Big Countries Don’t Have All the Answers

 

Economics
Faculty ResearcherJeffrey Frankel, James W. Harpel Professor of Capital Formation and Growth, Harvard Kennedy SchoolPaper Title What Small Countries Can Teach the World

When trying to devise policies, social systems, and development strategies, people tend to look at what the biggest and most influential countries have done effectively, notes Jeffrey Frankel, Harpel Professor of Capital Formation and Growth. “In the 19th century, for example, Great Britain and its industrial revolution was the model that other countries sought to emulate.” Early in the 20th century, the Soviet Union provided what some nations viewed as a compelling alternative to capitalism. In the 1980s, Japan illustrated one path to stunning economic success, just as the United States did a decade later.

But you can miss a lot if you consider only what the leading nations are doing, Frankel notes, because small countries may have some answers too. “They are often better able to experiment with innovative policies and institutions.” Because small countries tend to be more dependent on foreign trade, which invariably involves discussions between nations, they also tend to be more open to new ideas. Furthermore, small countries can implement radical reforms more readily than an established power like the United States. For all these reasons, plus the existence of some genuinely good ideas that warrant attention, Frankel was prompted to write “What Small Countries Can Teach the World.”

For instance, Singapore — a diminutive island nation with a high population density — solved its traffic problems with a “congestion pricing” system that charges drivers fees for entering the downtown area. When it was instituted, in 1975, the program relied on human-operated tollbooths. In 1998, Singapore moved to an automated, electronic approach that has since been used in London. “Every single country in the world should adopt this,” Frankel says. “Otherwise people can sit in traffic all day, wasting huge amounts of time, when you could use the price mechanism to alleviate traffic.”

Unwise lending practices in the United States, which promoted homeownership even for people who could not afford it, contributed to a global financial crisis that started in 2007. That crisis might have been averted if the United States had followed the example of our neighbor to the north. Unlike the United States, says Frankel, Canada has long had “sensible” homeownership policies. The Canadians don’t seek to artificially increase the amount of owner-occupied housing through tax incentives or by encouraging loans that people may not be able to repay. “It stands to reason that if you’re buying an expensive house,” he says, “you have to be able to put up some money.”

Switzerland and Chile have commonsense policies that prevent them from running up astronomical deficits, like the one with which the United States is currently saddled. Rules in place in both countries impose a “cyclically adjusted” limit on budget deficits, “which means that you can run a deficit during hard times, but when the economy is in an upswing, you have to run a surplus,” Frankel explains. “In other words, you can’t just assume a boom will go on forever; you have to set aside money for a rainy day.”

Costa Rica and Mauritius long ago economically surpassed their neighbors in Central America and Africa by deciding to forgo a standing army, among other shrewd moves. “The result in both cases has been histories with no coups and financial savings that can be used for education, investment, and other productive purposes,” Frankel writes. “One might argue that a remote island country [like Mauritius] has little need of armed forces…, but small size has not stopped other countries from futile military endeavors.”

In 1998, Mexico pioneered the idea of “conditional cash transfers,” which make income support for poor families contingent on their kids attending school. Children fare better over the long haul because of this program, which has been emulated by Brazil. Although Mexico is crippled by the drug trade, among other problems, it has introduced a number of “brilliant innovations” that could be useful for others, Frankel says. “A country doesn’t have to be large like the United States to serve as a model.”


— by Steve Nadis

“[Small countries] are often better able to experiment with innovative policies and institutions,” said Frankel.


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