Around the World in Volatile Economies

17^th April 2013

ResPublica's Stephen Lock on the lessons we can learn from smaller economies in the competitive networked world

In 1791 Thomas Paine wrote: “there can be no such thing as a Nation flourishing alone in commerce; she can only participate”. In September 2010 William Hague, then the new Foreign Secretary, drew on this insight when addressing how Britain will continue to compete in the modern ‘networked world’. It is clearly a sensible policy – maintaining our high standards of living depends on finding our niche (or set of niches) in the global market, on making sure we are well connected globally to exploit this successfully, and on securing ourselves and our economy from events beyond our borders.

In this quest we tend to focus on the large scale – comparing our performance to countries with economies of similar or larger size, in particular at present by seeking to gain the advantage in providing services and luxury products to the emerging economies. However, we should not think ourselves above drawing useful lessons from the experiences of the smallest of markets, especially as our own relative share of the world economy continues to shrink. The emphasis on the smaller scale is also relevant as we explore how our businesses can remain globally connected while being much more locally targeted, sustainable and capable of facilitating regeneration.

Small economies can be significantly more exposed to global market conditions, as well as other unpredictable events – from terrorism to natural disasters – than their larger counterparts. They are particularly reliant on individuals to make entrepreneurial responses to international business opportunities, and they can struggle to attract investment, especially since they are often tied to the prosperity of a single trading partner and/or a single resource. On a less extreme scale, much of this language actually sounds familiar in Britain already, whether we’re dealing with Icelandic ash clouds, overexposure to European trading partners, dithering decisions over transport infrastructure investment or over-leveraged and unsustainable banking practices. The innumerable and infinitely varied comparisons (local, national and international) will be obvious to any reader.

Of course the analogies are far from perfect, as Britain has the money and manpower to enable much greater connectivity, education and the like – but when looking for demonstrations of the opportunities, risks and potential costs of failure in trying to fit into the networked world, small and highly-exposed economies accentuate the basic messages. A few examples from the 14 far-flung British Overseas Territories colourfully and poignantly illustrate this.

Take Saint Helena for example. This extremely isolated volcanic island in the mid-South Atlantic faces the giant obstacles of negligible export earnings, few resources and an unsustainable demographic scenario due to an ever-dwindling economically active population. It provides the ultimate example of an economy that struggles to connect globally because it is simply too hard to reach. However, in time and with investment it is hoped that this can be reversed, and that highly ambitious plans for a vibrant and sustainable economy can be realised, through incentivising repopulation as well as important and long-overdue infrastructure projects (such as the island’s first airport, which is under construction). At the same time, this demands responsible consideration for the rich local ecology which this development might endanger and whose loss could undermine the entire vision.

The Falkland Islands meanwhile provide a good lesson for overcoming exposure to one natural resource. Fishing is the largest part of the economy (over 50% according to the 2010 forecast), and has been a great success story. This Territory has circumvented the pitfalls of its over-reliance on one exhaustible resource by establishing a sustainable system of fishing licences – which has, simultaneously, been a great financial success. Established in 1986, the licence system has grown ever-more sophisticated, and the big fees now paid by fleets from countries like South Korea, Spain and Taiwan have enabled the government to remove its debt altogether – and even to accumulate savings. Such innovative management of a primary resource can create economic success, and the expertise and insight thereby gained could be exported around the world.

Then again, there are Territories with barely any natural resources at all, like Bermuda in the western North Atlantic. It has no lucrative natural resources to speak of, and little arable land, meaning that its population relies on expensive and heavily-taxed imports. Nevertheless, Bermudans enjoy great wealth, as Bermuda’s economy is a successful provider of financial services for international business (largely due to its status as a well-regulated offshore tax haven). However, this overdependence on one sector has left Bermudans more exposed than most to the recent global financial crisis. It is anticipated that the future investment that the island needs will be attracted by efforts to diversify the economy into other sustainable business opportunities. One possible candidate is tourism, Bermuda’s second industry, but this has suffered from risky overexposure to one market (US holidaymakers). This was dramatically evidenced after September 11, when many Americans were put off flying and Bermuda’s tourist industry experienced a particularly severe contraction.

Finally, Montserrat provides perhaps the most dramatic example of economic risks from natural events. From July 1995 this Caribbean island was severely disrupted by volcanic activity. The Territory’s GDP is thought to have subsequently halved in 5 years (although this was also due in large part to the completion of major private and public sector projects). But now we are seeing an impressive reversal of this trend: as well as ambitious plans to stimulate sustainable and lucrative business in the island, there has also been significant work to turn the volcano itself into its most prized economic asset, by creating world class volcanology facilities, geothermal energy plants and high-end tourist experiences.

There are useful lessons in these few examples as indeed there are with every small economy. Appreciating their delicate predicament can in turn inform our own struggle to identify economic opportunities and to confront the challenges of connectivity and sustainability. Simultaneously, they provide simple but valuable lessons on the interrelation of economic, environmental and social issues, and on the dangerous and destabilising consequences of being under-prepared. They are obliged to think upwards from the small scale – but we equally can learn a lot by adopting similar principles to maximise our application of resources and talents to the globally networked market.