The reigning paradigm of looking at the main regions of the world economy is through the prism of the largest regional economies and the economic growth impulse that emanates from these heavyweights to their regional neighbours via trade, investment and migration/remittances channels. A different way of looking at the regional patterns in the world economy is to discern the smaller economies that in their respective regions serve as stabilizers, anchors or role models. In some cases, such economies are already performing important roles in their respective regions/regional integration blocs – in the case of Singapore in ASEAN or the UAE in GCC the qualitative impact of these economies may rival the quantitative contributions to regional growth impulses delivered by the largest economies of the respective regional groupings. A pattern whereby every major region has its “safe haven”/regional stabilizer would harbor significant benefits for the world economy and could be facilitated by the creation of a global platform for regional safe havens pursuing superior economic modernization/macroeconomic stability policies.
The current global pattern of the distribution of “safe havens” – economies that exhibit superior economic policy practices that are rewarded by financial markets with high long-term returns and lowers asset price volatility – appears to be (quite expectedly) largely concentrated in a limited number of developed economies, with far less such stability anchors observed in the developing world. Such a concentrated pattern of safe havens may be self-reinforcing, with initial advantages attained by advanced economies being perpetuated by capital outflows from emerging markets (cumulative causation factor). Most of the safe haven economies in the developed economies are global in scope and go well beyond their regional realms – what is lacking then in the current set-up is the layer of “regional safe havens” (RSHs) that would serve as stability anchors in their respective regions and that would provide for a more even distribution of low-risk/low volatility assets across the global economy.
There may be several reasons why a more decentralized pattern of regional safe havens that are present in all of the main regions of the world economy would benefit global economic development:
- RSHs allow for scaling up superior economic policy practices from the safe haven economies to their regional partners via such channels as economic policy coordination within the regional integration arrangements and exchange of best practices
- Retention of capital within the wider region in case of capital outflows from any given economy: with capital staying closer to home within the region there is more scope for capital repatriation compared to outflows into “far abroad” economies in line with the indications of the gravity model[1]
- More safe havens in the global economy: it may be hard for some of the regional safe havens to compete with their peers that have a global reach/status – there is much more scope for such safe havens to differentiate themselves in relative terms on a regional basis.
- A decentralized pattern of regional safe havens opens the possibility for the creation of a global platform for such regional nodes that targets the exchange of economic policy best practices and the possibility of a coordinated development agenda
Across the different parts of the global economy the small countries that may feature as regional safe havens with a strong economic policy track-record could include: Switzerland in Europe, Singapore in Southeast Asia, United Arab Emirates in the MENA region and Uruguay in South America. Their large economy antipodes that play a leading role in the economic growth momentum in their respective regions are represented by G20 economies such as Germany in Europe, China in East Asia, Saudi Arabia in the MENA region, Brazil in South America. Both groups of countries are crucial for the regional success in their respective regions, with their roles being complementary and mutually reinforcing in attaining higher levels of regional and global economic development.
A greater role for regional safe havens could pertain to areas such as the launching of global initiatives related to sustainable development/dealing with climate change as well as in leading some of the key economic policy tracks in their respective regional integration blocs. Indeed, rather than the largest economies serving invariably as the main representatives of their respective regional associations/groupings, the smaller economies that serve as economic policy role models may take the lead in their regions in coordinating the harmonization and the inter-operability of standards[2] across the main regions of the global economy.
The normative implications of the above discussion pertain to the need for greater policy coordination among the RSHs with the possibility of the creation of a global platform that would connect such small open economies. The launching of such horizontal cross-continental platforms could foster the emergence of new regional safe havens when coupled with efforts undertaken at the level of the respective regional integration arrangements. The longer term goal of such a diversified network of RSHs may be directed towards building (in an ideal world) a network of “fully equipped regions”, whereby all of the main regions of the global economy are endowed with a critical/minimal array of arrangements, policy tools and anchors: regional development institutions, regional policy rules, regional financing arrangements, regional safe havens, regional trading arrangements. Such a “minimal array”/MVP of regional instruments and arrangements could boost the quality of economic policy in the main regions of the global economy, while also setting the stage for improved cross-regional/cross-continental harmonization of standards and economic policy coordination.
[1] https://www.econstor.eu/bitstream/10419/40304/1/55876939X.pdf
[2] This may be particularly important in areas such as digital economy standards or the inter-operability of regional/national carbon pricing markets.
Yaroslav Lissovolik, Founder, BRICS+ Analytics
Image by geralt via Pixabay