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An interview with Jón Baldvin Hannibalsson.

Introduction: Late November last year there was a multinational conference in Tallinn, where the major questions to be tackled were the following: Can small nations offer state services to their citizens at the same level of quantity and quality as bigger nations? Or will the relative cost (as a percentage of GDP) be too high – or even prohibitive? Do small nation face tough choices as to what services they are going to give priority? Although the central government in Tallinn accounts for a relatively small percentage of GDP, there is a growing debate in Estonia about increasing cost pressures concerning government expenditures.Is there such a thing as an optimal size of the public sector conducive to economic growth?

I was invited to speak at the conference and to participate in panel discussions. Eventually, for the sake of cost cutting, we settled for an interview which was posted on the conference web page in Estonian. What follows is the English text.

Q: How do you envisage the abilities of small nations to maintain sustainable living standards and take care of their national interest in the international arena?

A: By definition the abilities (capacities) of small nations are limited. They have limited resources (e.g. in terms of population and economic and military power). How can they preserve their freedom of action (independence) and remain competitive in a globalized world, in spite of those deficiencies? A successful strategy should be measured in terms of how well a small state makes up for those natural limitations.

In the real world many small nation-states have succeeded in overcoming those restrictions. Quite a few small states have achieved higher living standards than their bigger neighbours. Luxemburgh is the smallest and the richest EU-member state. Switzerland has for long been a major financial center. So is Singapore. The oil kingdoms (including Norway) are much richer than many of their bigger (and more numerous) neighbours. The Nordic welfare states – with their enviable quality of life – have maintained their competitiveness, in the era of globalization, contrary to the neo-liberal doom-sayers. High taxes, well spent, contribute towards high productivity.

There is no single formula explaining those success stories, which is applicable to all. Rich natural resources may not be sustainable in the long term. Cheap labour and low taxes may attract foreign capital for a while, but can hardly be an end in itself. Productivity, generated by a high standard of education and technological competence have, in the case of the Nordic countries, enabled welfare states to remain competitive.

Is there any optimal size for success – not too big and not too small? Well, look at my own country, by current UN definition a micro-state (pop.320 thousand). Before the Crash in 2008, Icelanders enjoyed the 6th highest pr.capita income in the world. The neo-liberal experiment in turning Iceland into a financial center lasted less than a decade and ended in ruin. Can we rebuild it, based on rich natural resources (fish and renewable energy) and (relatively) high level of education? The verdict is not out yet.

It is not to be taken for granted that a population equivalent to a small European town, can actually sustain a competitive nation-state, with all it entails: Effective national defense, the smallest currency area in the world, competitive university education, R&D, a national theater, an opera, an international airport, effective infrasturcture, etc., etc..
Any lessons? There is no optimal size. A lot depends on location and luck. There is no single economic model guaranteeing success; but a prerequisite for success seems to be a high level of education, good governance and absence of corruption.

Q: Iceland´s choice has been membership of NATO but not of the European Union: What are the advantages or disadvantages of this choice?

A: Those choices have, for better or for worse, mostly been determined by our geographic location, conditioned by outside forces and are rooted in our national history. When Iceland became a sovereign state (albeit in royal union with Denmark) in 1918, it was declared to be „eternally neutral“. The Second World War swept such naïve notions away. The British occupied Iceland (just ahead of Hitler) and then the Americans took over. Iceland turned out to be crucial for the “battle of the Atlanti”. A US naval base in Iceland enabled the allies ultimately to defeat German sub-marine warfare. This victory secured the transatlantic convoys bringing men and war materiel from “the arsenal of democracy” for the Normandy invasion and to Murmansk, for the war on the Eastern front, both a precondition for the defeat of Nazi Germany.

This taught us – and the Americans – a lesson. During the Cold War Iceland was of crucial military significance for NATO. NATO secretary-general, Joseph Luns, once described Iceland as the equivalent of a floating air-carrier in the North Atlantic. This – along with the fate of other self-declared neutral countries during the Second World War – explains our NATO choice.

