What is the status of small nations in the era of globalization? How are they doing? What are their prospects? Are they doing better or worse than the so called major states? Are they doing better or worse than they did in the 20th C; in the bi-polar world of the cold war or in the inter- war period, under the shadow of the totalitarian menace of military conquest?
As a former Minister for Foreign Affairs and an ambassador of a small state, Iceland, I wish to use this opportunity to share with you my thoughts on this subject. As citizens of a small state, celebrating the 15th anniversary of your restored independence, this is hopefully a matter of mutual interest.

As a matter of fact I have recently started a new career as a visiting scholar at two universities in Iceland where one of my courses has to do with the question of the capacity of small states to take care of their vital interests, such as security and business interests, in the international system.

Let me begin, as a matter of illustration, to tell you a success- story, which has to do with the smallest country in the European union- Luxembourg.
In the post-war era Iceland and Luxembourg developed close cooperation in the fiercely competitive business of transatlantic air traffic between Europe and North-America. Luxembourg became the continental hub for Icelandair on the new New York, Boston and Baltimore destinations, adding stop-overs in Iceland as a bonus. Those were the low-fare trans-atlantic flights at the time and mutually beneficial to those small countries. This enabled Icelandair to carve out a niche in the transatlantic tourist business and it put Luxembourg on the map of American tourists.

On becoming the Foreign Minister of Iceland in 1988 I soon went on an official working visit to Luxembourg. At a state dinner I was lucky enough to be seated beside Mr. Gaston Thorn, several times prime minister of Luxembourg and later president of the European commission. Mr. Thorn was the leading statesman of Luxembourg of the early post-war era. Of course I seized the opportunity and asked Mr. Thorn to explain to me, how he and his colleagues had managed to transform Luxembourg from being one of the poorest and most backward counties in that part of Europe into becoming the richest country in Europe – and now the world.

Being the astute politician that he was, Mr. Thorn started by taking all credit for this miracle himself. He said the turning point was that he succeeded in preventing the establishment of a national university. This meant that a movement to upgrade the Luxembourg dialect into a national language was thwarted. Instead Luxembourg established a student support fund and encouraged their best and brightest to study abroad: In Germany, Belgium and the Netherlands, France, Italy, Switzerland and the USA. When those young students returned back home they not only spoke the languages of the neighbouring countries and the language of internatiol business but they knew the mindset, the customs and the institutions of the outside world. This enabled Luxembourg to catapult itself into a new position as a European center of banking and financial services. Of course bank secrecy and lenient taxation attracted capital to Luxembourg. But without the knowledge and the skills which those young students brought home with them, it is doubtful if Luxembourg would have been up to it.

In contrast we Icelanders take pride in having preserved the ancient Nordic mother tongue, the language of the Vikings which enshrines the common foundation of Nordic culture. This is still today our national language. And at our first opportunity we founded a national unversity already in 1911. Nonetheless we have to this day preserved an ancient tradition, namely that young people go abroad to study and work, already at the undergraduate level. Doing so they not only pick up languages but acquire skills and expertise as well as getting acquainted with the customs and work practices of foreign lands. On returning home this experience fosters an international outlook; it encourages quick adaptation of new technologies and work practices and it uproots any feelings of inferiority and makes it natural to seek foreign contacts. This unique tradition has been decisive in transforming modern Iceland from a traditional resource based economy into an internationally orientated knowledge based society. Instead of fishing and seafood the growth sectors of the Icelandic economy are now in geothermal energy, pharmaceuticals, telecommunications, financial services and tourism. It is all based on a high level of education and international experience. The EEA- agreement – which means that Iceland is roughly 2/3 member of EU – has removed the restrictions of the home market and globalization has opened up the world.

At the beginning of my talk I asked: How are small states doing in the era of globalization? Globalization, however it is academically defined, means the anti-thesis of protectionism. It means open borders; it means unhindered access to markets; it means the free flow of ideas as well as capital, investments and profits across the borders of nation states. How does this affect small states? Does it offer new opportunities that were out of reach before? Or does it turn small states into helpless victims of the overwhelming forces of multinational, capitalist conglomerates? An opportunity or misfortune or both, depending on the circumstances?

