Too Small to Fail: Why Some Small Nations Outperform Larger Ones and How They Are Reshaping the World

Prologue

A small nation is usually stronger in proportion than a large one.

A thousand arguments could be advanced in favour of this principle. First, management becomes more difficult because of the great distances, the way weight becomes heavier at the edge of a larger lever.

It also becomes a heavier burden with the increasing number of steps involved in the exercise of power. The needs of the subjects are not better handled by this multiplicity of authorities. They would have been comfortable if only one person had overseen them.

That is not all. Not only is the government not strong and quick, but the people also have little affection for their leaders who never see them. It is impossible for the same laws to fit so many different communities, sectors and customs.

The leaders, who are overly preoccupied, do not see anything but for themselves. Talent is buried, virtue unknown and vice unpunished among such a multitude of men who do not know one another.

Thus, a body falls too large in proportion to its structure and is lost under its weight. On the other hand, the state must secure a solid foundation for itself so that it can withstand the inevitable shocks.

From here, we see that there are reasons for expansion and preferences for reduction. In every body politic, there is a maximum strength which it cannot exceed and which it only loses by increasing in size. It is better to count on the vigour that comes of good government than on the resources a great territory furnishes. It is best to establish limits that will make a nation’s size neither too large for good governance, nor too small for self-maintenance. The statesman’s ability to find the relationship between them is of great importance.

Jean-Jacques Rousseau, The Social Contract and Discourses(1762), abridged

In a large republic, there are large fortunes, and consequently little moderation of spirit. The common good is sacrificed to a thousand considerations; it is subordinated to various exceptions; it depends on accidents. In a small republic, the public good is more strongly felt, better known, and closer to each citizen.

Montesquieu, C.L. The Spirit of Laws

Kings and princes can indeed create professors and privy-councillors, and confer titles and decorations, but they cannot make great men – spirits that soar above the base turmoil of this world.

Beethoven, L.v. Selected Letters

Introduction

Warren Buffett, probably the world’s most successful investor, has attributed much of his good fortune to the lottery of life, tracing it to being born ‘in the right country, at the right time’ – namely, America in 1930 (Crippen 2010). Some six decades later, in 1988, The Economist wholeheartedly agreed with a study that the US was the most desirable place to spend a lifetime. But as with all lotteries, odds change. Redoing the analysis in 2012, the magazine put the US in the humble sixteenth spot in the global order, below Taiwan and just above the United Arab Emirates (Economist 2012). Surging into the top ranks this time around were small countries with populations of less than twenty-five million people, such as Switzerland, Singapore and Ireland.

Small countries now make up eleven of the top fifteen advanced economies in terms of per capita income. They took nine out of the top ten spots in IMD’s most recent Global Competitiveness Report (Jamrisko 2019). And in 2018, they took fifteen of the top twenty positions in the United Nations Human Development Index.

What explains their remarkable ascendance?

Much of the current debate on global economic performance focuses not on success but on failure. There is a shelf load of books discussing flawed states, foremost among them is Why Nations Fail by Daron Acemoglu and James Robinson published in 2012. In part, this is because of the elephantine case of the US, which is often the inspiration for studies of all kinds. But as Harvard University’s Steven Pinker reminds us, ‘There are so many more ways for things to go wrong than to go right,’ making success far more valuable to explain than failure (Pinker 2017).

Have we not heard enough about failure? After all, history shows that unlike lotteries, progress is usually a matter of finding something which works and reverse-engineering it. Nations do not spontaneously organize themselves to achieve higher PISA (Programme for International Student Assessment) rankings, file more patents and export more goods. Food does not fall on our plates, clothes on our backs or roofs over our heads. Wealth, not poverty, is what begs a better explanation.

Given the rising concern in large nations over wealth disparities, dwindling job opportunities, stagnating growth and waning confidence in political systems, now may be a good time to peek over the garden hedge and see what we can learn from the success of small countries on all these fronts. As many large nations struggle with the trade-offs between sovereignty and globalization – as signalled by Donald Trump’s election in America, the vote for Brexit in Britain and rising right-wing populism elsewhere in the world – could smaller economies provide some helpful guidance?

