Working Paper Spotlights Innovative Public Programs in Small Countries

April 19, 2012
by Doug Gavel

Many public sector reforms that are the most worthy of emulation come from small countries. That is the premise of a new Harvard Kennedy School (HKS) Faculty Working Paper authored by HKS Professor Jeffrey Frankel.

In "What Small Countries Can Teach the World," Frankel examines some of the most unique and effective public sector innovations that have emerged from Wellington, Santiago, Gaborone, and other relatively obscure places -- from inflation targeting in New Zealand to labor market reforms in the Netherlands.

"We are accustomed to looking to large countries for innovations that push out the frontier of governance," Frankel writes. "But some smaller countries, and countries on the periphery, have experimented with policies and institutions that could usefully be adopted by others.

"Small countries tend to be trade-dependent, and open to new ideas. Countries that are small, newly independent, remote, or emerging from a devastating war, often find it easier politically to institute radical reforms, than in the US or other large established countries. Not all the experiments will succeed. But some will. Those innovations that succeed may be worthy of emulation by others," he says.

Frankel examines several innovative ideas and programs emerging from small countries, including:

• The banking structure in Canada, which has contributed to stable housing and financial markets;
• Chile's fiscal institutions designed to promote a countercyclical budget, which ensures that the nation doesn't overspend during boom years;
• Tax reform in Estonia, where a flat tax was instituted in 1994, followed by other small countries in Central and Eastern Europe;
• Low corporate tax rates instituted in Ireland, which help spur foreign direct investment in the late 1990's and early 2000s;
• Education policies in Korea, which have contributed to the nation's tremendous economic growth over the past 50 years;
• Conditional Cash Transfers (CCTs) in Mexico, designed to reduce poverty while incentivizing recipients;
• Reforms designed to make labor markets more flexible in the Netherlands, resulting in the creation of thousands of new jobs;
• Unique strategies in Singapore, including the imposition of traffic fees, which helping reduce urban congestion;
• Inflation targeting in New Zealand, originally developed as part of a strategy of holding individual civil servants accountable for annual goals.

"I...do not mean to suggest that the examples of good innovations that I have identified are entirely responsible for the success of the economies in which they were made," Frankel concludes. "But a country doesn’t have to be large like the United States to serve as a model. Small countries are often more free to experiment with new policies and new institutions. The results include some useful lessons for others."

Jeffrey A. Frankel is James W. Harpel Professor of Capital Formation and Growth. He directs the Program in International Finance and Macroeconomics at the National Bureau of Economic Research, where he is also on the Business Cycle Dating Committee, which officially declares recessions. He also served on the White House Council of Economic Advisers in 1983-84 and 1996-99.

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Professor Jeffrey Frankel

Jeffrey Frankel, James W. Harpel Professor of Capital Formation and Growth

"...a country doesn’t have to be large like the United States to serve as a model. Small countries are often more free to experiment with new policies and new institutions. The results include some useful lessons for others," Frankel concludes.