Let us look at your next door neighbours, the five Nordic countries. How are they doing? The conventional wisdom of the orthodox prophets of globalisation is that if you want to succeed in the global market place you must play by the rules. “The state is part of the problem but not part of the solution”, – was the favorite quotation of president Reagan. Give the market forces a free play- privatize, deregulate and open up for free trade and free capital movements. Reduce cost and lower taxes. Especially on business and profits. Else you take the risk that companies and capital will relocate to other countries were they are more favorably treated. If you play by the rules you will get rewarded. You will attract foreign direct investment, attain economic growth and remain competitive in the market place. If on the other hand you don’t play by the rules you will risk capital flight and hence stagnation and unemployment. You have a choice. It’s up to you to find the right path forward.
If this recipe were in fact rocket science, you could count the Nordic Countries out of the game at once. According to the recipe they seem to be doing everything wrong. Despite their internal differences- which are considerable – they all share the basic features of the Nordic welfare state. Strong government and high taxes to support welfare services, that have a distinctive redistributive effect on income, living standards and social security. It is based on the basic principle of equality of opportunity. It includes free access to public education, health care and social insurance, with obligatory membership of pension funds and funded pension rights in retirement. The net result is that these are the most egalitarian societies in Europe and probably in the world.

But surely this is too good to be true. Haven’t the Nordics been counted out in the first rounds in the fierce competition to succeed in the global market place? What is the verdict after a decade and a half of the advance of globalization?

Surprise, surprise. The Nordice welfare states have in fact never been doing better. They seem to be in pretty good shape if you apply the conventional criteria for economic success: the rate of growth, GDP per capita, technological innovation, quality of infrastructure, application of I.T., quality of education, sound public finances, growth of exports and market share, the competitive edge in international markets and even labour market participation and job creation. Job creation in the private sector and overall participation in the labour market has been among the weaknesses in Sweden and Finland. Nonetheless, three of the Nordic countries, (Finland, Sweden and Denmark) along with Switzerland were rated as the most competitive societies in the world in 2006 by the World Economic Forum.

How come? Well, success in the global market place depends above all on creative innovation and technological prowess. That is what the so called knowledge based industries are all about. According to the WEF’s list on the most competitive economies in the world four of the Nordics were among the top six last year. And according to the experts this achievement is not in spite of the welfare state but because of it. It is because of the long term investment in education, research and development; it is because of long term investment in human capital. That is what counts. So – we can say about the Nordic welfare states what Mark Twain said on reading his obituary in the newspaper: It is a bit premature to write them off.

I have cited a few examples of small states that have turned out to be eminently successful in the era of globalization. They have been well prepared to seize new opportunities to act on a bigger stage. We could also cite similar examples of successful small states from other parts of the world, especially in Asia. The key to their success has also been their emphasis on the leading role of the state, public education no less than open markets.

But what about the small states within the European Union – how are they doing? All small states, by definition, share some basic characteristics: Usually they cannot make much of an impact on their own and they are vulnerable vis a vis external pressure, be it economic or military. They cannot impose their will upon others on their own. That is essentially what being a small state means.

And that is why the basic idea behind the European integration process has such a strong appeal to small states: The idea that nation states should pool part of their sovereignty into a supranational institution and thus make sure that disagreements and conflicts are to be solved on the basis of negotiations and compromise and that military force is technically excluded as an arbiter of interstate conflicts – this revolutionary idea appeals to the basic instinct and interest of small states. Just as we strife to impose the rule of law, to solve domestic conflicts among individuals and groups within states, so it is in our interest to adopt the rule of law in interstate relations.
This is why there is no paradox in the fact, that small nations, who have recently regained their independence, should, of their own free will, wish to join in this new experiment of European integration, in the name of peace, stability and the rule of law.

Recent experience has shown that small nations have benefitted the most from their membership of the E.U. From among the founding states, it is Luxembourg that has been the most successful. From among the later recruits it is the Republic of Ireland. And if we consider the last bouts of enlargement it is my safe bet, that the small states will turn out to be the most successful – the first to catch up with the old established ones and to attain the quality of life, which is our common aim. Small countries, it seems, can better attend to long-term investment in the quality of their human capital, which after all, in the present day and age, is the key to success.

September 28th, 2006