Small economies in a post-Covid world

Singapore and other small advanced economies have weathered the pandemic better than many larger ones. They should leverage their agility and strengths in technology- and knowledge-intensive activities to do even better in the years ahead.

There are specific challenges facing small economies such as Hong Kong (above) and Singapore which have positioned themselves as global hubs for people, capital and companies, says the writer. PHOTO: AGENCE FRANCE-PRESSE

Small economies have managed well through the Covid-19 crisis relative to larger economies. Despite the recent cases, Singapore is commonly ranked as a world leader, alongside New Zealand and Taiwan, in having controlled the spread of Covid-19.

In terms of economic outcomes, small advanced economies have outperformed their larger counterparts over the past year. Small advanced economies' gross domestic product (GDP) growth contracted by 3.5 per cent last year, compared with 5 per cent in the Group of Seven large economies.

This performance was due to a combination of adept domestic management, aggressive macro policy stimulus, and resilient globalisation. World trade in goods contracted by less than expected last year, and is already back above pre-Covid-19 levels.

Small advanced economies are a useful comparison group for Singapore because their high level of openness to the global economy means that they have similar eternal exposures as well as similar policy options. From the Nordics and Ireland, to Switzerland, the Netherlands, Israel, Hong Kong, and New Zealand, small advanced economies have similar economic dynamics despite their surface differences.

Singapore's economy contracted by 5.4 per cent last year. The Covid-19 shock directly impacted several of Singapore's key growth engines (notably tourism), in addition to the cost of the domestic restrictions. But Singapore has been able to navigate these economic challenges; it has generated three consecutive quarters of positive GDP growth.

The Government's aggressive fiscal support measures, estimated by the International Monetary Fund to amount to 16 per cent of GDP, have been very helpful. Indeed, the IMF's recently concluded Article IV consultations in Singapore applauded its "bold, comprehensive, and coordinated policy response". And Singapore's exports have been resilient, in part due to strong demand for electronics and pharmaceuticals.

Looking forward, small advanced economies are forecast to outperform other advanced economies over the next several years. The historical record suggests that small advanced economies come out of crises faster than larger economies.

Indeed, Singapore's GDP is forecast by its Ministry of Trade and Industry to grow by 4 per cent to 6 per cent this year. And the Monetary Authority of Singapore suggests that Singapore's growth may exceed this target range. This strong recovery experience is reminiscent of the global financial crisis experience, where the Singapore economy also rebounded strongly from 2009.

Overall, the small economy model has continued to perform through the crisis. High-quality policymaking, strong fiscal policy positions and positions of strong competitive advantage have been a good combination. Once again, small economies have not been disadvantaged by scale.

Structural impact of Covid-19

But the economic impact of Covid-19 will extend well beyond the immediate impact on GDP. The Covid-19 shock will have an enduring impact on the functioning of economies around the world. In contrast, the global financial crisis did not leave a structural economic impact, other than high debt levels and low interest rates.

From the role of the state in strengthening national resilience to the implications of remote working models for cities, Covid-19 will have an ongoing impact in advanced economies around the world. The policy response needs to move beyond fiscal policy - necessary though this is in the short term - to policies that respond to new competitive dynamics in the global economy.

Some existing growth engines will not be able to offer the economic support that they have historically. For example, sectors like international tourism and physical retail will face structural headwinds, whereas sectors in the digital economy have stronger post-Covid growth prospects. Rebalancing of economies will be required in response to these new growth profiles.

Small economies will also need to adjust to changes in globalisation in the post-Covid global economy. Globalisation will continue, but it will be increasingly more political, more regional, and with greater frictions - from supply chain nationalism to the risk of US/China decoupling.

There are some specific challenges facing small economies such as Hong Kong and Singapore that have positioned themselves as global hubs for people, capital and firms. These economies will need to strengthen positions of competitive advantage rather than continuing to rely on the rising tide of globalisation.

And growth models are changing. In particular, there will likely be a transition to more technology- and knowledge-intensive growth models. Some of this has been evident in the accelerated adoption of digital technologies and new business models over the past year. To prosper in a post-Covid world, small economies will need to deepen their investments in technology to maintain their edge as well as seize the new opportunities that arise from digitalisation.

Indeed, my assessment is that the next decade could see a productivity renaissance. Labour productivity growth has been in sustained decline across advanced economies for several decades. But the accelerated adoption of new business models as well as substantial new investments in technology, combined with strong global demand, could be a catalyst for markedly higher productivity growth.

The small economy outlook

In this context, there is a positive outlook for small advanced economies in the post-Covid environment. Many small advanced economies have strengths and capabilities in technology- and knowledge-intensive activities. And they have institutions to effectively manage the rebalancing of their economies, supporting broadly shared gains from the growth process.

The agility and flexibility of small advanced economies, and their reliance on policy measures to strengthen competitiveness, will stand them in good stead. And many are already working to position themselves for new economic realities.

Singapore is also well placed for this transformation process. The structure of the Singapore economy gives it an edge relative to other hubs, such as Hong Kong. Singapore has deliberately built a diversified economy, with a range of strengths in manufacturing as well as services - which provides it with resilience as well as dynamism.

Singapore has also invested heavily in skills and innovation. These capabilities mean that Singapore is less exposed to changes in the shape of globalisation, and that it has strong foundations to further increase its knowledge intensity.

Of course, some additional policy measures will be required. Policy will need to respond to the changing post-Covid growth profile of various sectors, supporting the transition of workers and capital to the growth parts of the economy. Skills and retraining policies will be vital.

And policies to support increased investment in capital, technology, and innovation by Singapore-based firms to drive productivity growth and strengthen Singapore's competitive position are also important. Some of this is simply doubling down on the Singapore policy playbook.

But there are some additional policy priorities to ensure that economic value from this innovative activity is captured in Singapore.

The international small economy experience highlights the importance of building dense, innovative clusters of economic activity that can support strong growth by domestic firms. Although Singapore continues to receive record amounts of inward foreign direct investment, building domestic capabilities is even more important in a post-Covid world.

The emerging changes in the global economy provide a real opportunity for Singapore, offering a pathway to accelerate its productivity agenda. Previous crises have provided an opportunity for Singapore to upgrade its growth model and to strengthen its competitive position. Consider, for example, the recommendations from the Economic Strategies Committee, established after the global financial crisis, and from the Economic Review Committee after the Asian financial crisis.

The Covid-19 shock could be a similar catalyst for an upgraded economic strategy. Indeed, Singapore is being as aggressive and creative in both its short-term and structural policy responses to Covid-19 as any other advanced economy around the world. From skills and labour market initiatives, to actively identifying new growth sectors, as well as the work of the Emerging Stronger Taskforce, Singapore is looking ahead.

This is welcome, but is also an imperative given the scale of the challenges and opportunities ahead for small economies.

Dr David Skilling is director at Landfall Strategy Group, an economic and policy advisory firm focused on small advanced economies.