(Title Image: awe365.com)

I’m returning to one of the more important academic papers produced on the subject of the economics of independence – not just for Wales, but other stateless nations too.

The Flotilla Effect: Europe’s small economies through the eye of the storm (pdf) was co-authored by Adam Price AM (Plaid, Carms. E & Dinefwr) and Ben Levinger – while both were at Harvard University – on behalf of the Green-EFA group in the European Parliament (currently represented in Wales by Plaid’s Jill Evans MEP).

The Flotilla Effect is an examination of how smaller nations fare in a globalised economy, the impact the Great Recession had on smaller nations and what advantages and disadvantages smaller independent nations have economically.

The report pre-dates Brexit, the Scottish and Catalan independence referendums, the “Second Cold War” and the rise of the populist right-wing in the West; so the main question is whether The Flotilla Effect still stands up to scrutiny?

Firstly, it’s worth a recap of what was in The Flotilla Effect itself.

Section One: Sizing Up The Evidence

Good News

  • The European Union has moved from a balance between large and small nations to domination by small nations. 7 of the top 10 EU member nations in terms of GVA-per-head are “small nations”(defined in the report as nations with a population less than 15million).
  • Smaller countries perform well on international measures of peace, innovation, long-term prosperity and life satisfaction.
  • There’s no evidence that larger nations automatically have larger economies (“home market effect”) due to capital and knowledge-intensive industries locating as close to their main markets as possible.
  • Small countries which are open to trade correlate with increased economic growth compared to larger countries, meaning smaller countries stand to benefit more from globalisation.
  • The economies of smaller nations grew up to 2.3% faster than larger nations between 1996-2004. Smaller nations also increased exports by 50% compared to 35% for larger countries.
  • There’s a negative correlation between large population and economic growth in the EU, even after taking into account the market liberalisation in eastern Europe.
  • There is a “moderate” level of economic volatility that benefits growth (a la Laffer Curve). Smaller nations were more volatile between 1996-2010, however, increased volatility in smaller countries correlated with increased economic growth during the period.

Smaller nations have four core advantages:

  • Increased openness to trade/an export oriented economy that leads to globally significant specialisation in niche markets and the creation of “Small Nation Stars” (major global companies headquartered in smaller nations i.e. Nokia in Finland, Maersk in Denmark).
  • Greater social cohesion; small nations are better at integrating minorities, have more effective governance, less income inequality and stronger accountability to decision-makers.
  • Adaptability; small nations react better to economic shocks and are much better at innovating economically and socially. Examples of such innovation led by small nations include: congestion charging (Singapore), flat taxes (Estonia) and the abolition of the military (Costa Rica).
  • Socially inclusive supply-side economics (i.e. The Nordic model) means there’s no need for governments to spend their way out of trouble (Keynesian-style fiscal stimulus) as big governments in small countries already act as a natural stabiliser.

Bad News

  • Larger nations outperform smaller nations in terms of global competitiveness. Small nations also feature prominently in “misery indices” but not disproportionately.
  • Small nations performed worse during the economic downturn, however, small nations made up 8 of the 10 fastest recovering nations. Germany and Poland adopted export-based “small country approach” to boost growth.

Section Two: Surviving the Storm

  • The euro zone crisis was caused structural weaknesses in the monetary union. Higher inflation meant interest rates were kept artificially lower – the exact opposite of what was needed.
  • Public spending in the “PIIGS” nations (Portugal, Italy, Ireland, Greece, Spain) was at or below the EU average. Countries which spent big were largely untroubled by financial problems (i.e. Denmark).
  • Before the Great Recession, there was no difference in pricing of government debt between small and large nations. After the economic crisis, small nations had a 50 base point “premium” due to the introduction of full-blown austerity programmes. Only a small group of EU countries are/were actually in good financial shape – most of them small nations.
  • Euro zone debt problems were more the fault of private borrowing than public borrowing. Public debt remained stable or fell throughout. Private debt increased on the back of property booms, corporate borrowing and credit growth. This was driven by the difference in inflation between the “periphery” and the “core” of the euro zone. An example’s given of banks in Germany finding willing borrowers in Ireland and Greece when they couldn’t do so domestically.
  • Institutional cronyism in small nations can breed corruption. However, big financial institutions and small nations are not always a toxic combination (i.e. Switzerland). Small nations turned to experts in other small nations during the financial crisis; a lack of regulatory oversight in Scotland was one of the causes of the problems at RBS and HBOS.
  • Small nations enjoy comparative advantages as financial centres; four small nations dubbed “Mighty Minnows” (Luxembourg, Switzerland, Republic of Ireland & Belgium) hold more US debt combined than China.

Section Three: The Flotilla Advantage

  • There are two generic variants of capitalism at work in Europe: Alpine (a Nordic-style social market) and Maritime (the Anglo-American model based on individualism).
  • Wales and Scotland – with their social democratic traditions – have a very different economic model to England dubbed a “Flotilla”; Wales could potentially be an open corporatist social market (an economy based on interest groups) based on community cohesion, a spirit of adventure and diversity at large, “a network of dynamic comparative advantage seeking innovation and growth.”
  • UN Industrial Development Organisation: “Small, highly dynamic economies are replacing mature, developed countries as global industrial competitors”.

The Flotilla Effect & Independence

  • Luxembourg is compared to Saarland. Both had economies rooted in coal and steel. Luxembourg remained independent, Saarland rejected independence and became a German federal state. Luxembourg became a founding member of fore-runner to the EU and home to Arcelor-Mital steel, Saarland’s steel industry declined.
  • Luxembourg’s economic growth outstripped Saarland by 2.5% year on year from the 1960’s to 2007. Luxembourg has one of the highest GVA-per-head rates in the world, while Saarland became the poorest state in the former West Germany.
  • Since 1990, Wales’s per-capita GDP growth has been, on average 0.9% a year. If Wales became independent in 1990, a model (based on population) projects growth of 2.2% per year.
  • The Welsh economy could have been, on average, 39% more productive with independence in 1990 than we are at present – though Wales could perform better or worse than this based on its economic and political policy.

Conclusions

There are two things nationalists can take away from the report:

  • There’s no link between a larger population/larger country and economic growth. There’s no such thing as “being too small” to be able to afford independence or support an economy.
  • There’s a correlation between openness to trade and economic growth. This is true for both large and small nations, though there’s a trend that hints that smaller nations generally have better prospects for economic growth than larger ones when they are open to trade (which in layman’s terms means having a healthy amount of exports and imports compared to the size of the economy as a whole).

What the report didn’t say:

  • That the Union has, in itself, hampered economic growth in Wales – though the evidence leans towards this being the case.
  • There’s an acknowledgement in the report that they can’t evaluate the economic prospects of an emerging/stateless nations post-independence (i.e. whether Wales really would be better off independent).

Even after all the events of the previous 6 years, by and large, the report still stands up to scrutiny and, if anything, the rapid recovery of Iceland and the Republic of Ireland from the Great Recession is a sign smaller nations do have some measure of an economic advantage over larger ones.

There’s also been no attempt by anyone (to date) to outline the economic benefits of political union in the UK (fiscal transfers/subsidy, military spending etc are not economic benefits). It’s just assumed as fact when everything to date over the last century suggests otherwise, particularly in the case of Wales.