The United Kingdom may have little choice here, partly because of the impetus that Brexit will give to the Scottish independence movement and to the socioeconomic and political changes it may trigger in Northern Ireland. For these regions, and for Ireland, Brexit is a historic event that may set off new economic and political journeys.7 Like the characters in the 1939 film The Wizard of Oz, each country is searching for a different quality or solving a distinct challenge. England needs to navigate the potential shock of the Brexit process and then must fill out the vision of “Global Britain.” Scotland has to build a new economic base and the institutions needed to support it. Northern Ireland must wean itself away from a state-supported economy and a sclerotic political system. Ireland, for whom Brexit holds clear threats and opportunities, needs to learn to overcome persistent extreme socioeconomic imbalances.
At a broader international level, all of this is relevant in many ways. First, the world is watching Brexit for signs that it marks a new beginning for Britain and potentially the end of the European Union, or vice versa. Second, small countries around the world, from Singapore to Dubai, not to mention emerging markets and reviving cities, will be examining the way policy makers in Scotland and Ireland deal with the multiple challenges posed by Brexit. Third, for eighty million Americans, at least, the nexus of Ireland, Scotland, and England is part of their cultural identity, and this debate has broader emotional resonance.
After Brexit, Scotland will be the next test case, in that it may hold another referendum on independence sometime in the 2020s. Though many who held that Brexit would benefit the British economy also said that Scottish independence would be an economic disaster, this does not need to be the case. The post-Brexit era will present a range of opportunities as well as the need for a competitive discipline. Scotland, for instance, has not yet had a chance to build the policy capability to make the most of its brand as a country and of its access to markets. Indeed, until recent decades, the absence of very distinctive Scotland-facing policies from London has been a real constraint on Scotland; most notable has been the absence of a policy response to the (global) process of deindustrialization that Scotland experienced starting in the 1980s. Today, its economic model will need to be the small-country one described earlier in this chapter.
In Scotland, the first referendum on independence was fought largely on the basis of the potential for independence to bring economic gains or losses. Indeed, it must have been one of the first independence debates to have been fought by spreadsheet. It was marked by a noisy and often misleading debate on what currency Scotland might have: the pound, the euro, or a new Scottish currency that would start life pegged to the pound. Another way of framing this argument is to say that too much of the 2014 referendum debate was focused on high-level macropolicy—on currency and public finance—and not enough was focused on the future investments that needed to be made so that an independent Scotland could act to position itself for success in the global economy. Scotland will need to make investments in establishing institutions and building capability—for example, a Monetary Authority and an Office for Budget Responsibility (OBR)–style institution on the fiscal policy side. A key lesson from the international small-economy experience is that there is a need to develop economic strengths in the economy; for Scotland, these strengths range from finance to tourism, renewable energy, and life sciences.
Moving west of Scotland, scanning the world map in terms of attainment on intangible infrastructure and related metrics, such as the human development indicators, reveals that Northern Ireland stands out as a poor performer. Brexit threatens Northern Ireland in that it may force a repositioning of Northern Ireland with respect to the Republic of Ireland and to the European Union. The peace in Northern Ireland is still fragile, and there needs to be a recognition in London and Dublin that Northern Ireland needs a second wind in terms of its socioeconomic development. Northern Ireland should not be parked as a political issue but should be cultivated economically and socially.
One suggestion is that a small portion of Britain’s Brexit exit fee to the European Union be set aside to underwrite a Marshall Plan–type fund for Northern Ireland, which would follow the small-country model. A few examples of what this might tangibly focus on include the kind of skill-based apprentice schemes found in Austria and Switzerland, rezoning of housing from deeply politically entrenched areas using the social-impact-investing model found in Belgium, investment in cultural projects that are common to all communities (such as is done in Scandinavia and Switzerland), and the establishment of poles of excellence in certain professions, such as legal financial services. Such a fund might draw on the expertise and governance capabilities of other small states. This might help by removing some of the baggage from policy decisions (for example, the advice of Swiss technocrats might be easier to take than views from London or Dublin), and the employment of detailed rolling five-year plans might help speed up what is at times a sclerotic policy process.
South of the border, Ireland is a prominent member of the small country success club. Having had its first major boom and bust through the first decade of the twenty-first century, its economy has recovered, posting the best growth rates of any European economy from 2011 to 2018. To an extent, and unsurprisingly given its economic links to the United States, in many parts of Ireland the recovery does not feel like a full and broad one, and many Americans may sympathize with this. There are two broad policy issues facing Ireland.
First, as with many other small economies, Ireland does best when it faces the outside world: its best institutions (diplomacy and the Industrial Development Authority [IDA], for instance) are outward facing, but many domestic institutions are under severe strain. To distill the meaning of crises in the police, health care, and housing: many of the administrative institutions in Ireland are slow and badly suited for the twenty-first century.
