Thursday, May 17, 2012

Why we need small countries: they experiment with policies

Small countries are often considered a nuisance. They are sometimes tax havens that annoy larger countries because it increases tax competition. They have more weight than their size in international organizations (UN, European Commission, ECB) or sports organizations (FIFA), which at least in the latter case encourages corruption. And they increase sample sizes in cross-country regressions without truly adding information, sometimes leading to erroneous results. But small countries are also great because it allows to experiment with policies.

That is the argument of Jeffrey Frankel. He gives plenty of examples of innovative policies adopted in small countries that turned out to be good choices. In many cases, it looks like larger countries would also benefit from adopting them, that is, smallness is not a necessary condition for success. A good read with a boatload of interesting anecdotes to bring up in conversation.


Kansan said...

We should even pay small countries to experiment with policies. Finally, macro would have its randomized experiments!

David said...

Couldn't agree more.

I've been working in Africa for 15 years and a recent assignment in Rwanda enlightened me to the advantages of making a real impact in smaller countries.

The priority of President Kagame's administration on innovation is inspiring for me, as a development professional, and the demonstration effect of policy reform in Rwanda is definitely gaining traction in other East African countries too.

Kevin Denny said...

I would have said the opposite for the following reason: If you are interested in micro experiments, it is very difficult to do experiments. I live in Ireland, a small centralized economy. It is not practical to introduce a fiscal, public health or educational experiment in one part of the country: there are spill-overs, people get upset etc. I envy how you have big between- state variation in the US.
Kevin Denny