The prevalent antipathy towards the European Union in Iceland (and in Norway) is a bit more complicated. Remember that Iceland is an ex-colony (for more than 600 years) and a newly independent state. The independence struggle against Denmark for 100 years - although formally concluded by the founding of the republic in 1944 – is still being waged in domestic politics, against the outside world – and against the EU in particular. Icelanders jealously guard their national sovereignty, which they credit for bringing them from rags to riches in the latter half of the 20ieth century. Why should they give it up?

In terms of trade, there is no urgency to do so, since the EEA-agreement (European Economic Area) gives us (almost) complete access to the internal market, where Icelandic companies can operate on an equal basis. Paradoxically, we pay the price for this privilege by adopting EU-legislation, without any means of influencing it. In other words: We seem to be ready to give up a big chunk of our legal and judicial sovereignty, in order to preserve the rest of it (which most Icelanders seem to believe means maintaining their control over their natural resources).

The disadvantages? Well, this way we are doomed to maintain “the smallest monetary area in the world”, which pushed us into the economic abyss only five years ago. Having been for some time under the intensive care of the IMF, we are still in the emergency room of “capital controls”. Were they to be lifted, massive capital outflows would push us into a new devaluation, again doubling our already heavy debt burden, intensifying the devastating fire of inflation. Frequent devaluations of an inconvertible currency are a short-term fix, which makes the patient addictive and precludes stability and long term growth. Isn´t this the essence of the hilarious quarrel between your president, Toomas Hendrik Ilves, and the Nobel prize winning economist, Paul Krugman? A delightful subject matter for an operetta?

Q: You have been an advocate of “the solidarity of small nations” (including Baltic/Nordic cooperation): Why is this so important in your view?

A: Your own arduous Baltic Road to Freedom is a case in point. Why did it take so long for the leaders of Western democracies to accept your restored independence – which meant secession from the Soviet Union? There were several reasons. One was the naïve belief of the Bush Sr. administration, that Mr. Gorbachev could succeed in reforming Soviet communism. That was from the start “mission impossible”. Another was that the West had invested a lot of political capital in the person of Mr. Gorbachev as a partner in ending the cold war. If Gorbachev were to be deposed, the hardliners would come back, it was repeated ad nauseam.

This would endanger domestic reform within the USSR, put an end to our hopes for disarmament and even risk a return to the cold war – not to speak of the danger of armed conflict in Eastern Europe. The German leadership, Die Herren Kohl und Genscher, had invested a lot of capital – political and otherwise – in Mr. Gorbachev as a guarantor of peaceful German reunification. The Brits and the French, for their own domestic reasons, have never been supportive of “ethnic minorities”, breaking away from colonial tutelage. Moreover, the US superpower had a hidden agenda in securing Mr. Gorbachev´s complicity in “Operation Desert Storm” – the first invasion of Irak.

When Mr. Gorbachev had failed in implementing any meaningful reform within the Soviet Union, he had only one major goal left to fight for: To keep the Soviet Union together at all cost. And the leaders of the West ended up – all their democratic rhetoric not-with-standing – supporting Mr. Gorbachev, and hence the Soviet Union, under his leadership. This was of course a case of dismal failure of leadership. The gap between the leaders´ idealistic rhetoric and their realpolitik, was deep and widening. This is why the leaders of your independence movement received such a lukewarm support in the West.

For a while it seemed that the Baltic nations would have to pay the prize for ending the Cold War by remaining locked up in the Soviet prison of nations. This was going on – mainly between 1989-1991. That is why some of us, recognizing this failure of leadership, tried to resist and sought instead to galvanize support among the smaller European democracies for your restored indepencence. As luck would have it, the attempted coup d´état in Morcow in August 1991, opened up a window of opportunity for us to act, making the process of recognition irreversible.

