All Articel 4

1. Large Countries as Models in the Twentieth Century
For some countries that gained their independence in the twentieth century, the Soviet Union became the country to emulate. Toward the end of the century, of course, the socialist model lost its appeal. It became evident to all that Russia and the other members of the Soviet bloc had failed miserably. At the same time, east Asian economies had ridden capitalism to prosperity.
Although the issue of market economics vs. socialism had been settled by 1990, there remained competing models of capitalism. At the time, many thought the lesson of the 1980s had been that Japan's variant of capitalism was the best model and that other countries around the world should and would follow it. The model was said to include such institutions as: strategic trade policy, administrative guidance, relationship banking, life-time employment, collusive industrial groupings (keiretsu), and corporate governance that seeks to maximize the capital stock and long-term market share rather than short-term profits. (1)
As it turns out, there is indeed such a thing as accumulating too much capital. The Japanese model quickly lost its luster in the 1990s as the speculative bubbles of the late-1980s burst and the economy sunk into two decades of stagnation. From this, many drew the lesson that the U.S. variant of capitalism had been the best model all along. The touted institutions included American-style corporate governance: securities markets, rating agencies, accounting standards, generous compensation for CEOs (tied, for example, to options), and pursuit of profitability and share prices rather than sheer size. The United States began the 1990s with military triumph in Kuwait and ended it with the longest economic expansion in its history. Other countries should and would follow the American model.
The American model in turn lost its attractiveness in the decade of the 2000s. Its reputation for competence and integrity took some heavy blows, including the Enron-type accounting scandals of 2001, failing incomes among blue collar workers, the subprime mortgage crisis and ensuing recession, massive budget deficits, the occupation of Iraq and associated failures, and disasters in the Gulf of Mexico.
Where should countries look for a model, now? Some will respond, "China." It is undeniable that the rate of growth sustained by China over the last three decades is a miracle of history. But I find it difficult to think of many Chinese institutions that I would recommend that other countries try to copy [Williamson 2012]. Even today, China's status as the world's second largest economy owes more to the size of its population than to its GDP per capita, which has still to rise above the median level in global rankings.
We are accustomed to looking to large countries for innovations that push out the frontier of governance. But some smaller countries, and countries on the periphery, have experimented with policies and institutions that could usefully be adopted by others.
Small countries tend to be trade-dependent, and open to new ideas. Countries that are small, newly independent, remote, or emerging from a devastating war often find it easier politically to institute radical reforms than do the United States or other large, established countries. Not all the experiments will succeed. But some will. Those innovations that succeed may be worthy of emulation by others.
Let us begin with examples from countries that are small in size, but have relatively high per capita incomes.
2. Ideas from Small Advanced Economies
New Zealand adopted a comprehensive set of liberalization reforms, known as "Rogernomics," after Roger Douglas, a Minister of Finance, starting in 1984. Perhaps its Labor Party should even be given credit for pioneering the principle that left-of-center governments can sometimes achieve economic liberalization better than their right-of-center opponents [Nagel 1998]. New Zealand's monetary authorities pioneered inflation targeting in 1990, originally as part of a larger strategy of holding individual civil servants accountable for yearly goals. Canada in 1991 and then many other central banks over the subsequent two decades followed New Zealand in adopting inflation targeting.
Estonia led the way in simplifying its tax system by means of a successful flat tax in 1994, followed by other small countries in Central/Eastern Europe and elsewhere. (2) Switzerland in 2001 put into its constitution the "debt brake." This was not a rule that the actual budget be balanced, like the impractical Stability and Growth Pact of the euro countries, but rather a rule that the structurally adjusted budget be balanced [Danniger 2002]. Germany emulated Switzerland in 2009, by putting a similar debt brake into its constitution and would like the other 16 members of the eurozone to follow suit.
Ireland recognized the importance of foreign direct investment and encouraged it by instituting a low corporate tax rate. The strategy to become the Celtic Tiger succeeded--economic growth averaged in excess of 7 percent per annum between 1995 and 2007--though the economy entered an unsustainable bubble toward the end of this period.
Canada has shown how to run a crisis-free banking system. It is not by breaking up banks that are "too big to fail" into small bits. The Canadian system is concentrated in five large banks, which hold more than 80 percent of bank assets, but the authorities have never had to bail them out. Public policy in Ottawa does not seek artificially to increase the extent of owner-occupied housing by encouraging loans that the households may not be able to repay: mortgage interest is not tax deductible, a 20 percent down payment is standard (unless the borrower takes out insurance), and mortgages are "full recourse" loans (defaulting does not let the borrower off the hook). The result is that Canada achieves the same level of home ownership as the United States, but with far less leverage, fewer defaults, and no systemic crises [Perry 2010].
Sweden in 1992 showed how to move aggressively to rescue a banking system in crisis while yet taking steps so that the taxpayer eventually gets all or most of his money back [Dougherty 2008; Larsen and Giles 2009]. (3) This example helped inspire the U.S. government's redesign of the Troubled Asset Relief Program in early 2009.
More broadly, the Scandinavian countries, after deciding that they had swung too far in the high-spending socialist direction in the 1970s, made some adjustments in the 1990s [Aslund 2010; Becker, 2007; Borg 2010]. The "Nordic model" has by now shown that it is possible to combine a high level of social protection, social services, and corporatist labor relations with market economics, fiscal responsibility, and free trade. According to Anders Aslund [2010], Denmark was the pioneer in the 1980s, in which case we should call this the Scandinavian model, followed in the 1990s by Sweden under the prime ministership of Carl Bildt. High female participation in the labor force is one ingredient in the formula. Sweden's comprehensive school voucher system may be another.