For centuries, a country’s status has been measured by the size of its territorial reach, its military might and its natural resource endowment. These were the foundations for the Treaty of Westphalia in 1648, the blueprint of the modern system of nation states. While still important to the global balance of power, these physical metrics are waning today in relevance in the face of increasing global economic interdependence, driven largely by rapid developments in information technology, telecommunication and transportation. Gaining sway over the world’s treasures is no longer a matter of giant armies and navies, but of winning trade battles and global contests for professional talent. And, in a surprisingly large number of cases, the smaller, nimbler countries are winning.

This shift from the mega-states to the minnows reflects the changing structure of global commerce. In the past, enterprises sprang up parochially and grew organically before morphing into international and sometimes multinational businesses. But their strengths could still be traced to their industrial-age origins in places like Manchester, St. Louis and Stuttgart. Today, the location of a company matters much less. Products cross borders multiple times, reaching customers from all around the world. Technology, manufacturing, customers, competition and financing can come from anywhere in the world and at any time, often leaving traditional behemoths behind.

Big Lessons from Small Countries

Too Small to Fail analyses several successful countries which have created strengths out of their physical limitations. It tries to understand what they do differently and why they seem to do it better. What is their secret recipe for a better educated, more egalitarian and wealthier population?

The book looks first at the forest and then the trees. The first section surveys small countries such as Denmark, Ireland and Switzerland to uncover common patterns behind their success, besides having made a virtue out of their smallness. Some are fairly obvious, such as outstanding education systems and openness towards trade, talent and ideas. Others are more counter-intuitive, such as humility, vulnerability, adaptability and their attitude towards ownership. We then do a deeper dive into concrete examples of public policies which have enabled these results. We study how Singapore’s healthcare system achieved superior outcomes at a quarter of the American cost and at 40 per cent of Britain’s, and how Ireland transformed itself from a state of impoverishment and neglect into the rising star of Europe. We look at how Israel managed to create its own indigenous form of Silicon Valley and why Finnish schoolchildren outperform their peers elsewhere in the world. We then ask whether these lessons are relevant to other countries and if they can be replicated, in whole or in part.

Finally, we consider the future of the nation state, asking what these emerging patterns mean for the rest of the world, including the super-sized countries which have until now dominated its governance and economics. We conclude that the world is marching towards smaller states, rewarding their approaches and amplifying their strengths in ways which might ultimately force larger states to pay attention. I also believe that at the level of the individual, citizenship will be more mobile and fungible in the future, as people are able to move more freely and nations increasingly compete in a slower growth environment for the world’s brightest minds and wealthiest people.

Crawling between the Toes of the Elephants

Karl Marx once said, ‘Men make their own history, but they do not make it as they please; they do not make it under self-selected circumstances, but under circumstances existing already’ (Marx 1852, cited in Thompson 2011). Too Small to Fail is a story about successful adaptation to circumstances which already existed. However, given that they have made considerable progress with regard to global challenges, they are worth studying.

Though there are almost an infinite type of small nations in the world, the most successful share certain common attributes. They conduct their economies more openly and rely heavily on foreign trade for their survival. Their economies are more exposed and thus sensitive to new opportunities and threats, making them more alert and willing to adapt. Their consumers are exposed to a greater variety of new products and services and their societies are more likely to attract talented immigrants. With this openness comes greater tolerance, enabling a more level playing field, often irrespective of gender, religion or sexual preference, and thus, creating larger pools of talent.

Since it is their human rather than natural resources which determine their competitiveness, smaller states tend to maintain education systems which reflect the needs of industry better. Teachers enjoy public respect, higher pay and work in tandem with parents to develop skills of the students. Children grow up embracing meritocracy and egalitarianism, not privilege and elitism. They learn at an early age to place more value on the community than the individual, on collaboration rather than rivalry and on social norms rather than regulations. Not just the universities but also the vocational schools and apprenticeship systems equip them with the skills they need for a solid foundation of a successful career.