As the smallest member of the Nordic group – and the last one to regain independence along with Finland in the wake of the First World War – Iceland has benefitted most from Nordic cooperation. From our early days of statehood, Nordic cooperation has been invaluable for us, in terms of learning statecraft and good governance. My wish to extend Nordic cooperation to include the Baltic states, is deeply rooted in this experience. Structured cooperation between the Nordic/Baltic countries, as a sub-region within the European Union, or at least in close cooperation with the EU, will significantly strengthen our ability to deal with the outside world and the challenges ahead. Through it, we may be able to combine the advantages of small states with the size of a significant regional player, in European and international affairs.

Q: Increasingly academic research has been directed at issues concerning quantity and quality in interstate relations: In view of this, how do small states have to organize their public administration differently from the large states?

A: I take this question to mean the following: Can small states make up for their lack of quantity by maintaining higher quality, at least in their chosen fields of specialization? Can we?
In our era of globalization, nation-states are constantly being put to all sorts of comparative tests. We are continuously being tested and given marks for our performance in this or that field of competence: Competitiveness, level of education, R&D, innovation, labor market participation, (female participation in particular), productivity, attractiveness for foreign direct investment, rate of economic growth, absence of corruption, transparency, good governance, adaptability to change, in addition to indicators of the quality of life, such as absence of pollution, access to clean water, access to nature, access to health care, low levels of child mortality, absence of major diseases, prospects for longevity and so on and so forth.

It is remarkable that during the last two decades, small nations have generally tended to come out on top in most of those comparative tests of nations. Even scholastic performance as measured by, e.g. the Pisa tests, confirms this trend: Students from Finland, South Korea, Singapore and a few other relatively small states, consistently outperform students from the so called major states.

How come? In the compilation of the one hundred best universities in the world, aren´t American universities consistently deemed the best? Haven´t the old European seats of learning been lagging behind? And what about the Nobel prize winners? Since the end of the Second World War, at least, the preponderance of American Nobel prize winners in the sciences, seems to confirm the excellence of America´s elite universities. How can small countries, with their limited resources, compete in the fields of research and innovation, which constitutes the driving force in modern economies?

This seems to me to be a bit paradoxical: The Americans have all the best universities, but we – the small nations – seem to come out on top in most of the tests, measuring comparative performance of nation states. I would be grateful for any help in solving this riddle! Is a part of the explanation that foreign (Chinese) students are attending American universities in great numbers and actually constituting a majority of Ph.d-graduates and post-graduate researchers at those institutions?

Icelanders have for long taken pride in their old established tradition of our “best and the brightest” students going abroad to study, both at the undergraduate and graduate levels. Before the Crash, most of those students returned home, enriching our society through their experience, linguistic skills and expertise. In the aftermath of the Crash, many of my compatriots have been taken aback by the revelation, that most of our basic institutions were after all visibly sub-standard.

Recruitment for public office was often based on political patronage and nepotism rather than merit. That is why many of our institutions were, when put to the test, found to be wanting in expertise, administrative skills, professionalism and the pathos of good governance. This applied to institutions such as key ministries, the Central Bank, the financial surveillance authority, the universities and the media. When it came to the judicial branch and the courts, there was a painful lack of experience and expertise in dealing with cases of international financial fraud and corruption. Trust in major institutions such as Alþingi (parliament), political parties and politicians, the banks, the media, etc. has since the Crash been at a low ebb.

Before the crash the president of the Republic had consistently, in his speeches at home and abroad, been extolling the virtues of the wizards of the Icelandic financial sector, for their pioneering spirit, willingness to take risks, relentless drive and daring – even ingrained superiority! He even suggested that the conventional wisdom taught at the world´s major business schools would have to be rewritten, to take account of the unique achievements of the Icelandic “oligarchs”. It has now taken the Special Prosecutor´s Office, set up after the Crash, more than five years to investigate the intricate webs of fraud, illegalities, abuse of rules and tax evasion that they have left behind amidst the ruins of our society.

