The World's Newest Nations

11/03/2011 04:05 pm ET | Updated Jan 03, 2012
  • Marcelo Giugale Senior Economic Adviser at the World Bank - Fellow of the National Academy of Public Administration - Author of "Economic Development: What Everyone Needs To Know".

How do you start up a country? Say that your province or region suddenly becomes an independent country -- with recognition from the United Nations and all. After the celebrations end, and the celebrities leave, the real decision-making begins. Will you have your own currency? What kind of taxes will you impose? What services will the government provide, and to whom? Will you keep your borders open to people, goods and money? If you happen to be rich in natural resources, who will exploit them and how will you share the income? And what about building state institutions like the police, the courts and the central bank?

These questions are far from academic. More than thirty countries were created in the past quarter century alone. Think of Namibia, Lithuania, Georgia, the Czech Republic, Eritrea, East Timor, and Kosovo. And think of the newest nation on earth -- South Sudan, born in July 2011. For none of them has nationhood been easy and, truth be told, few have so far succeeded. What are the lessons? Successful new nations have done a handful of things right from the beginning.

First, they quickly agreed on how to fund their new governments -- and kept them from running large deficits. This is no technicality or accident. It usually implied tough decisions over how to share tax burdens and revenues from commodities -- Kazakhstan is an example of the latter. Will the oil that happens to be in one area be used to benefit the new country as a whole? How about taxes that are bound to fall on one group more than another? If foreign countries make donations, how do you tell them -- politely -- that they cannot tell you what to do? And, wherever the money comes from, how do you make sure that it is spent wisely, rather than corrupted away? You see, the initial legitimacy of a new state hangs on its capacity to manage its fiscal affairs.

Second, they visibly delivered a modicum of public services. Remember, many of these countries arose from years of war and from bigger countries that broke down and apart. Their infrastructures, schools and hospitals were dilapidated, damaged or destroyed. So simple achievements like reconnecting street lighting, paving roads, or restarting classes, brought an early sense of progress -- and of a functional government in charge. Ironically, it was not always the government who delivered the services; in many cases, it was private charities.

Third, they had currencies that people trusted. Some created their own new money (Namibia introduced the "Namibian dollar"). Others adopted someone else's (East Timor opted for the US dollar). But the new countries that did well avoided inflation -- let alone hyperinflation. Stable prices are in themselves a sign of an economy returning to normalcy. And they make it possible to build a banking system where, with luck, households can safeguard their savings, businesses can get credit, and everyone can make payments.

Fourth, they've soon got their economy restarted. When the turmoil of national birth is over, people need to go back to work. Finding them a job is not easy -- especially when fighting has been the sole occupation for much of your labor force. There are typically two sources of immediate employment: reconstruction and agriculture. Just clearing out roads and helping small farmers venture back into their fields can put a lot of people to work. But it is not enough. The key is to lure in private investors, local and foreign, by signaling that you will treat them fairly. Remember, you have all the appeal but also all the risk of a "frontier market." If you don't pass the laws -- say, a Companies Bill -- and build the public institutions -- say, a bankruptcy court -- that businesspeople need to operate, you can't expect them to bet their capital in your new country. This is less cold-hearted than it sounds: usually, many of the early investors are members of your own diaspora. They may be morally identified -- and excited -- with nationhood, but they will still need a minimum of reassurance.

Finally, successful new nations stayed open. For them, independence did not mean isolation but integration. Many of the countries that sprang out of the former Soviet Union ran to join the European Union. Others sought new friends in -- and banked on the goodwill of -- the international community. New countries rarely counted with large industrial bases, so they had to import much of what they consumed. And anyway they could barely control their borders -- migrants and commerce flowed more or less unimpeded. So, in practice, they learned to live with globalization from the start.

Is that all? Certainly not. There are plenty of other things to do -- protecting people and their property, settling border disputes, demobilizing fighters, managing expectations, creating a sense of national identity, all while leaving no social or ethnic group behind. But those are tasks that become even more difficult if the initial economic policies are wrong -- or missing. Future new countries should take note of that.