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Chapter 3: Theoretical Framework and Methodology Theoretical Framework

Introduction

This chapter proposes a theoretical framework to facilitate an understanding of the phenomenon of benign protection and the microstates’ politico-economic functioning within it. An appropriate theoretical approach is essential to explaining the phenomenon of benign protection that by itself seems to run counter to the conventional understanding of sovereignty and international relations. Therefore, it is important to explain not only the behaviour of microstates or the consequences of benign protection but also why and how certain political entities become benignly protected.
The chapter begins with an overview of the theoretical discussions on the sources of economic development in very small political entities. It then briefly presents the managed dependency framework and how it could be adapted to the specific situation of microstates understood as modern protected states. Thereafter, the analytical tools used to analyse the relations between microstates and their respective protecting powers are overviewed. Following this, the chapter offers a detailed explanation of the key variables determining the successful management of protection for the purpose of maximising economic benefits. In the final section, it presents the consolidated methodological approach of the thesis.
Context: From Dependency to Managed or Mismanaged Dependency As hinted in the previous chapters, the dominant economic growth and development paradigms view all types of very small political units as inherently vulnerable, profoundly economically disadvantaged and particularly prone to natural disasters and environmental degradation (Armstrong & Read, 1995; Briguglio, 1995; Dommen, 1980; Hezel, 2012; Jalan, 1982; Kuznets, 1960; Robinson, 1960; Selwyn, 1975). Because of the above challenges and due to the small political units’ invariable and arguably inevitable need for openness to the global economy (Baldacchino, 2011; Easterly, 2000; Gantner, 2002, p. 67), micropolities⁴¹ can perhaps be viewed as more likely than any other types of polities to become politically, economically or otherwise dependent on larger economies or their metropolitan centres (Bellam, 1980).
Academics interested in studying the question of economic development have tended to view this condition as inherently problematic. From the point of view of one of the main schools of development, the dependency school, this situation of obvious dependence on the richer and larger economies should make true economic development in these units very unlikely or even impossible (e.g. Frank, 1967). The dependency theory was developed in the 1950s in opposition to modernisation theory ⁴² (G. Simpson, 1990, p. 73) and in response to the perceived persistency of poverty in large parts of the world (Ferraro, 2008). According to its proponents, the international inequalities result from a particular structure and hierarchy of the global politico-economic order (Chasy-Dunn, 2007). As explained Frank “contemporary underdevelopment is in large part the historical product of past and continuing economic and other relations between the satellite underdeveloped and the now developed metropolitan countries.” (Frank, 1972, p. 3) In the view of the dependency scholars, the world is divided between the wealthy, well-established and dominant “core”, and impoverished, underdeveloped “periphery” (Bertram & Watters, 1984b; Ferraro, 2008). To be located in the latter arguably means being subjected to powerful external forces (such as multinational corporations, international organisations, rules of trade, global markets, etc.) that represent the interests of the core and as such ensure the perpetual “underdevelopment” of the periphery (Ferraro, 2008)
Dependency theory scholars argue that the world capitalist system has created and enforced a rigid division of labour according to which the dependent states’ economic roles are reduced to the provision of raw materials, cheap labour, and demand for obsolete goods and technologies. From this perspective, the poor countries are not merely “catching up” to the wealthy economies, but are in fact placed in the permanent position of disadvantage, exploitation and poverty (Chasy-Dunn, 2007; Ferraro, 2008; G. Simpson, 1990). Consequently, the only viable alternative to underdevelopment is economic growth based on self-sufficiency and self-reliance that should arguably be pursued through economic nationalism and/or revolutionary activism (Bertram & Watters, 1984).
The merit of the dependency theory is its focus on the global economy as an interconnected whole rather than a collection of disconnected national economies. Its disadvantages are that “it misunderstands much of what it tries to explain and, even more serious, that it generates policy proposals that are disastrous” (Davies, 2006). The recent decades have demonstrated that most of the dependency theory’s policy recommendations, i.e. heavy protectionism, state ownership of the means of production, import substitution and isolation from foreign sources of capital, have failed virtually everywhere where they have been tried (ibid.)⁴³.