Small countries also draw strength from their historical status as underdogs bullied by larger neighbours. Fifty years ago, newly independent Singapore lost its mandate to host port facilities for Britain’s Royal Navy at a time when its industrial base was weak to non-existent. Switzerland faced neighbouring imperialist giants through most of its modern history, devising survival strategies such as neutrality to head off invasions. Denmark is just a shadow of its former imperial self, having lost vast swaths of territory through diplomatic mishaps and military defeats, but it has learned how to do more with less. Finland was jostled between the Swedish monarchy and the Russian Czar for seven hundred years until it emerged as a staunchly independent nation. The Dutch have crossed swords with the French, Germans, Spanish and others, and still found within themselves the ingenuity to deter the encroaching North Sea and applied it to building a global mercantile empire. Each have turned their vulnerability into a source of vigilance, flexibility and renewal.

Along with resilience, these histories have instilled a sense of modesty. A history lesson in Great Britain rarely passes without children being reminded, for good or bad, of the glory of the past empire and the exploits of Admiral Nelson or Winston Churchill. France cherishes its legacy as La Grande Nation. The Chinese characters for the word ‘China’ mean ‘middle or centre country’, reflecting their belief that the world revolves around Beijing and that countries like Korea and Japan are provincial satellites. In the US, Donald Trump’s potent battle cry, ‘make America great again’, helped pave the way to his election. But there is a fine line between pride and arrogance. In an increasingly competitive world, modesty often provides a distinct advantage. After all, people prefer counterparts whom they can like and trust – hard to do if your prospective partner is chauvinistic.

Large countries tend to approach competition – be it in sport, war or business – with a winner-take-all mindset. Yet, mutuality brings greater rewards. Small countries have realized the value of mutual respect and collaboration in a changing world compared with hard-nosed rivalry. To take just the most obvious example, reciprocity is fundamental to trade, allowing both sides to benefit from their dealings. Too-small-to-fail (TSTF) countries have realized that cooperation rather than domination is the key to success, and they are adept at achieving their goals not by aggression and coercion but through negotiation.

Counter-intuitively, smaller countries often shun the perceived advantages of centralization, opting instead for more decentralized systems which instil a greater sense of self-reliance and empower people at the community level where costs and benefits of government services are more readily ascertainable. These systems give voice to their citizens, foster a sense of shared community and even spur domestic competition among government agencies. Swiss voters, for instance, are increasingly asked to take a position on concrete issues such as climate change, or the amount of debt its parliament can impose on its citizens, thus dispersing power to individuals and providing a check on elected representatives.

There is an even more fundamental grassroots advantage to those living in a smaller state. Notwithstanding their propensity for earning higher incomes, citizens of these countries tend to be less avaricious. In fact, the qualities of greed and self-interest are currently undergoing a major re-evaluation by economists. Since as early as the mid-eighteenth century, thinkers, most notably David Hume, have argued that such impulses drive economic progress. But new evidence shows that citizens of smaller nations place less value on money for its own sake than their counterparts do in larger nations. This strengthens the societies and economies of the smaller nations, on the whole.

People in smaller countries also seem to be more willing to make sacrifices for the sake of the future. Rather than kick the can down the road, smaller countries have shown more willingness to embrace long-term problems in the present in order to prevent mortgaging their children’s futures. Government debt levels tend to be substantially lower and the concern for the environment stronger. Switzerland leads the world in clean energy production and Denmark is working towards becoming CO2 neutral by 2025.¹

Altogether, these trends offer powerful clues about what our world will look like a century from now. Too Small to Fail argues that smaller and nimbler nations will be more successful in the future, and consequently, there are likely to be more of them.

Historically, the sizes of countries have been determined as a trade-off between the advantages of scale and the costs of increasing heterogeneity, as the economists Alberto Alesina and Enrico Spolaore argued in The Size of Nations (2003). Benefits of scale derive from several factors. A large population, for example, allows defence costs to be amortized over more taxpayers, thus lowering the per capita expense. A richer resource endowment fuels industrial growth and a bigger domestic market propels the economy by generating local demand.

