Small economies can ride out the economic storm

Unemployed workers in Mexico (picture El mundo de Laura)

The Financial Times reported on an interesting study by the Lausanne Institute for Management Development yesterday, looking at the resilience of national economies, large and small. Read the report here.

The study found that, on the whole, smaller countries were better able to adapt themselves to the financial crisis and prepare for recovery. Political and business systems were more in touch with the needs of the people and the economy, and could implement changes more easily. Small is beautiful. (This blog commented on the economic benefits that flow from regional government earlier in the week.)

But before anyone gets too excited, there is an important additional factor to consider. This was a study of the ability of countries to prepare for economic recovery, when it comes. But when it comes is not an independent fact of nature. It too is susceptible to political intervention.

And the political intervention that will bring recovery sooner will come from the large economies, not the small ones. These are the countries whose decisions have repercussions all around the world. Major exporters like Germany and China and major importers like the United States and the UK are the countries whose economic policy decisions set the trend for the global economy.

Those economic policy decisions will be more effective if they are taken and implemented jointly. The coordination of fiscal stimulus packages will make all of them more effective: there is no national solution to global recession.

The ideal package therefore seems to be small scale government for industrial and enterprise policy but large scale government for macroeconomics. Different levels of government for different functions: whoever thought of that?

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