Small Country Economic Growth Models

An Overview

In the realm of economic growth strategy, economies seek strategies to rapidly raise employment, as a means of alleviating the social welfare burden of the state and to increase wealth of the lower 50% of income earners.  While there is no magic bullet, there are some case studies where countries have experienced a sudden and rapid growth in employment for a short period of time.

AnswerTeam undertook this analysis on behalf of a public sector entity which was looking for ways to boost national employment and reduce income disparity.  The vast majority of academic analysis on the topic points to solutions whereby countries increase investment, reduce structural barriers to wealth creation, and improve productivity over time.

Singapore is an excellent example of a country which started its economic growth journey from a humble state, and over the course of 20-30 years transformed its economy to a leading status in Asia and beyond.  Other countries have seen growth spurts in short periods of time, frequently associated with large scale infrastructure spending or one-off major projects which, for a small country, can significantly move the needle of employment for the duration of the construction.  It is then anticipated that the additional economic development enabled by the new infrastructure will increase opportunities for employment among the workforce that was previously engaged in building the civil infrastructure (including highways, dams, power plants and the like).

Traditional Wealth-building Strategies

While the numerical analysis of this article is reserved for our client, the record is strong in support of a few key strategies for long-term and sustainable wealth creation.  These are a few of the highlights, in summary:

Attracting Foreign Direct Investment (FDI)

Absolutely essential to any long-term economic growth strategy, investment (both local and foreign) is key to creating opportunities for the economically underserved population.  Foreign direct investment is the easiest way to stimulate growth at a large scale for a country that is relatively small and less wealthy by comparison, but which offers substantial room for growth and potentially high rates of return on investment.

With investment comes jobs, and with jobs comes the hope of continuing growth in the economy as a whole.  Countries which follow this approach aim to attract FDI through favorable tax incentives, creating special economic zones, and reducing bureaucratic hurdles to attract multinational companies.

The down-side of this approach is that countries must pay back loans or investment returns.  The up-side is that large-scale investment will stimulate economic activity and enable sustainable growth for the future.

Developing Niche Markets

In some cases, small economies are blessed with unique characteristics or natural resources.  Niche areas such as finance (e.g., Luxembourg), tourism (e.g., Maldives), or technology (e.g., Estonia) have enabled these countries to develop a unique value-added offer to their respective regions, and thus build wealth over time through specialization.

With this specialization, these countries have been able to create a brand around their unique cultural or natural resource offer.  It is understood that for some countries, however, an abundance of natural resources has not led to significant wealth creation among the general population.  Oil-rich countries in Africa have struggled to keep wealth within their countries and to distribute the benefits of natural resources in an equitable and economically sustainable manner.  Exploitation of natural resources or national capabilities certainly can generate sustainable wealth, but the exploitation must go hand in hand with broad spectrum development of the economy and workforce skills.  Which brings us to the next strategy, education and skills.

Investing in Education and Skills Training

Developing a skilled workforce that can meet the demands of new and emerging industries is essential.  Investing in quality education from early childhood to higher education ensures a foundation for lifelong learning and skills development. To achieve this, governments must include as part of their natural resources exploitation or foreign direct investment planning to increase funding for schools, provide training for teachers, and curricula that is aligned with modern competencies such as digital literacy, critical thinking, and problem-solving.

Partnerships with the private sector are vital, allowing educational programs to match the skills needed in the workforce. This can include apprenticeships, internships, and vocational training programs that provide hands-on experience and a direct pathway to employment. Additionally, small countries can focus on attracting and retaining top educators and researchers by offering competitive salaries and investing in educational infrastructure.

Innovation in education delivery, such as online learning platforms and technology-enhanced classrooms, can make high-quality education more accessible, especially in remote areas. Encouraging lifelong learning through adult education programs and online courses can help the workforce adapt to changing job markets.

Small countries can also establish centers of excellence in niche areas where they have or can develop a competitive advantage, fostering a culture of research and innovation that can attract international students and academics, further enriching the educational environment.