But even at the time Alesina and Spolaore published their book a decade and a half ago, all these advantages were beginning to erode. Lower transportation costs, access to cheaper goods and information through the internet reduced the benefits of having a large domestic market or natural resources. Customer demand was no longer limited to national borders and free trade enabled access to vastly larger markets and productivity gains.

Greater humility breeds fewer conflicts. Smaller countries have learned the advantages of avoiding geopolitical rivalry on the global stage, thus sparing themselves the hefty costs of military spending and the temptation to demonstrate its results. Given the growing disparity in strength between a few major powers and the rest of the world, ‘realpolitik’ means that smaller countries are increasingly forced to form allegiances with one of the superpowers (America or China) and effectively pay rent in exchange for their protection, rather than build their own costly defence systems.

While the benefits of size have decreased, the costs of heterogeneity have increased. Recent political upheavals, such as Brexit, the election of Trump and the surging right-wing movements in France, the Netherlands and Germany suggest that homogeneity is now elbowing diversity off the agenda in many societies. In a time of polarization, each side takes actions which please its most passionate members, but in doing so, alienate many potential supporters.

‘Me’ Vs ‘We’ Societies

Since the 1960s, traditionally cohesive institutions such as family, marriage, military and religion have weakened. Harvard political scientist Robert Putnam argued in Bowling Alone (2000) that we have become increasingly disconnected from one another and our social structures – whether that means the family, church, employers or neighbours. These loosened or, in many cases, broken bonds have been accompanied by a proliferation of new identities with regard to gender, generation, race, sexual preference and ideology. It has been popular during the past few decades to celebrate diversity with the steady beat of the old slogan – ‘E pluribus unum’, or ‘out of many, one’ – with the stress on individual identity, as though its benefits were infinitely linear. But recent trends suggest that identity has been relatively blurred, which ultimately begs the question: Who exactly are ‘we the people’?

The countries included in Too Small to Fail have managed to maintain their cohesiveness without restricting their ability to adapt and reinvent. They have achieved a greater sense of belonging and avoided the kind of stratification of communities which push common people out of sight, and thus, out of mind. With regard to gender, for example, Nordic countries have found ways to be equal without being the same. They remind us that throughout human history, social norms, rather than the rules and laws which are characteristic of larger states, have regulated much of our behaviour. The Nobel Prize-winning economist Kenneth Arrow argued that smaller, more homogenous societies are easier to govern and that democracy can grow dysfunctional when electorates become substantially more diverse and polarized.

Towards Smaller, Nimbler Nation States

Too Small to Fail argues that these models will only grow in relevance. For most of the past century, many nations enjoyed a win–win environment and grew wealthier from regular productivity gains and the easing of trade barriers. Now, according to Gideon Rachman, the foreign affairs commentator at the Financial Times, nations face a more zero-sum world where self-interest assumes far greater importance (Rachman 2010). Pankaj Mishra argues similarly in Age of Anger that the world will become more divided and disorderly as economies slow down and inequalities increasingly reveal themselves.

Societies will have to cope with slower growth and learn to do more with less. The haves will come under greater scrutiny and criticism from the have-nots. Studies show that we are far more likely to feel empathy towards those with whom we feel an affinity. In empathetic societies, policies which redistribute wealth find more ready acceptance, as Scandinavia demonstrates. The Danes, for example, believe that taxes are a necessary investment for a better society. Yes, individuals have rights, but in order for the collective to be cohesive, individuals also have duties. When the sense of affinity wanes, individuals begin to view taxes as an annual punishment for creating wealth and thus something to be avoided – or at least minimized through exploiting loopholes. Citizens may polarize themselves between ‘those who do work’ and ‘those who mooch off those who do work’, undermining the acceptance of redistribution policies aimed at reducing inequality.

Supranational governance structures like the European Union led by appointed rather than elected officials, as well as societies which feel uncomfortably placed in regional groupings which are legacies of an obsolete epoch, may find it more difficult to stay together under these circumstances.

Figure 0.1: Changing Dynamics of State Formation

This graph shows how scale will take on less importance and social cohesion more for state formation in the future.

