The Year When Shrinking Was Good

Almost two years after the 2008 market crash, the biggest national losers from the financial crisis seem all too apparent: Latvia, Greece, and Iceland — with perhaps Spain and Portugal close behind. These once-booming economies were hit big when markets crashed and their exposure to debt and profligate lending was made painfully clear. Look at the "positive" data, however — the countries that supposedly did well — and the picture gets murkier. Sure, there are the obvious winners, the Australias, Brazils, and Chinas of the world. But did Afghanistan, Burundi, and Liberia — each with more than 3 percent growth last year — really outplay the European Union?

No, it turns out, because these countries and a dozen others were never even in the game. East Timor, Haiti, Malawi, and Rwanda didn’t shrink last year — but that’s mainly because they never really grew in the first place. Behind the drama of the global financial crisis stands an entire class of countries so isolated by their failure that they escaped a sudden decline. But it’s also these countries that should worry us most.

What do these countries have in common? Clearly, they are extremely poor — meaning that for generations, their economic growth has been meager, fitful, or both. International trade contributes sparsely to their closed economies, as many of their governments actively limit trade and the greater world shows limited interest in what they are selling. And financial systems are so underdeveloped that cash remains king.

But most importantly, these losing economies are profoundly uncomplex. And simplicity is a losing strategy. Since the Industrial Revolution, sustained economic growth in the advanced countries has gone hand in hand with increasing specialization, complexity, and interconnectedness — all qualities that magnify fluctuations. By contrast, countries with stale, single-industry economies can limp along with little change, but limp they do. Over the past three decades, Nepal, Guinea, and Yemen are the countries whose GDPs have fluctuated least — proof that no movement is indeed a sign of lifelessness.

In fact, to shrink in 2009 was probably a sign that you’ve done at least a few things right in recent years. Those countries that succeeded in building strong, prosperous economies were also the ones hardest hit in the crisis. At least they were in the game, which the world’s Afghanistans are decidedly not.

This isn’t the first time we’ve seen this effect in action. During the East Asian financial crisis of the late 1990s, the real economies of South Korea, Malaysia, and Thailand were devastated. Burma, Cambodia, and Laos sailed along relatively unaffected. But we all know which group is today worse off.

This crisis too shall pass, and when it does, countries that shunned isolation and continued actively engaging with the dynamic world economy will be glad they did.