Status: I thought this was a common economics term, but when I google it I get either unrelated or references using it the way I expect but not defining it. It’s a really useful term, so I’m going to attempt to make it a thing.
“Tallest Pygmy Effect” is when you benefit not from absolute skill or value at a thing, but by being better at it than anyone else. For example, the US dollar is not that great a currency and the US economy is not that great an economy. However, the dollar is more stable than other currencies, so it becomes the currency of choice when you want stability. This high volume makes USD more stable and is in general good for the US economy (because e.g. US companies don’t have to take on currency risk when they borrow money).
Tallest pygmy effects are fragile, especially when they are reliant on self-fulfilling prophecies or network effects. If everyone suddenly thought the Euro was the most stable currency, the resulting switch would destabilize the dollar and hurt both its value and the US economy as a whole.