And nowhere have the problems of the dependency theory been as visible as in the case of tiny political units. The policy recommendations based on protectionism and economic nationalism are not only detrimental, but quite simply unfeasible in the case of very small polities lacking both natural and human resources (Armstrong & Read, 2003; Cole, 1993). More importantly, the last decades of impressive economic growth in so many of the small political units suggest that it is far from clear that the condition of certain political or economic dependence on a metropolitan, protecting or merely neighbouring power should be seen as passive or necessarily harmful (Rendu, 2004). In light of the above, it is clear that a different framework is necessary in order to understand the operation of very small economies.
An alternative paradigm explaining the economic development in at least some of the diminutive polities was offered by perhaps the most prominent of small state scholars, Godfrey Baldacchino. In his essay “Bursting the bubble: the pseudo-development strategies of microstates” (1993), he reversed the dependency theory and suggested a new framework, later described as “managed dependency” (Hampton & Christensen, 2002), offering tools for analysing and explaining the economic growth (or lack thereof) in different types of very small states and jurisdictions (Baldacchino, 1993). Baldacchino’s point of departure was that, from the perspective of political economy, smallness or even remoteness should not necessarily be viewed as disadvantages – instead they could be regarded as opportunities (Baldacchino, 1993a, p. 37). Being small and unimportant, diminutive sovereign states and sub-national jurisdictions are able to secure a variety of concessions, special privileges and material benefits from larger economies or regional blocs (Hampton & Christensen, 2002, p. 1663). As noted by Armstrong and Read (Armstrong & Read, 2002a), tiny entities manage to achieve success “by virtue of their small size” demonstrating “the importance of being unimportant”.
According to the managed dependency paradigm, this advantage becomes particularly beneficial in the case of non-sovereign, yet substantially autonomous, units which can engage in a process of managing dependency with the metropolitan power holding responsibility for their survival and development (Baldacchino & Milne, 2008; Rendu, 2004). Such sub-national jurisdictions achieve economic viability either through direct financial transfers from the metropolitan power or through securing channels to engage in various economic niche (and potentially illegitimate) activities, particularly in the field of finance and banking (Baldacchino, 1993). The latter are granted by metropolitan powers because they wish their dependencies to be economically self-reliant and politically stable. Dependencies become especially attractive from the point of view of such activities because they are viewed as politically and economically stable by virtue of being constitutionally affiliated with a large and respectful economy.
So, successful diminutive policies are those that can actively manage their dependency on their metropolitan power so as to preserve and exploit a dependency relationship to advantage (Rendu, 2004, p. 75). The metropolitan powers also benefit from the process, because by granting favourable economic terms to their dependencies, they maintain a formal bureaucratic structure of communication and can easily “exert informal and covert pressure” without instigating separatist feelings or publicizing potential disputes in the international arena (ibid. 88). In contrast, the “few particularly poor microstates are actually those which have failed to establish (or have abrogated) sufficiently intimate relations with a prosperous protector” (Baldacchino, 1993a, p. 38). Not surprisingly, scholars from the managed dependency school often discount the value of sovereignty and praise constitutional affiliation as the best framework for achieving long-term economic viability and even prosperity (e.g. Baldacchino, 2008; McElroy & Parry, 2011; McElroy, 2006; Rendu, 2004).
