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Small economies

Benito Legarda and Western Atlantic, one in the Indian tion of trade and the elimination or mar- Ocean, and nine in the Pacific. ginalization of small operators. The con- Consultant, International Monetary Fund The politically independent island econ- tainer technologies developed for large, omies varied tremendously in terms of ge- high-wage, continental with There are a host of characteristics that help ography, demographics, and economic -based transportation systems have define small economies, and since a sizable size, and per capita income. They ranged in completely changed the nature of sea traffic number of the so-called small economies land area from 25 to 28,446 square kilome- from an independent mode of transport to are or archipelagoes, most of these ters, and had populations ranging from a mere extension of the land transportation characteristics apply also to small island 8,000 to 958,000 in 1980. Their per capita system. Increasingly, large vessels carry economies. The two accompanying articles GNP also varied widely, from $260 to al- much heavier cargoes to fewer ports with by Barend de Vries and Vicente Galbis dis- most $24,000. The smallest, , had a container-handling equipment. Air traffic cuss some of the conditions that hold in the GNP higher than 16 other independent is- compounds the plight of conventional economies of small countries or territories. lands and the highest per capita GNP, shipping by drawing away passengers. In brief, these conditions cover both the while the largest island , the Solo- Modern air traffic also tends to burden geographic and the economic aspects of mon Islands, was in sixth place in order of small economies, since long-range jumbo smallness. Apart from smallness of popula- GNP and was eighteenth in order of per jets require fewer stops for refueling and tion, land area, and gross national product, capita GNP. The nonindependent island larger, costlier, airport facilities. small economies and small island econo- economies were equally diverse in their Small islands, because they have often mies share other characteristics, including: economic characteristics, with their GNP been bypassed by the larger ships and by • Geographic isolation; and per capita GNP affected by either eco- international air traffic, are at a disadvan- • Narrow production bases, often one or nomic ties to major economies or by prox- tage. For archipelagic countries—a number two primary products or industries, mainly imity to larger, more prosperous countries. of the independent island economies fall producing for export; In assessing their economic situation and into this group—the effect is compounded • Diseconomies of scale, translated the policy options available to them, the by domestic fragmentation: the outer is- through factor indivisibilities into higher questions that must be posed are whether lands are, in turn, increasingly left out of unit costs of infrastructure, investment, a small island economy faces a particular the economic mainstream. Official and un- and production; set of problems that are different from official accounts tell of the decline and • Restricted number of export markets other small economies or whether the ef- sometimes disappearance of cutter boat and import suppliers; fects of the same conditions are especially services in the Pacific and of schooner traf- • High vulnerability to natural hazards acute for the small island economies. Much fic in the Caribbean. and global market fluctuations. of the literature skirts these issues, but These consequences have probably been In 1980, there were 21 independent, where the questions are addressed, more accommodated more readily by the larger small island economies, of which 17 were often than not the answer in each case is island economies. But they have serious members of the Fund—small here referring that there are no significant differences. It implications for the small island economies to countries of less than one million peo- is pointed out that smallness, remoteness, since they hinder the trading activities of ple (but excluding , , and dependence, peripherality, the decline in these countries, thus laying the basis for ). The Fund members were situated self-reliance, insufficient economic diversi- treating them as a separate category. in the Caribbean and Western Atlantic (An- fication, and weak bargaining positions vis- Another disadvantage of small islands is tigua and Barbuda, , Barba- a-vis foreign investors and transport opera- remoteness, which has both geographic dos, , Grenada, St. Lucia, and St. tors are all problems faced by small remote and economic aspects that contribute to the Vincent), off and in the Indian countries and even by peripheral peculiar economic circumstances of these Ocean (, the Comoros, Mal- regions with larger countries. countries. In its most obvious meaning, re- dives, , Sao Tome and Principe, moteness refers to geographic distance, and ), and in the Pacific (, Sol- Why they are different with implications for transport costs and omon Islands, , and Western Sa- However, some justification for putting delivery time, giving the advantage in the moa). The nonmember countries, all in the small island developing countries in a spe- export trade to those countries that are lo- Pacific, were , Nauru, Tonga, and cial category emerges out of the conse- cated close to the rich markets of the more . In addition, there were another 17 quences of the transportation revolution of developed countries. But there is another island economies that were either associ- the last two decades or so. The rapid devel- aspect of remoteness that may enter the ated with or dependent upon other econo- opment of the container and the cellular picture even when physical distance is not mies. Seven of these were in the Caribbean container vessel has led to the centraliza- that great. For even if a small

