By Gideon Rachman
Published: October 19 2009 20:11
Ingram Pinn illustration
Almost two years ago, I wrote a column hailing “the age of the small state”. I pointed out that the number of independent nations had grown sharply over the past 40 years and that small countries topped many of the international league tables, on everything from gross domestic product-per-capita to peacefulness and “human development”.
But that was then. In the aftermath of the Great Recession, the economic and political tide has turned against small nations. Look around Europe and it is the smalls that have fared worst – Iceland, Ireland, the three Baltic states. Iceland has not only suffered a catastrophic economic and banking collapse. It is also being bullied by Britain and the Netherlands into paying back billions lost by their citizens when Icelandic banks collapsed.
Membership of the European Union has provided the Irish and the Balts with some protection from pressure by larger nations, but it cannot solve all problems. Latvia has had to go to the International Monetary Fund for a loan. Lithuania and Ireland may be forced to tread the same route.
So what has changed? Harold James, a historian at Princeton University, points out in a new book, The Creation and Destruction of Value : “In the heyday of modern globalisation in the 1990s, it looked as if small open states would be the winners: New Zealand, Chile, Ireland, the Baltic Republics, Slovakia and Slovenia.” These countries were able to take advantage of the removal of barriers to international trade and investment – and of a stable international order, guaranteed by the US.
Small and nimble nations slashed taxes and regulation to attract foreign capital and business. The Irish set some of the lowest corporation tax rates in Europe; the Balts and Slovaks went for flat taxes; Iceland became an improbable financial centre. International capital flooded into the smalls. But as Joseph Stiglitz, the economist, once warned: “Small open economies are like rowing boats on an open sea.” If a global economic storm blows up, such boats can capsize. Amounts of money that are relatively trifling to the international capital markets, can make a huge impact if suddenly withdrawn from a small nation.
International politics has also turned against small countries. The biggest geopolitical development to come out of the economic crisis is the formation of the Group of 20 – a club for large nations that now aims to set the regulatory climate for the world. The kind of regulatory and tax arbitrage that small countries once profited from is now subject to an international crackdown. In the age of global deregulation, large countries found it hard to stamp on small neighbours that were undercutting them with lower taxes or looser regulations. But the mood has changed.
Regulation is fashionable again and taxes are going up. At the recent G20 summit, Nicolas Sarkozy, French president, crowed: “Tax havens, banking secrecy – all that is finished.”
Even the wealthy and proud Swiss are suddenly nervous. Under pressure from the US, the Swiss have seriously compromised their tradition of banking secrecy – UBS has had to hand over the names of thousands of clients to the American authorities. The European Union and the Organisation for Economic Co-operation and Development are also piling pressure on Switzerland over tax and banking secrecy.
The Swiss government even felt compelled to grovel humiliatingly to Libya, after a row provoked by the arrest in Switzerland of Hannibal Gaddafi, the son of the Libyan leader, Muammer Gaddafi. Faced with a vengeful Tripoli, the Swiss felt they had few allies to call upon.
Switzerland, at least, does not have to worry about its security. But that will not be true of all small nations.
When the US was feeling all-powerful – in the “unipolar moment” that followed the end of the cold war – the Americans regularly made stands on behalf of small nations and would-be nations. In 1996, when China staged missile tests that were threatening to Taiwan, the US sent an aircraft carrier to the region and the Chinese tests stopped. Nato provided military assistance to both Bosnia and Kosovo in their struggle with Serbia. President George W. Bush made it clear that he wanted Georgia to join the Nato alliance, whatever Russia thought.
But with the American economy under severe pressure, the US is no longer so willing to stick its neck out for small countries or oppressed regions. The new policy is to look for better relations with the other major powers of the world – in particular, Russia and China. The Americans are playing down human rights in their “strategic dialogue” with China. President Barack Obama recently refused to meet the Dalai Lama, the Tibetan spiritual leader.
The US has also “pressed the reset button” in a bid to improve relations with Russia. It has abandoned plans for missile defence in central Europe, alarming the Baltic states and the Czech Republic but pleasing the Kremlin. Georgia’s Nato bid has been placed in very cold storage – and the Georgians are nervous about the threat of a renewed Russian assault.
In the heyday of globalisation, small countries were fashionable and prosperous. But now, as my colleague Michael Skapinker points out below, it is emerging giants such as Brazil that are getting the admiring headlines. Big is beautiful again. But a world in which small nations can be pushed around more easily will be an uglier place.
Copyright The Financial Times Limited 2009
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