The Vulnerabilities of Small Countries

This is the second post in my three part series, where I discuss why the model of small, urban, export-oriented countries/city states is under threat. You can read the first part here.

In the first part, we saw how polities made for a "Just in Time" world - where trade, regulations and corporations were created at a global scale. In this world, the economy was vitally dependent upon the nodal links that Small Countries provided by being centers of research, specialized manufacturing, hubs of business services. This importance, alongside other natural advantages such as clustering of talent in one place and homogeneity in economic needs made these countries superstars when it came to the quality of life. As major global economies move towards a "Just in Case" world, the benefits that such a centrality brought to Small Countries is under threat.

In this part, I will discuss their weaknesses with regard to trade and energy security in the world of 2020s.

When the planet you are orbiting turns hostile…

First, almost all of the aforementioned Successful Small Countries are geared heavily to global trade flows. They are also similar in this way to the classic entrepot states from the Early Modern era (Venice, Genoa, Cyprus). Furthermore, each of these six countries - has a dominant export partner which is either rapidly slowing down or actively selecting which partners/ trade blocs it will allow itself to open up to (EU and China respectively).

Especially, as I have written here and here, as trade and investment decisions become either/or decisions between economic blocs the overall addressable market for Successful Small Countries shrinks. This high dependence on exports also makes foreign exchange rates, w.r.t their trading partners a critical variable for these countries as well. 

Also, within this group, almost all successful small countries (except Norway) have a peg/soft-peg to their largest trading partner. This, alongside a high share of exports to GDP, makes them a “high-beta” economy relative to the world. The highs in growth are fairly high, whereas the lows are extremely deep. Having monetary and fiscal policies that are directly or indirectly outsourced to major global economies doesn’t help either. Particularly when all of them, including the US, are turning more protectionist and everything-- from supply chains to security markets- is being analyzed for its geopolitical implications.

Where did you buy your oil from?

Being small and developing a services oriented growth model can reduce a country’s overall commodity import requirements for growth. However, that doesn’t apply to energy commodities. Almost all Successful Small Countries are highly urbanized; this requires a greater use of energy per capita than others. Except for Norway  and Denmark (which has made rapid strides in energy sufficiency through renewables), others don’t have any significant domestic energy reserves. Even switching to renewables is likely to keep them dependent on commodities (copper and battery materials) which are not found within their borders .

Between 1980-2015, when global trade was steadily growing, energy security was not a concern for them. Their economies consistently outperformed peers with similar levels of GDP per capita. However, recent military conflicts have added friction to the energy supply trade routes in the Middle East and Russia.

As the world grows more multipolar, we are likely to see more short term turbulence as global powers try to establish their hegemony over energy supply hubs. This could be through restrictive trade agreements or even a show of force. This dynamic, combined with the fact that overall global trade growth is slowing, means that concerns around energy security are likely to further place a cap on their success.

In the next part of this essay, I will discuss why Small Countries might become an impediment to a start-up when it is looking to scale and how recent trends in immigration are also posing a challenge to their fiscal and economic stability.

Finally, a request.

I don't know how LinkedIn will evolve. But I suspect that deeper, original writing is more likely to get lost in the mass produced content from creators on this platform too.

I have a day job, which pays me good enough. And a work life balance that gives me time to reflect. My motivation to write is to become a better thinker. If you like these pieces, consider subscribing to my Substack here.