Source: Lambais and Breiding 2019; Alesina and Spolaore 2005

Too Small to Fail is not an attempt to find a ‘one size fits all’ benchmark to evaluate the relative success of nations, nor does it seek to concoct a ‘paint by numbers’ manual on how to do it with a false sense of precision and legitimacy. Each of the countries under study have experienced unique and complex trajectories which are irreproducible and, in any many cases, not comparable to other countries.

Countries discussed in Too Small to Fail could, however, be the main beneficiaries from this fragmentation. If smaller, nimbler and less heterogeneous societies confer competitive advantages, then it is likely for there to be more of them in the future. Figure 0.1 represents this trend. Legacy nation groupings burdened with incompatible ethnicity, language and traditions could experience deepening fault lines. Recent monetary crises in the EU already provide a hint of things to come.

It is tempting to speculate on what new national structure could emerge. Political movements for independence are gaining ground across the world from Catalan to California. Why couldn’t the six million people living in the Miami conurbation join forces with Cubans and Puerto Ricans to create a Novo Havana as a proud vestige of the Spanish empire at its zenith? Will the likes of Quebec, Scotland and Middle Eastern ethnic and national groups be tempted to push for autonomy or use such demands to bargain for better social contracts under existing structures?² Too Small to Fail argues that these scenarios may not be as far-fetched as they might seem today and that the future will favour smaller states. It also argues that a geopolitical restructuring need not be a matter of lottery and fate as it has been in the past; it could be a function of choice and design.

While these Davids may prevail over Goliaths, they are by no means utopias. On the contrary, they are laboratories struggling to deal with complex and challenging problems affecting us all, such as climate change, immigration, inequality, pollution, health and terrorism. But Too Small to Fail argues that these small, nimble and forward-thinking countries are at the forefront of addressing these problems and therefore, in Hegel’s words, are ‘the land of the future, where, in the ages that lie before us, the burden of the world’s history shall reveal itself’.

References and Further Reading

Acemoglu, D. and J.A. Robinson. Why Nations Fail: The Origins of Power, Prosperity and Poverty (London: Profile Books, 2013).

Alesina, A. and E. Spolaore. The Size of Nations (Cambridge, MA: MIT Press, 2003).

Crippen, A. ‘CNBC Transcript: Warren Buffet & Bill Gates – Keeping America Great’. CNBC, 2010. https://www.cnbc.com/id/33901003.

Human Development Report Office. ‘2018 Statistical Update’. Human Development Index (HDI), 2018. http://hdr.undp.org/en/2018-update.

Jamrisko, M. ‘Singapore Dethrones U.S. as World’s Most Competitive Economy’. Bloomberg, 2019. https://www.bloomberg.com/news/articles/2019-05-28/singapore-dethrones-u-s-to-top-world-competitiveness-rankings.

Københavns Kommune. ‘The CPH 2025 Climate Plan’, no date. https://urbandevelopmentcph.kk.dk/artikel/cph-2025-climate-plan.

Mishra, Pankaj. Age of Anger: A History of the Present (New York: Farrar, Straus and Giroux, 2017)

Pinker, S. ‘2017: What scientific term or concept ought to be more widely known?’ Edge, 2017. https://www.edge.org/response-detail/27023.

Putnam, R. Bowling Alone: The Collapse and Revival of American Community. (New York: Simon & Schuster, 2001).

Rachman, G. ‘Zero-Sum World’. The Financial Times, 2010. https://www.ft.com/content/bcfb2d80-dd62-11df-beb7-00144feabdc0.

Schwab, K. et al. The Global Competitiveness Report 2018. World Economic Forum. http://reports.weforum.org/global-competitiveness-report-2018/.

‘The lottery of life: Where to be born in 2013’. The Economist, 2012. https://www.economist.com/news/2012/11/21/the-lottery-of-life.

Part A

Secret Sauces

1

The Fallacy of Scale

Fallacy of Scale suggests that we may place too much value on exact forms of measurement.

Source: Wikimedia Commons

Any intelligent fool can make things bigger, more complex and more violent. It takes a touch of genius – and a lot of courage – to move in the opposite direction.