Instead of trying to tackle each symptom of this structural problem on a piecemeal basis, the Irish state should reexamine its approach to governance and public service. Such an examination should not exclude examples of what works in larger countries, but, arguably, factors in Ireland such as homogeneity of population, geopolitical standing, and proximity of policy makers to the public mean that Singapore (rather than China) and the Netherlands (rather than Germany) offer more plausible lessons for Ireland in the area of public administration. This examination should result in a new method and approach to public administration: one that is more flexible than compartmentalized, one that quickly deploys pilot projects rather than spending years rolling out huge, unwieldy initiatives, and one that reasserts the value of education and health care as public goods. Some of Ireland’s sports teams and cultural institutions are models here. Then, also, Ireland needs to develop more acumen in the governance and management of state-related enterprises, needs to approach them from a position of principle (i.e., that education and health are public goods), and needs to better oversee the state’s role as an economic actor and procurer of services.
The second issue is that Ireland still regularly suffers from imbalances in its economy, the most obvious one today being that house prices and rental charges are higher than during its bubble period, and that there is a resulting housing crisis. Ireland’s overheated property market is one area where it can learn from other small countries. In the past it has found it too easy to copy the policy model of the United Kingdom and has ignored the lessons of other small open countries (notably, the Scandinavian banking crisis of the 1990s came to the notice of Irish policy makers only after the collapse of the Celtic Tiger). Brexit will, naturally, change this.
As regards housing, Ireland as a country still needs to decide that “houses are for living in, not for speculation,” to quote a recent remark from China’s president.8 It must then act accordingly from a fiscal and regulatory point of view. A further challenge is to build up the domestic economic sector. Sweden and Switzerland (and to a much more specifically technological degree, Israe
l) are good examples of countries that have created the cultural, financial, and human capital conditions allowing medium-sized enterprises to thrive. If Ireland can do this, it will have less need to be concerned about a global race to the bottom in corporation taxes.
Overall, Brexit is unleashing a range of powerful dynamics and opportunities across the United Kingdom and Ireland. One reality is that the small-economy model will become more relevant in that part of the world. Another is that Britain’s interaction with the Commonwealth will change in the same way that England’s relationship with Scotland and Ireland will change. Brexit itself and a changing dynamic between developed and developing countries will curb the geopolitical relevance of the Commonwealth for its members, many of whom recognize it as a colonial construct.
End of Condescension
For Americans, the levelling at a geopolitical level largely will take the form of the US-Chinese rivalry, but there are other, more acute examples, one of which—the relationship between Britain and the Commonwealth countries—is instructive about the changing dimensions in world affairs.
Demographics mean that countries like Nigeria and India will probably outgrow the Commonwealth; their populations and economies will increase such that they no longer feel the Commonwealth is relevant to them. Their growth and their increasingly poor fit for networks like the Commonwealth—colonial in origin and relatively meaningless institutionally—may well spark a change of tone in international relations. In particular, the bigger emerging powers may, and should, have much less patience for being condescended to in diplomacy, not merely by the United Kingdom but also by larger powers such as the United States.
One figure who comes to mind here is Robert Hart, an Irishman and one of the more influential foreign figures in Chinese history over the past two hundred years. He was born and grew up in County Armagh and was educated in Dublin and Belfast. After leaving Queen’s University, he joined the Consular Service and was posted to China. His career flourished, owing to the good relations he established with the Chinese. Hart’s role soon involved the establishment of a network of customs offices across China, and in 1863 he was appointed inspector general of China’s Imperial Maritime Custom Service. He was a modernizer, and among his achievements were the upscaling of Chinese ports and river transport systems as well as a streamlined tariff-collection process, which soon produced 20 percent of China’s government revenues. He prompted the Chinese government to open embassies abroad and encouraged Chinese officials to learn foreign languages. His other notable contribution during his fifty-year career in China was to counsel his staff to deal with the Chinese in a manner that avoided offense and ill feeling. The Chinese, for their part, referred to him as “our Hart.”
This story is highly relevant today for the way in which it highlights the importance and complexity of trade systems and infrastructure and also for the manner in which Hart engaged in and insisted on a respectful conduct of business with the Chinese. It is fair to say that in the course of the last century or more, older or richer Western countries have not always treated emerging countries in a respectful way. This has sowed the seeds of resentment in some quarters in the emerging world, not least in India. India is interesting in this context of colonial condescension, given that the structure of its institutions, its multilayered society and education system, and the development of its independence have been fashioned through its relationship with the United Kingdom.9
Today India, compared to China, is at the relatively early stage of its development as an economic power, lacking the breadth in wealth and income distribution of China, and, importantly, lacking the very forceful way in which policy can be implemented in China. India is beginning to discover the potential of its soft power, and it still lacks experience and expertise in hard, military power (notwithstanding its nuclear and space programs). In time, the contrast and friction between India and China may grow, especially if Chinese presence in ports in Sri Lanka and Pakistan grows (spending on Chinese military equipment by Pakistan now dwarfs that spent on US military goods), if China’s One Belt, One Road plan encroaches on India, and if the two countries grow apart ideologically.