It is gradually dawning upon us that it may take a generation or more to learn the lessons of this banal case of hubris, and to restore our society back to health. Are we unique in this? In having to look into the mirror, and dislike what we see? What about the Irish? The Spanish? The Portuguese? The Italians? The Greek? How long will it take us to learn to make up for our lack of quantity by a higher level of quality?

Q: Estonians struggle to find good solutions for regional policy within their 45.227 km 2. Icelanders are fewer still within a bigger space. How have you coped with this challenge, in terms of providing public services and maintaining even living standards?

A: For centuries Icelanders survived by subsistence agriculture in a harsh, natural environment. Approximately 85% of the population were either agricultural laborers or tenant farmers. The land-owning elite consisted of the church (which also owned the souls) and a few dominant land-owner families, who also provided the minimal bureaucracy for the absent-minded colonial power (Denmark). Urbanization in medieval Europe (merchant towns thriving on trade and handicrafts) created demand for fish from foreign faraway places, already from the 16th C.

From then on, fishing fleets from the Basque country, Britain, the Netherlands, France (Bretagne), as well as Germany and Scandinavia, sought to fulfill this demand by fishing in the waters around Iceland, and also Newfoundland. As a matter of fact, cod brought more wealth to emerging European cities than precious metals (gold and silver) from Latin America to Spain. The opportunity for Icelanders to utilize this major natural resource for commercial purposes, which would have stimulated early urbanization, was consistently thwarted by the domestic land-owning elite in the service of their Danish colonial masters. This delayed Iceland´s economic development by a few centuries, basically until the 20ieth C. By the end of the 19th C. a fifth of the population had given up hope and emigrated to North America.

The formula for Iceland´s take-off from 13th C. subsistence agriculture into export led economic growth was three-dimensional: technological transfers (ships, engines and fishing-gear), foreign capital (through Danish owned banking) and tariff free access to consumer markets in the UK and continental Europe. This started relentless migration from the countryside to towns by the seaside. In the last few decades of the 20ieth C. this process was further enhanced by a quota system in fisheries, which through privatization concentrated fishing rights in the hands of a few big companies, leaving behind villages and townships without means of survival. Now, more than two thirds of Iceland´s population is concentrated in and around the capital city, Reykjavík. This is in spite of at least 100 years of public regional policy, aimed at halting the flight from the countryside. This seems to confirm the utter failure of our regional policy, which seems to be hardly fit to be emulated.

The Crash has raised serious questions about the ability of such a small population, concentrated for the most part in a single urban area, to build the necessary infrastructure and to maintain basic services (healthcare, education and transportation infrastructure) in the sparsely populated and economically weakened countryside.

Some social scientists are now asking themselves if those migratory trends, from the countryside to a single urban area, will continue beyond our borders, by means of a Post-Crash brain drain abroad. The old tradition for the best and the brightest to go abroad for academic training and work experience, which used to be our strength, may now be turning into a weakness. For the first time since the founding of the republic, experts in many fields are emigrating. And those finishing their studies abroad, increasingly choose to remain there, for lack of opportunities at home. With our economy creaking under a heavy debt burden, and enterprises servicing foreign markets being locked-up behind capital controls, long-term prospects of recovery seem to be fairly distant. – Estonians are, from their own experience, familiar with emigration. But, in your case, have you turned the tide?

Can this be turned around? The biggest factor for change in the high North is climate change and everything it entails: Melting of the ice, access to mineral resources and the opening up of new shipping lanes that may, with time, reorganize trading routes globally. Iceland´s geographic location may again come to the rescue by making the country a profitable hub for those new trading routes. Perhaps.

Q: How has Iceland used its advantages as a small state?

A: For centuries Icelanders were prevented from utilizing their rich natural resources by the narrow, special interest of t the land-owning elite and the inertia and disinterestedness of the far away colonial power. The Second World War and the subsequent Cold War changed all that. Instead of being a neglected faraway province, ruled from Copenhagen, Icelanders found themselves suddenly in the mainstream, coveted by both sides in the Cold War and functioning as a bridge between Europe and North-America.