42 Finance & Development/June 1984

©International Monetary Fund. Not for Redistribution is located near its potential markets, if it ments, and so on. Not all these countries tries have had some success in this line. does not have the facilities to take advan- have the capability of going into the major One possible discouraging feature is the tage of that proximity—that is, if it does not growth sectors, because of location, labor, modest retained-value ratio, which, for have harbors or airports equipped to re- and other factors. cases where figures are available, is less ceive the large carriers of the modern tour- A review by the author of the 17 small than 30 percent. Another, and possibly ist trade—then it can be said to be eco- island countries that were Fund members more serious, drawback is the chilling in- nomically remote. in 1980 identified a characteristic of these fluence of protectionism in the developed Similarly, peripherality—that is, the dis- economies that could be exploited: the im- industrial economies, which are the mar- tant relationship between a small island portance of invisible receipts. Of these, kets for the output of these smaller coun- economy and an economic center—affects alone was larger, for the group as tries. In any program aimed at helping the ability of such countries to keep up with a whole, than commodity exports. It has small island countries, the lowering of pro- the pace and direction of developments at been responsible for dramatic increases in tectionist barriers by the developed coun- the center. This may be a function of socio- per capita incomes in several small island tries probably would rank as high as any economic systems, cultural biases, or the countries, but many islands were not de- other policy prescription. state of communications. The most suc- veloping tourism because of cultural, polit- cessful island countries are those that have ical, or environmental reasons. Next in Overview best been able to adapt to economic importance among invisibles were trans- The small island countries have open changes at the center, largely through the fers (private and official), which for at least economies with severe constraints on their development of human resources and en- three countries surpassed not only other material and labor inputs, because of their trepreneurial skills. invisibles but also commodity exports. Off- limited land area and small populations. The problems facing small island econo- shore banking revenues made a noticeable These constraints preclude economies of mies therefore appear to arise from several impact in only two countries, and the scale for a wide range of products and lead distinct but often related factors that affect amounts involved were quite modest. to high unit costs of production. Com- most small economies, but perhaps more Studies distinguish between "paper" cen- pounding the disadvantages are high trans- so the island countries. As mentioned ear- ters, which record deposit and lending port costs arising from their remoteness, lier, these factors include small popula- transactions that actually take place else- isolation, and fragmentation (in the case of tions; limited land area, natural resources, where, and "functional" centers, that archipelagic countries). Long-range mod- and skilled manpower; geographical and physically host banks that raise, invest, ern aircraft and ships which bypass them geopolitical isolation; and high per capita and lend funds largely on their own ini- have heightened the transportation prob- costs. How, then, should these countries tiative. While many countries are capable lems of these countries. Finally, they are cope with an ever changing and competi- of hosting "paper" operations, only a few dependent on a few primary exports which tive global economy? have the potential to become "functional" makes them vulnerable to natural hazards centers, and most of the countries that had and to wide cyclical fluctuations that affect Options available real potential to establish themselves as these products. Because of the diseconomies of scale for successful offshore centers have already To overcome their disadvantages, these major industry and agriculture, small is- done so. countries must diversify into dynamic sec- land economies could profit from develop- Fisheries hold great promise for island tors where economies of scale play little ing primarily their light manufacturing and economies, especially since the recent part, or where they have a resource advan- services sectors. This would include light introduction of the 200-mile exclusive eco- tage. The main avenues for this diversifica- manufacturing for export, creating export nomic zone. But it is of quantitative impor- tion include tourism, fisheries, and light processing zones, attracting foreign invest- tance in only three countries. The problems manufactures for export. Subsidiary sec- ment and multinationals, developing tour- affecting this sector include the migratory tors include produce for regional markets ism, encouraging migration of excess labor nature of offshore species, the costs associ- and products with low bulk weight to value (including work on foreign ships), and the ated with smallness and remoteness, and ratio, like certain nuts and craft timbers. setting up of offshore financial centers. An- the constraints of scale economies. Fuel Not all small island countries can move into other sector that could be profitably devel- costs are high and fishing boats are expen- all these sectors, but many of them could oped is fisheries. But the diversification sive. Cooperation with neighboring states, go into one or more. For many small island into these dynamic sectors has its costs, preferably on a regional basis, could help countries—namely, the more disadvan- such as the need to create trade infrastruc- alleviate these problems. taged among them—the development ef- ture, that is, credit systems, information As for light industries for export, some fort will be a lengthy process and will re- and marketing networks, shipping arrange- Caribbean and Indian Ocean island coun- quire external assistance.

Finance & Development /June 1984 43

©International Monetary Fund. Not for Redistribution