—E.F. Schumacher, Small Is Beautiful

What gravity is to physics, ‘π’ is to geometry or entropy is to chemistry, ‘economies of scale’ is meant to be for prosperity. The ‘bigger is better’ mantra has driven nation formation throughout history. Nations strived to achieve vaster territories, larger natural resource endowments and bigger swaths of new citizens. Larger populations mean larger consumer markets and the cost per citizen across a wide range of common benefits declines considerably. Hence, amenities such as hospitals, roads, airports, schools, sewage treatment plants and police protection should be much cheaper per person in the US than, for example, in Singapore. The cost of defence becomes exponentially lower with the size of population as conscripted forces can be called upon in the time of war and the cost of professional armies can be shared across more people at a fraction of the cost.

When it comes to understanding the benefits of scale, it may help to consider the example of a chocolate chip cookie. A large company can purchase eggs, chocolate and flour at much cheaper prices. Much of their work is automated and production runs are larger and longer, so the cost per cookie is less. Hence, a company’s profitability should increase exponentially with the increasing volume of its cookie production.

So, when the size of a nation’s population is compared to its per capita GDP, we should expect to see a gradual increase in productivity reflecting the synergies attributable to greater scale. But, for some reason, something happens along the way which nullifies these benefits of scale. Research shows that there is no correlation between size and relative productivity. Indeed, figure 1.1 shows that TSTF nations demonstrate a remarkable level of productivity for their size, vastly outperforming larger nations.

The lack of a straight-line relationship is not limited to productivity per person. 75 per cent of the twenty most competitive countries in the world have populations of under twenty-five million people (IMD 2018). The US has the second highest per capita spending on health care in the world and the world’s most sophisticated healthcare industry (Miller and Lu 2018). Far from achieving benefits of scale, the US ranks fifty-fourth, together with Azerbaijan, with regard to effectiveness. Singapore, a country with less than six million people, has the second-most effective healthcare system in the world, with per capita healthcare costs which are a quarter of those in the US.

Figure 1.1: Bigger Doesn’t Mean Better among Nations

The top graph demonstrates what close correlation between a nation’s size and its GDP per capita would look like theoretically. The bottom graph shows that, in reality, there is effectively no correlation (r = 0 means random). It also shows that a clutch of smaller nations (TSTF) have a considerably higher GDP per capita relative to their size.

Source: World Bank, NZZ; R. J. Breiding

Similar results can be seen in other areas too. PISA scores, a widely accepted metric for the quality of primary education, are substantially higher in most TSTF countries rather than in the UK or the US (Jackson and Kiersz 2016). These results are achieved at a lower cost. Eight of the ten best countries in the world for a working mother to live in (i.e., the countries which offer superior child care facilities, a more inclusive work force and wages more comparable to men for the same task) have populations of less than twenty-five million (Jones 2015). The highest ranking among all TSTF nations include Denmark, Sweden, Norway, the Netherlands and Finland.

Geoffrey West, an academic at the Santa Fe Institute, published a book in 2017 whose title alone captures these issues – Scale: The Universal Laws of Growth, Innovation, Sustainability, and the Pace of Life, in Organisms, Cities, Economies, and Companies. In the case of cities, West points out that while there are benefits with size, negative externalities such as violent crimes, traffic, regulations and pollution grow faster. Despite its beauty and wealth, San Francisco now has the highest rate of property crime per inhabitant (Economist 2019). With statistics like these, smaller cities look increasingly attractive. Indeed, the ranking of the top twenty-five cities to live in the world are dominated by smaller cities in smaller nations (Mercer 2019). Better places to live tend to be outposts of liberalism, possibility and ambition. Their attraction is fueled less by size and more by a higher degree of openness to new ideas, technology and lower tolerance for status games.

Figure 1.2: The World’s Most Liveable Cities

Smaller cities in smaller countries dominate the Mercer rankings of the world’s most liveable cities.

Source: Mercer 2019

With regard to companies, and after studying the records of 23,000 businesses, West concludes that corporate productivity is significantly sublinear. This means that after an initial period of flourishing, profit per employee shrinks as the number of employees grows. In his words, ‘it is the bleak reality of corporate growth that efficiencies of scale are almost always outweighed by