Big Ideas from Small Countries

Ve798c_thumb3 Jeffrey Frankel in Project Syndicate:

[W]here should countries look now, in 2010, for models of economic success to emulate?

Perhaps they should look to the periphery of the world economy. Many small countries there have experimented with policies and institutions that could usefully be adopted by others.

Costa Rica in Central America and Mauritius in Africa each pulled ahead of its regional peers some time ago. Among many other decisions that have worked out well for them, both countries have foregone a standing army. The results in both cases have been a political history devoid of coups, and financial savings that can be used for education, investment, and other good things.

A panoply of innovations has helped Chile to outperform its South American neighbors. Chile’s fiscal institutions insure a countercyclical budget. Many governments increase spending excessively in booms, and then are forced to cut back in downturns, thereby exacerbating the cyclical swings.

There are two key elements to Chile’s fiscal institutions:

● A structural budget balance rule allows deficits only to the extent that the current price of copper is below its 10-year equilibrium or output is below its long-term trend.

● Two panels of technical experts are the ones to judge trends in copper prices and output, respectively, insulated from the political processes that can otherwise succumb to wishful thinking.

These institutions are particularly worthy of imitation by other commodity-exporting countries, in order to defeat the so-called “natural-resource curse.” Even advanced countries such as the US and UK could learn something from Chile, given that in the last expansion they evidently forgot how to run countercyclical fiscal policy.

Singapore achieved rich-country status with a unique development strategy. Among its many innovations were a paternalistic approach to saving and use of the price mechanism to defeat urban traffic congestion (an approach later adopted by London).