It is argued here that managed dependency provides a useful framework for understanding the operation of the economies of at least some of the entities broadly categorised as small or micro states (Rendu, 2004, p. 75). However, it also suffers from several limitations. One criticism of this theory focuses on its overly optimistic assessment of the tiny dependencies’ ability to achieve long-term economic stability and self-reliance. According to some authors, writing since the publication of Baldacchino’s work, managed dependency strategy has in some cases perhaps turned into a “mismanaged dependency” (Hampton and Christensen 2002, 1663). In their view, many of the sub-national jurisdictions have found themselves in an uncomfortable situation where the continuation of their prosperity is now “inextricably linked to the future of offshore finance and tax haven activity” which is currently under scrutiny and pressure from the world’s most powerful states and international institutions (Weichenrieder & Xu, 2015). In other words, at least some of such units might have become potentially unstable monocultures dependent not only on their respective metropolitan powers but also on the global financial industry (Rendu, 2010).⁴⁴
Yet, more importantly, in its current form the managed dependency paradigm is of the greatest relevance to non-sovereign political entities and not to microstates understood as sovereign (even if protected) states. While this framework acknowledges that being small and unimportant alone can help all types of polities to secure favourable deals with larger economies, it also implies that a sustainable and manageable economic arrangement is particularly likely to take place in the context of non-sovereignty and political affiliation with the “mainland” (e.g. Christensen and Hampton 1999). Not surprisingly, the managed dependency school is primarily concerned with the study of relationships between non-sovereign offshore entities and their metropolitan (sovereign) powers. Indeed, the idea that constitutional arrangements that do not involve achieving full sovereignty by the micropolity are more beneficial than sovereignty is one of the central points made by scholars associated with the managed dependency scholarship (Baldacchino, 2013; Baldacchino & Hepburn, 2012; Baldacchino & Milne, 2008).

Chapter 1: Introduction
Chapter 2: What is a microstate? Towards a new definition of Micro-Statehood 
Small States in International Politics and Academia
The Perplexing Rise of Small States
How Small is Small?
The Existing Approaches to Defining Microstates
The Problem of Size
The Problem of Statehood
Microstates as Modern Protected States: Towards a New Definition
The League of Nations and the Lilliputian States
Lilliputians as Protected States
Microstates as Modern Protected States
Conclusion
Chapter 3: Theoretical Framework and Methodology  Theoretical Framework 
Introduction
Context: From Dependency to Managed or Mismanaged Dependency
Management of Benign Protection
Formation of Benign Protection Arrangements
Management of Benign Protection and Economic Development
Methodology
Case Analysis and Selection
Advantages of studying microstates
Data collection
Challenges and Limitations
Conclusions
Chapter 4: The Principality of Liechtenstein 
Introduction
Territory, Location and Population
Political System
History prior to Sovereign Statehood
Early History
The Birth of the Principality of Liechtenstein as a Distinct Political Unit
First Micro-statehood: Association with Austria
Sovereign Liechtenstein
Formation and Functioning of Benign Protection
Economic development under Austria’s Benign Protection
International Perception of Sovereignty
The Impact of Benign Protection on the International Perception of Statehood
The Question of Neutrality during the First World War
The End of Association with Austria
Growing Dissatisfaction with Liechtenstein’s Links to Austria
The End of Association with Austria
A new of Micro-Statehood: Association with Switzerland
Early Relations between Switzerland and Liechtenstein
Formation of micro-statehood
Towards a Closer Association
The Role of Liechtenstein’s Small Size in the Formation of Micro-Statehood
Economic Development under Switzerland’s Benign Protection
Economic Indicators and Current Situation
The impact and type of benign protection
Domestic policies and the importance of smallness
Economic challenges
Summary
Conclusion
Chapter 5: The Cook Islands and Niue
Introduction
The Cook Islands
Geography and Population
Political System
History Prior to Micro-Statehood
Micro-Statehood
Economic Development under New Zealand’s benign protection
Niue
Geography, Population and Political System
Micro-Statehood
Additional Challenges
Summary and Conclusion
Chapter 6: Summary and Conclusion
Summary
Contributions, Limitations and Further Research
Conclusion
Bibliography
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Political Survival and Economic Development in Microstates: The Cases of Liechtenstein, the Cook Islands and Niue