Promoting Entrepreneurship and SMEs

Another essential growth strategy is investment and development of the entrepreneurial sector.  By fostering an inclusive environment that supports innovation and risk-taking, small countries can enable all citizens to contribute to economic growth and job creation.

One frequently-leveraged strategy is in the creation of microfinance programs that provide accessible loans and credit to low-income individuals. These financial services help to empower low income entrepreneurs to start small businesses with little or no collateral. Governments can also offer business development services, including training in financial literacy, business planning, and management skills, tailored to the needs of the less affluent.

Creating incubators and accelerators that focus on low-income entrepreneurs provide mentorship, networking opportunities, and resources to help them grow their businesses. Additionally, simplifying the business registration process and reducing fees can remove barriers to entry. Tax incentives and grants for small businesses in underserved communities further help to encourage entrepreneurship.

Building Growth-enablers is Paramount to Economic Development

Economic enablers like technology, infrastructure, and trade are pivotal to driving economic growth and job creation. Technology spurs innovation, increases productivity, and opens new markets, while a robust infrastructure in transport, energy, and communications is fundamental for efficient business operations and attracting investment.

Trade expansion allows countries to specialize in areas of competitive advantage, access larger markets, and benefit from economies of scale. Together, these enablers facilitate the flow of goods, services, and information, reduce operational costs, and create a dynamic environment where businesses can thrive, innovate, and generate employment opportunities, ultimately contributing to a prosperous and sustainable economy.

Furthermore, successful economic development strategies frequently engaging in PPPs to finance and manage projects that can create jobs and improve services, particularly in the areas of infrastructure, high-value manufacturing, and improved utility and healthcare services, among others.

Benchmark Examples of National Economic Growth Strategies for Small Countries

Several small countries have experienced sudden and rapid job growth, often due to strategic initiatives, natural resource discoveries, or significant investments in specific sectors. Here are a few examples:

Singapore:  Transitioned from a developing to a developed country in a few decades by focusing on manufacturing, finance, and transport hubs.  Their approach centered on attracting foreign investment through a highly skilled workforce, excellent infrastructure, and favorable business incentives and tax schemes.

Ireland:  Known as the “Celtic Tiger” for its rapid economic growth from the mid-1990s to the mid-2000s.  Ireland became a hub for technology and pharmaceutical companies due to low corporate tax rates and a skilled, English-speaking workforce.

Iceland:  After the 2008 financial crisis, Iceland invested in tourism, which became a significant source of job growth as the country became a popular travel destination.

United Arab Emirates (Dubai):  Diversified its economy from oil to become a global hub for finance, trade, and tourism. Massive infrastructure projects and the development of free zones have attracted businesses and further investment.

Estonia:  After regaining independence, Estonia embraced digital innovation and became known as “e-Estonia.”  It has a thriving start-up scene and is a leader in technology-driven public services.

Malta:  Has seen growth in the financial services, online gaming, and tourism sectors.  The introduction of favorable tax schemes and regulatory frameworks has attracted foreign companies.

Rwanda:  Despite its challenging history, Rwanda has become one of Africa’s fastest-growing economies in recent years.  Investments in technology, agriculture, and tourism have spurred job creation.

Costa Rica:  Transitioned from an agriculture-based economy to one focused on technology and eco-tourism.  Costa Rica attracts multinational companies as a base for Latin American operations due to its political stability, enabled by a welcoming tourism sector and underpinned by investment in education.

Luxembourg:  Leveraged its strategic location and favorable tax policies to become a financial center in Europe.  The country has also invested in unique areas such as space mining and satellite communications.

Qatar:  Rapid growth due to its natural gas reserves and hosting events like the FIFA World Cup 2022.  Significant investment in infrastructure and construction have led to substantial job creation.

These examples illustrate how small countries can leverage their unique strengths and strategic decisions to catalyze job growth and economic development. Each of these countries has taken a different path, but they all share a focus on creating a favorable environment for investment, innovation, and skilled labor.