Small States and Cities: Interpersonal Networks and Economic Restructuring

The recent success of the Nordic countries has renewed interest in the adaptive advantages enjoyed by small, homogeneous states. Cohesive and encompassing social networks, where ‘everyone knows everyone,’ have been linked to a variety of positive economic outcomes, from redistributive bargaining (Katzenstein 1985) to reform capacity (Martin 2014) and macroeconomic performance (Campbell and Hall 2009). In particular, the Nordic countries have used the politics of persuasion, compensation and coordination to engineer ‘big leaps’ into a range of fundamentally new, radically innovative, high-technology industries (Ornston 2012).

This paper explores whether larger, more thinly institutionalized states, can employ similar strategies to manage economic adjustment. There is little evidence of this at the national level, but this paper focuses on cities, where actors are more likely to interact on a regular basis and trust one another. Can municipalities use interpersonal networks to accelerate policy reform and economic restructuring? Or are such efforts futile absent the fiscal resources, regulatory powers and strong sense of national identity that characterize the Nordic states? If municipalities can use cohesive, encompassing social networks to coordinate economic adjustment, what are the costs of doing so?

To answer this question, this paper systematically compares economic adjustment in Finland, a small, cohesive state, and Waterloo, a medium-sized city in Canada, a liberal market economy. Clearly, Waterloo did not control the kinds of fiscal and regulatory tools that the Finns used to restructure their economy. Despite these differences, however, a common strategic vision and coordinated action enabled reform-oriented policy makers and entrepreneurial businesses to effectively mobilize provincial, federal and private sector resources around new industries. Interpersonal networks thus accelerated Waterloo’s transformation from a center for traditional, mechanical engineering into one of Canada’s most technology-intensive regions, in parallel with Finland. At the same time, the common vision that revitalized the region increased its vulnerability to disruptive, technological shocks.

Part of a broader project on ‘Creating Digital Opportunity’ in Canada and a separate, book-length manuscript on urban political economy, this comparative study is designed to generate hypotheses that can be tested on a broader set of municipal cases. To this end, the paper concludes by exploring the conditions that might have enabled Waterloo to pursue a coordinated strategy and the degree to which this might generalize to other regions.