Emirates a micro power

Magazine covers can often offer the best guide to the future – though upside down. I am thinking of the famous BusinessWeek cover of August 1979 that proclaimed ‘The Death of Equities’ before the beginning of the 1980’s bull market, the 2014 Time magazine cover with the headline ‘Can anyone stop Hilary ?’, or the Economist cover ‘Brazil takes off’ in November 2009 just before its markets collapsed, and then ‘Has Brazil blown it ?’ in September 2013 as the country was about to boom.

In this light, I was wary to recently read the Economist magazine (August) declare Ireland as an ‘unlikely diplomatic superpower’ because of the array of important policy seats it holds (UN Security Council, Chief economist ECB, etc). The Economist curse soon struck, and Ireland lost hold of the EU Trade Commission.

In many respects, Ireland is very powerful diplomatically, not least compared to other similar sized states. This largely due to the performance of its superb diplomatic service (which is very much underestimated in Ireland) and outward focused state organisations like the IDA (Industrial Development Authority). Also, Brexit has been an excellent proving ground for Irish diplomacy and in addition, should Joe Biden be elected as US President, this will significantly bolster Ireland’s place in Europe (Biden is likely the most fervent Irish American President).

However, the secret of Irish diplomatic success is that in general Irish people do not take themselves too seriously, and many would laugh at the notion of being a diplomatic superpower.

Maybe a ‘micro-power’ is a better term for a geopolitically influential small state. I’ve derived this from former French foreign minister and commentator on diplomacy, Hubert Vedrine’s term ‘hyper-puissance’ which means ‘hyper power’, or more than a superpower.

The idea of the ‘micro-power’ really came to mind when Israel and the United Arab Emirates recently normalised diplomatic relations. Both are powerful, small states. Israel’s power derives from its military, its diaspora and technology industry while the Emirates is politically powerful across the MENA region and financially and economically very influential (Indeed, one expert, Afshin Molavi, has described Dubai as the ‘Hong Kong of India, or the Singapore of the Middle East’).

While the deal between the two countries very much sidelines the cause of the Palestinians, it reflects the speed and complexity of political change across the Middle East, and, in my view the ambition of both states to be considered ‘micro-powers’. The deal means both Israel and the UAE will gain new markets, cement relations with the White House, and deepen their collective rivalry with Iran.  

In a world that is quickly leaving globalization behind, entering a multipolar world order, the idea of the ‘micro-power’ may be one of the new diplomatic constructs of the 21st century. Regular readers will know that I have written a lot about the small, advanced economy model (and David Skilling’s newsletter on this is worth a read https://davidskilling.substack.com/) but not all small, advanced states are micropowers – Austria, Finland and New Zealand all top the list in terms of socio-economic models, but their diplomatic reach is not overawing.

My criteria for a micro-power are that it must be regionally dominant, count upon a significant resource (in Ireland’s case its diaspora, in the Emirates’ case its wealth and reputation for vision), and must be durable (Switzerland is the best example here).

As the idea of the ‘micro-power’ takes hold (I hope), there will be a number of considerations to bear in mind. One is that like superpowers, we already have the first ‘micro-power’ cold war between the Emirates and Qatar (it has thawed in recent months). Another question is what micropowers are for, beyond bolstering their own influence in the world.

In general, in a world that is transitioning from being driven by geographical to values based alliances, micropowers such as Norway, Ireland and Switzerland can act against the denigration of the rule of law and democracy internationally, and can and in my view should take the lead in pushing the remaking of international institutions – from the UN to the World Health Organisation (WHO).

Some micro-powers in the making, like Singapore, may choose to dodge competing value systems – they risk being subsumed in the crush between the USA and China – and try to foster a form of regional neutrality. Others, like Scotland, have a long way to travel if they want to become micro-powers, but at least they have their history to guide them. Scotland was once the intellectual fulcrum and centre of innovation of Great Britain, and in time could again take on this role.

Have a great week ahead


Hidden Gems

Small and free

One of the rituals associated with the World Economic Forum’s conference in Davos in late January is that a growing number of think tanks uses this event as an opportunity to release headline grabbing studies (Oxfam’s ’22 richest men in the world have greater wealth than all the women in Africa’ is one example). Of the prominent ones to catch the eye, the Bloomberg Innovation Index, the Economist Intelligence Unit’s Democracy Index and the WEF’s own, interesting Social Mobility Index, all stand out, for at least two reasons.
The first is that they underline the accelerated rise and fall of nations (in the Transparency International Corruption Perception Index, America has fallen to its weakest rating in eight years – at a time when ‘trust in government in the US’ is only 17% according to the Pew Research Centre) and the ongoing crisis of democracy worldwide (the Economist Intelligence Unit reports that ).
The second is that small, advanced economies top the league tables in nearly all of the studies published last week. For instance, the least corrupt countries in the world are New Zealand, Denmark, Finland, Singapore, Sweden and Switzerland, while the top ten countries in the WEF Global Social Mobility index are also small, advanced countries. Then, eight of the top ten countries in the EIU Democracy Index are also small, advanced states (New Zealand, Ireland, Switzerland, the Nordics), and to top it Singapore, Switzerland, Sweden, Israel, Denmark & Finland are in the top ten most innovative countries as ranked by Bloomberg.
Given that innovation, corruption, democracy and inequality are the key issues of our day, it is surprising that more investors and commentators, especially those in large economies, do not study the success of small states more carefully.
Regular readers will however know that this topic is one that is dear to my heart and is something I have written a great deal on with David Skilling of Landfall Strategy (his note on the ‘Decade Ahead for Small States’ is worth a read, https://www.landfallstrategy.com/commentary/2020/1/15/into-the-next-decade-for-small-economies).
At the risk of repeating myself, I think a few aspects of the ‘success of small states’ are worth restating as the new decade begins.
One is that, as growth slows globally, and at some stage the world economy faces the prospect of a recession, there will be a debate as to how (apart from taking on more debate and undertaking more QE) long term economic growth can be generated. The recipe for this lies in the many public goods (education, institutions) that are being denigrated in large developed and many emerging economies, but that remain healthily manifest in many small, advanced states.
Most of these economies are also highly globalized and offer a convincing rebuttal to the view that globalization creates inequality. Inequality is a function of the way in which individual states process globalization and the effect of financial markets on their economies. The US is the best example I can find, where wealth inequality is at record high levels. In contrast Ireland does experience income inequality at a gross level, but its highly redistributive tax system levels this out.
What small states in aggregate do well, with I should say some glaring omissions, is think strategically about the impact of the wider world on their economies and societies (Denmark for instance has a ‘Minister for Silicon Valley’), and then try to buffer these outside influences.
The other interesting phenomenon regarding small states and the wider world is how they are reacting to changes in geopolitics. Brexit has robbed Ireland and the Netherlands of a natural ally in Brussels, and both nations are now part of the ‘Hanseatic league 2.0’ group of small EU states that broadly speaking are pro-growth, fiscally responsible nations. On a broader scale, David Skilling and I have written on the need for a ‘g20’ of smaller, advanced states. Such a body might be one of the coalitions of the 21st century, given that many small, advanced states have far more in common (democracy, leaders on environmental policy, focused on soft power). A platform like this might also give countries like Singapore, now torn between America and China as geopolitical partners, a different platform.
If readers are not convinced of my entirely biased case for small states, consider their investment performance. Over the last ten years, a portfolio of resilient, larger cap, export-oriented stocks in the twelve leading, small advanced economies have handily beaten Asian and European indices, and are not far off matching the S&P index. Time to pay more attention to small, advanced economies.
Have a great week ahead,