalisers are winning more support in elections in many countries across the continent.

These are not happy times for free-traders.

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