For the moment, the United Kingdom might well be a more telling reference point for India. As the United Kingdom deals with Brexit’s threat to its geopolitical power and economic size, India will prove an interesting counterexample to the United Kingdom. Its economy should continue to grow speedily under its own steam, and the country will discover that its size and growing influence (consider, for example, the role of the Indian diaspora in the Gulf States) will bring the opportunity and responsibility to assert itself more in world affairs. In time, Indian politicians may look to cement this institutionally by taking the United Kingdom’s permanent seat on the UN Security Council (if that body continues to have relevance).
In the meantime, India will be interesting for the bubbling array of economic forces—not all of them well marshaled yet from a policy point of view—that will drive its economy. Reforms are beginning to affect the structure of its economy. In November 2016, for instance, the government withdrew from circulation five-hundred- and thousand-rupee notes, the country’s two largest denominations. The objective was to curb the black economy. The aim is to formalize transactions and to drive savings into the banking system. That the introduction of a relatively simple policy measure like this can have such a profound impact on the Indian economy speaks to the possible level of growth that can eventually be attained from reform, even if the path toward it is slightly chaotic.
India is replete with fascinating microtrends, such as the impact of social media and the digitization of social security. The Aadhaar system—or Unique Identification Authority of India (UIDAI)—is now the world’s largest biometric identity program; India’s residents are given a twelve-digit identification number based on demographic and biometric data. Other important trends include the spread of telecommunications-related payment systems, the nation’s growing rural economies, the challenge of urbanizing the country in a sustainable way, and the promise of properly developing a financial and wealth infrastructure that can enable a more fluid distribution of capital across companies and that will improve the profile of wealth distribution.
Success of Small States
Much of this chapter, and indeed the book, has focused on the fortunes of large countries, which is understandable given that clashes among them will reverberate around the world and that their economic weight is considerable. In contrast, though many smaller countries may find a world of big beasts harder to deal with, one group of small, advanced nations may gain and seek greater prominence.
In chapter 6 we discussed the country strength economic model, which is inspired by the Nordic model of countries like Sweden and Denmark, which themselves are pioneers of what we have described as having strong intangible infrastructure. They are part of an increasingly coherent group of small, advanced economies that may emerge both as a political economic species and as an informal grouping, especially if the great powers or great poles prefer to exercise power in a regressive manner.
For many years, the geopolitical fate of these small, advanced economies has been determined by their geography and, in particular, by their relationships with their larger neighbors (i.e., Singapore with China, Ireland with England, Finland with Russia, and so on).10 Indeed, geography is still a determining factor in a country’s fortunes, and there is substantial research to support this, from Paul Krugman’s book Geography and Trade to recent books like Prisoners of Geography by Tim Marshall. However, size may also become a defining variable.
Small, developed states have distinguished themselves in that they have overcome geographic constraints in building successful and resilient socioeconomic models. They are the policy models that the likes of Katherine Chidley will follow closely. They have done so in somewhat different ways: Israel has focused on technology and innovation, Switzerland on high-value-added products, and Ireland on fiscal policy. But
their secrets of success have several common factors: policy agility and speed of implementation, a focus on intangible infrastructure factors such as education and human development, and an economic openness that has permitted them to ride on the coattails of globalization. Small, developed states are now the most globalized of nations and also rank well on more balanced measures of national well-being, such as human development scores and levels of inequality. For instance, the Bloomberg Innovation Index counts ten of the small, advanced countries (Sweden, Singapore, Switzerland, Finland, Denmark, Israel, Austria, Ireland, Belgium, and Norway) in the top fifteen of its ranking.
These nations are also among the most equitable countries in the world, together with being the most advanced in terms of human development. Most are at the pinnacle of democracy. The Economist Intelligence Unit’s Democracy Index report looks at five criteria—political culture, political participation, the functioning of government, electoral process, and civil liberties—and classifies just nineteen countries as “full democracies.”11 The top five countries in 2017 were Norway, Iceland, Sweden, New Zealand, and Denmark; the bottom ones were North Korea, Chad, Syria, the Democratic Republic of Congo, and the Central African Republic. Of the nineteen countries classified as “full democracies,” fourteen are small countries, with eight of them in the top ten.
These facts point in two or perhaps three directions.
The first is that, as I’ve said, these “canaries in the coal mine” are the first to respond to trends that materialize in larger economies, and their experience thus has something to say to larger countries. It should also be stated that small states are policy innovators and in many instances react to and solve problems ahead of larger states.
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