While Europe was devastated by war Icelanders profited greatly by the war. During the Cold War Iceland was in a privileged position. We were the recipients of the Marshall-Aid, intended to help rebuild war-torn countries. We were given preferential loans and grants for the building of infrastructure (an International airport at Keflavik), as well as preferential access to the US market for our exports. Also, NATO membership and the bi-lateral defense agreement with the US (1951-2006) enabled Iceland to extend her territorial waters from three to two hundred miles with tacit US support, despite entrenched British opposition. This is how we played our Cold War cards to our advantage.

In 2006 the US withdrew their military presence from Iceland. Immediately after the Crash in 2008, the majority of Icelanders were of the opinion that Iceland needed shelter as a member-state of the European Union. For reasons already explained, the political climate is now very much changed. After the last elections (April 2013), the political parties mainly responsible for leading Iceland into the crash, are back in power. They have put Iceland´s negotiations for EU-membership on hold, which for most observers actually means a cancellation. For the time being Iceland is therefore adrift: No longer an American client state, nor aspiring towards EU-membership. The decade old experiment with neo-liberal policies brought Iceland, in political terms, closer to America and away from the “Nordic model”. Now we are adrift in unchartered waters.

What lies ahead is the transformation of the Arctic region through the force of climate change. The countries most immediately affected are the Arctic coastal states under the Law of the Sea Convention. Those states are Russia, The US (through Alaska), Canada, Greenland (formally still under Denmark) and the four Nordic States – Norway, Sweden, Finland – and Iceland. Jointly those 8 nation-states constitute the Arctic Council, which is the chosen venue for cooperation and coordination of policies within the region. Part of the area on the North Pole, and along the new sea lanes, are outside the jurisdiction of the coastal states. They are open sea, a free for all. That is where, among others, China comes in, claiming to represent the international community outside the sphere of the coastal states. Several other states now enjoy observer status within the Arctic Council – but the European Union is conspicuous by its absence .

It may be considered unique that within the Arctic Council you find the two old Cold War adversaries, the US and Russia, Canada as a middle power and the 5 small Nordic States (Denmark – on behalf of Greenland). How are they going to get along together? Will they manage to settle their inevitable conflicts of interest peacefully, through negotiations under the rule of law (The Law of the Sea Convention); or will the opening up of new shipping lanes and the grab for new and valuable resources lead to conflicts, where the force of arms will prevail - as in the case of Africa in the 19th C.? How will Iceland be able to take care of its interests in this new environment, acting alone, without the bulk of a large alliance, such as the European Union, behind it?

Q: How do you find Estonia has used its advantages and solved her problems deriving from her smallness.

A: I remember vividly, skimming through the Los Angeles Times – during my tenure as ambassador to the US – seeing a photo with familiar faces, under the heading: The first E-government of the world. This was the Estonian government at a cabinet meeting, every minister sitting in front of his (or her) computer screen. It was the year 2000. It aroused international attention. How come that a former Soviet colony, having recently regained independence, after almost half a century of subjugation and stagnation, had reached so far?

I also remember reading an interview with my friend, President Lennart Meri, where he was asked to recount the most memorable official visit that he had undertaken as president of Estonia. He answered: Sure – that was my visit to the headquarters of Microsoft and my conversations with Bill Gates. President Meri explained to the technological wizard – and at that time the richest man in the world – that he, Meri, was the president of a small nation-state, which had lost out on the latter half of the 20ieth C., and had now to jump-start itself into the 21st. Would the high-tech wizard please help?

This is the image that Estonia enjoys in the eyes of the outside world: A child prodigy and a high-tech wizard. Is it true? I shall find out, while residing as a visiting scholar at Tartu University next year, lecturing on small states in the international system, through several case studies

Jón Baldvin Hannibalsson

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