Small Countries in a Global Economy

Does globalisation represent the twilight or honeymoon for small countries (hereinafter ‘SCs’)? It is no wonder that some political scientists even predict that the number of nations may double over the next two or three decades (Salvatore, herein:71). Some claim that historically small states have never been in such a good position as they are today. Others insist that SCs cannot survive in the context of contemporary integration tendencies, that they have to forget about their sovereignty and integrate into regional groups. The growing importance of regional integration groups should support the latter thesis, while the increasing number of small states supports the former. Is there any contradiction between the political process of disintegration, the birth of new small states and economic integration trends? This book will demonstrate that there is in fact no such contradiction, that by integrating small countries do not ‘lose’, they even gain sovereignty in domains which were previously completely closed for them. By developing strengths in one area gives them power also in those areas where such power is weak. This is the so-called paradox of the ‘weakness’ (Baillie, 1999).The objective of the paper is to explain this apparent inconsistency. In order to do so, we start with some general observations on the relationship between income and sovereignty that are supposed to apply to all countries.

[There are three ways in which countries grow. First, by] ‘fonning a league consisting of several republics in which no one of them had preference, authority or rank above the others; and in which, when other cities were acquired, they made them constituent members in the same way as the Swiss act in our time, and as in Greece the Acheans and the Aetolians acted in olden tunes….The reason why such a republic cannot expand is that its members are distinct…which makes it difficult for them to consult and to make decisions. It means that they are less keen on acquiring dominion, for, since many communities share in that dominion, they do not appreciate further acquisition in the same way as does a single republic which hopes to enjoy the whole. Furthermore, a league is governed by a council, which must needs be slower in arriving at any decision….The second method consists in forming alliances in which you reserve to yourself the headship, the seat in which the central authority resides, and the right of mitiative. This was the method adopted by the Romans. The third method is to make other states subjects instead of allies, as the Spartans and the Athenians did…[This method] is quite useless, as can be seen in the case of the two republics just mentioned.

The number of nations has quadrupled during the past 50 years, from 51 in 1945 to 210 in 1997. Globalization and the reduction of trade barriers have sharply reduced the disadvantages of smallness and encouraged the proliferation of new nations during the past decades. And there is no end in sight — some political scientists predict that the number of nations may double again during the next two or three decades. In this paper, we begin by classifying nations into large and small nations and then we examine the economic performance of small nations in relation to large nations over the past 12 years (1985–1997). Data availability and the greater relevance of the experience of the last dozen years make it the most feasible and useful period to study.

In the past four decades there have only been a few studies on the economic consequences of the size of countries (Robinson (1960), Khalaf (1971), Jalan (1982)) and only a few more on some of their special economic characteristics (Kuznets (1960), Michealy (1962), Lloyd (1968), Deans and Bernstein (1978), Senjur (1992a and 1992b), Damijan (1993, 1996), etc.). The main economic characteristics of small countries identified in those studies can be classified as a tendency towards:

For many authors transition is understood as an institutional change due to fundamental changes in relative prices and/or changes in sociopolitical preferences, as outlined by North (1990). A radical change of this kind entails a transition to new equilibria in such characteristics like ownership, exchange, organisations, dominant economic agents and incentives. In this paper, transition will be associated with a long-run path of change in the economic system caused by the dislocations in:

Whether a transition economy such as that of Slovenia, which a few years ago left a kind of monetary integration, should prepare itself for joining the European single currency area — another monetary integration — is for the moment, as will be seen, not the right question. In the first place, the country must put its house in order, not only because it was previously a (market-planned) variety of a non-market economy, but also because it decided, under the influence of foreign experts, to abolish social ownership of business enterprises in the wrong way (Ribnikar, 1991). Since it will take quite some time before its house is brought into order, the question of formally or de iure entering the single currency area will not arise in the imminent future.

The enterprise sector in Slovenia entered the process of economic transition with the legacy of a specific quasi-market socialist economic system based on self-management and social ownership. Slovenia was, in a certain sense, the manufacturing platform of the former Yugoslavia. This resulted in a relatively broad and sophisticated industrial structure, different to that, which would have developed in a small open economy with an export-oriented development concept. Disintegration of the former Yugoslavia led to the loss of easy and well-protected markets. Slovenian companies were forced to turn to export markets. Accommodating to the pressures of more competitive markets has, as a rule, been achieved by short-term rationalisation measures (predominantly by reducing costs via lay-offs and an intensive process of early retirement, tolerated by the state) and only much less through long-term restructuring.

Discussions on country competitiveness have become widespread; however, country competitiveness means different things to different people. It is often used to mean the ability to sell more in foreign markets, a concept criticised by Krugman (1994:44) because its pursuit could lead to beggar-thy-neighbour policies and/or trade wars. Such a definition also contradicts the theory that all countries gain from international trade through comparative advantage, and it implies an acceptance of the mercantilist promotion of trade surpluses that was in vogue from about 1500 to 1800. We prefer to consider national competitiveness as a means to an end — the end being the well-being of the nation’s residents; however, we acknowledge that the measurement of well-being is fraught with difficulties, especially when predicting how the future will evolve (Daniels, 1991).

Membership in the European Union goes far beyond any previous integration step Austria had experienced after World War II. As an EFTA member, Austria has only participated in a free-trade area since the sixties. The abolition of import tariffs for manufactured goods led to welfare improving trade with EFTA member-countries and welfare decreasing trade with the EC countries. The free-trade agreements between EFTA countries and the EC in 1972 enlarged the free-trade area of the mid-seventies when all tariffs between both integration associations were abolished. Since then, the European Community has moved from one ambitious integration target to another — from the Single Market project in 1993 to the EMU with a single currency in 1999 and to Eastern European enlargement. EU membership implies not only integration in a borderless market with common competition rules, but also participation in many harmonised or co-ordinated policy areas (CAP, common commercial policy, regional policy, competition policy etc.). The EFTA has instead stagnated on the free-trade area status. It is no wonder that most of its members were eager to become EU members. After the fourth EU enlargement involving Austria, Finland and Sweden in 1995, EFTA shrank to only four members, two of which are mini-states (Island and Liechtenstein) and one of which has refused not just for the first time to enter the EU (Norway) with Switzerland even refusing to sign the EEA treaty in 1993.

The opening up of Eastern Europe has brought with it an influx of foreign capital in the form of foreign direct investment (FDI), most of which is market-oriented, whilst some of it is cost-oriented. Some of the more advanced Central and Eastern European countries (CEECs) are small (e.g. Czech Republic, Slovenia, Slovakia, Croatia, the Baltic states) and view the investments of multinational companies (MNCs) as being ‘engines of growth’, based on the experience of the small European nations after World War II (e.g. Bellak 1998). In general, ‘the linkages between development and MNC involvement have tended to become closer and less avoidable as economic activity has become more globalized.’ (Cantwell 1997:167; see also Sally, 1995; Bellak and Cantwell, 1998) Normally, the theoretical assumption prevails that both parties, i.e. both MNCs and small CEECs, will benefit from this process of ‘interactive transition assisted by MNCs’ (Ozawa 1992) and the catalytic role of inward FDI. Catching-up involves three phases (cf. Barta and Url, 1996), namely adjustment, restmcturing and growth. In accordance with these phases, the contribution of inward FDI varies over time (Donges and Wieners, 1994: 129): Whereas, in the short run it secures the survival of existing firms, in the medium-term it helps to rebuild the largely obsolescent capital stock (by replacing the depreciated stock of fixed capital) and generates growth in the long run.