Why small, open economies must rethink ‘strategic incompleteness’

FOR two generations, smallness looked less like a liability than an economic strategy.

Luxembourg and Ireland built financial centres of global reach. Singapore coordinated commerce and capital across a region many times its size.

Meanwhile, Gulf monarchies converted concentrated resources and small populations into commercial and diplomatic influence.

The successful small economy specialised, traded and imported what it could not efficiently produce at home. We credited agility, education, openness and a competent government.

All mattered. None fully explained why dependence on larger systems did not become subordination.

The missing condition was law or, more precisely, the power behind it. Small states prospered not merely because they were agile, but also because the post-1945 order organised power behind their rights.

These states could remain strategically incomplete: specialising in trade and capital flows, while relying on a wider order for much of the security and enforcement behind their rights.

Cross-border commerce worked, because claimants did not have to supply their own coercive force.

Companies could enforce contracts against stronger counterparties, and investors could hold assets in jurisdictions where they had no independent means of protecting them.

Smallness did not defeat power. The law placed organised power behind the claims of actors that lacked enough of their own.

The distinctive achievement of the international order built after 1945 was not simply that it multiplied rights. It distributed rights much more widely than it distributed the power required to sustain them.

Lack of impartiality in post-1945 order

The post-1945 order was never impartial, however.

American enforcement was strategic from the beginning, shaped first by the threat of communism and rivalry with the former Soviet Union, and later by changing calculations of national interest.

Powerful states exempted themselves, when they could. International law was applied unevenly. Conquest, confiscation and arbitrary exclusion never disappeared.

Yet, the system was dependable enough for governments, companies and investors to organise their affairs around it.

Violations occurred, but they were treated as breaches of the normal order, rather than the normal conditions of commerce.

Dependence is efficient when the surrounding order makes it safe. It becomes exposure when energy, technology and access to markets cease to be merely economic inputs and become instruments of strategic competition as well.

Diversification can reduce a particular vulnerability, but it cannot abolish dependence.

Several suppliers may rely on the same underlying technology. Several trade routes may depend on the same naval power. Several banks may clear through the same currency system.

What appears commercially diversified may remain strategically concentrated.

The small open economy succeeded by externalising functions that larger states treated as attributes of power. The cost of that externalisation is presently becoming visible.

That settlement is now weakening, not because openness has ceased to create wealth, but because the power that made dependence tolerable is becoming more selective, strategic and contested.

Adapting to fragmentation

American power need not disappear for the bargain to change. A hegemon can remain immensely powerful, while becoming more transactional. International law need not collapse for its enforcement to depend more heavily on nationality, alignment and strategic value.

Formal sovereign equality also remains. But when a right is challenged, its practical value depends on whether stronger powers are prepared to spend money, ships or political capital defending it.

A small state may possess an undisputed legal claim and still find no one willing to bear the cost of making that claim effective.

When enforcement becomes selective, economic rights also become conditional. Sanctions, export controls, investment screening and restrictions on payments or technology reveal the political conditions beneath apparently neutral entitlements.

An investor may still hold legal title to shares while being unable to sell them, receive dividends or move the proceeds. A cargo may have been lawfully bought and sold but remain in port because no insurer will cover the vessel.

A company may possess technology, but be prohibited from servicing, updating or exporting it.

Ownership is not the same as usable control. Market access is not the same as dependable access. All these matter to every internationally integrated economy, but most to those that prospered by remaining deliberately incomplete.

This shift does not mark the end of small open economies, but it demands a change in how they operate.

As Lubna Qassim argued recently in The Business Times, merchant states such as Singapore and the United Arab Emirates are adapting to fragmentation by offering businesses greater connectivity, predictability and optionality.

Their value rises when they can provide alternative routes, institutional reliability and operational resilience across increasingly divided systems.

The question considered here lies at a different level. Even the most adaptable merchant state operates within wider systems of security, finance, technology and law.

Its future depends not only on how effectively it connects those systems, but also whether they continue to protect the connector, recognise the transaction and keep the principal channels open.

Merchant states may represent an evolution of the traditional small open-economy model. Their adaptation does not remove the question of what will stand behind their rights when enforcement becomes more selective.

The fading of the traditional small open economy does not mean the end of small states, or of their capacity to adapt.

It means the end of one historically unusual form of small-state success: openness protected by rights, the ultimate enforcement of which was supplied elsewhere.

To navigate a selective global order, small economies must confront choices they could previously postpone: how much autonomy to exchange for protection, how closely to bind private wealth to public purpose, how much internal capacity to build, and which critical networks they must control rather than merely use.

Warnings for transition

History offers warnings rather than templates for this transition.

The Delian League demonstrates how an alliance can harden into an empire, when security comes at the cost of autonomy.

Venice showed how merchant elites could convert private wealth, commercial intelligence, public credit, diplomacy and naval force into coherent state power.

Finally, Genoa achieved extraordinary commercial reach, but its political history was repeatedly disrupted by factional conflict because private wealth did not automatically produce durable public capacity.

These cases demonstrate that for small polities, influence has rarely rested on legal rights alone. Instead, it relies on some combination of alignment, internal discipline, state capacity and control over networks that larger powers need.

The next successful model may resemble none of its predecessors. It may align with a protector without becoming a client, organise commercial power without becoming oligarchic, or make itself indispensable without mistaking usefulness for safety.

Different states will answer differently. Some will deepen their alliances. Some will acquire domestic capabilities that once appeared inefficient.

Others will try to make exclusion so costly that larger powers prefer continued cooperation. Most will combine these strategies, rather than rely on just one. All will have to pay more for the capacities they once externalised.

They will also confront the same political question: How can a small state make its rights consequential, when it can no longer assume that someone else will enforce them?

The treaties, institutions and language of sovereign equality may remain. What is fading is the presumption that power will stand behind them in the same way, at the same cost and for the same beneficiaries.

Small states can remain open and prosperous. But openness will no longer spare them the politics of enforcement.

The sun is setting not on small states, nor necessarily on openness, but on the age in which smallness could outsource the enforcement of its rights.

The writer, a lawyer and economist, is president and secretary-general of the Helsinki Geoeconomics Society