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39247 Final Report Public Disclosure Authorized TOWARD AN OUTWARD-ORIENTED DEVELOPMENT STRATEGY FOR SMALL STATES: ISSUES, OPPORTUNITIES, AND RESILIENCE BUILDING A REVIEW OF THE SMALL STATES AGENDA PROPOSED IN THE COMMONWEALTH/WORLD BANK JOINT TASK FORCE REPORT OF APRIL 2000 Public Disclosure Authorized by Lino Briguglio, Bishnodat Persaud, and Richard Stern * Public Disclosure Authorized Public Disclosure Authorized August 8, 2006 * The authors may be reached by e-mail at [email protected], [email protected], and [email protected], respectively. Acronyms and Abbreviations ACP African, Caribbean, and Pacific GDP Gross domestic product AGOA African Growth and Opportunity GNI Gross national income Act GSP Generalized System of AIDS Acquired immune deficiency Preferences syndrome HIPC Heavily-indebted poor country CARIBCAN Caribbean/Canada Trade HIV Human immunodeficiency virus Agreement IPCC Intergovernmental Panel on CARICOM Caribbean Community Climate Change CHOGM Commonwealth Heads of ITIO International Trade and Government Meeting Investment Organisation CMA Common Monetary Area MDG Millennium development goal CPIA Country Policy and Institutional MFA Multi-fibre arrangement Assessment NGO Nongovernmental organization CRNM Caribbean Regional Negotiating ODA Official Development Assistance Machinery OECD Organization for Economic CSME Caribbean single market and Cooperation and Development economy OECS Organization of Eastern EBA Everything but Arms Caribbean States ECCB Eastern Caribbean Central Bank PAHO Pan American Health ECTEL Eastern Caribbean Organization Telecommunication Authority PIC Pacific islands countries ESMAP Energy Sector Management SACU Southern African Customs Union Assistance Program SDT Special and differential treatment EDF Export development fund SIDS Small island developing states EDT External debt, total SME small and medium enterprises EEZ Exclusive economic zone UNCTAD UN Conference on Trade and EU European Union Development FATF Financial Action Task Force UC-SIS University Consortium – Small FDI Foreign direct investment Island Studies FSAP Financial Sector Assessment VAT Value-added tax Program WSSD World Summit on Sustainable FSF Financial Stability Forum Development GATS General Agreement on Trade in WTO World Trade Organization Services GATT General Agreement on Tariffs and Trade ii Contents Executive Summary........................................................................................................... iv Introduction..........................................................................................................................1 How Have the Small States Performed Since 2000?...........................................................2 Does the 2000 Task Force Agenda Remain Relevant?........................................................8 Trade: Adjusting to a Changing Global Regime and Representation Issues......................9 Domestic Policies, Economic Management, and Public Finance......................................15 Towards a Service- and Knowledge-Based Development Paradigm ................................17 Private Sector Development ..............................................................................................19 Financial Sector Development and Regulation..................................................................23 Governance and Capacity Building ...................................................................................25 Security and Crime ............................................................................................................30 HIV/AIDS..........................................................................................................................31 Environment and Sustainable Development......................................................................33 Managing Natural Resource Endowments.........................................................................34 Disaster Insurance and Risk Management.........................................................................35 Regional Cooperation ........................................................................................................37 Aid, Aid Management, and Harmonization.......................................................................38 Conclusions and Recommendations ..................................................................................42 Selected Bibliography........................................................................................................49 Annex I. Summary of Consultations and Feedback on this Report.................................53 Annex II. List of Countries, Organisations and Experts Consulted..................................65 Annex III. Tables Table A1. GDP growth (annual %)....................................................................................76 Table A2. Merchandise exports (% of GDP).....................................................................78 Table A3. Workers’ remittances and compensation of employees (received, % of GNI).79 Table A4. Foreign direct investment (US$ per capita)......................................................80 Table A5. External debt burden in small states .................................................................81 Table A6. Population, per capita income, and progress toward the Millennium Development Goals.............................................................................................82 Table A7. Official development assistance and official aid (current US$ millions).........83 iii TOWARD AN OUTWARD-ORIENTED DEVELOPMENT STRATEGY FOR SMALL STATES: ISSUES, OPPORTUNITIES, AND RESILIENCE BUILDING A REVIEW OF THE SMALL STATES AGENDA PROPOSED IN THE COMMONWEALTH/WORLD BANK JOINT TASK FORCE REPORT OF APRIL 2000 EXECUTIVE SUMMARY 1. The 2004 annual Small States Forum and Commonwealth Finance Ministers Meeting called for a review of the 2000 report of the Commonwealth/World Bank Joint Task Force that had been presented to the Development Committee and to the Commonwealth Heads of Government, to assess whether its analysis and agenda remain relevant, to identify significant small states’ issues and opportunities that have emerged since 2000, and to suggest additions to and/or deletions from the agenda in light of recent developments. This report, which responds to that request, was discussed in draft form at the 2005 Small States Forum and the Commonwealth Finance Ministers meeting which preceded it. During these discussions, Ministers requested that the Commonwealth Secretariat undertake additional consultations with member governments before resubmitting the conclusions of the report to the 2006 Commonwealth Finance Ministers Meeting and the 2006 Small States Forum. Such consultations were held from May through July 2006. This report reflects these discussions. 2. Post-2000 Experience of Small States. Notwithstanding the significant variations among small states, the following findings are broadly applicable to the experience of small states over the last five years (a) average GDP growth rates have declined relative to larger low- and middle-income states; (b) income and export volatility remains high; (c) the importance of the service sector (particularly tourism) has risen while that of agriculture and merchandise exports has declined; (d) remittances and foreign direct investment remain more important to small states than to their larger counterparts; and (e) the debt burden has grown, particularly for Caribbean small states. 3. Enduring Characteristics/Emerging Challenges. This report finds that the characteristics identified by the 2000 report as having important implications for the development of small states—including remoteness and insularity, susceptibility to natural disasters, limited institutional capacity, limited diversification, and a high degree of openness—remain pertinent today. However, new challenges have emerged for small states in the recent past, including faster than anticipated preference erosion for traditional exports and the related and pressing need to diversify into new economic activities; a rapid rise in the debt burden for many small states; increased environmental susceptibilities; rising concerns with respect to youth unemployment, security and crime; and the HIV/AIDS pandemic. 4. Small State and Donor Responses. The response to enduring and new challenges by small states and the development community presents a mixed picture. On the positive side, some small states have implemented aggressive economic reform programs; improved the investment climate and created an environment conducive to private sector development; upgraded their governance systems; expanded regional cooperation in the regulation and provision of banking, finance, telecommunications, education, and air traffic control services; and developed effective responses to HIV/AIDS. Less success has been achieved in articulating and implementing natural disaster mitigation and insurance measures. In many small states, progress in adjustment and fiscal reform has been disappointing and governance remains very weak. On the donor side, too, the picture is mixed. For example, although some progress has been achieved in strengthening the voice of small states in the WTO, much remains to be done to strengthen small states representation in international negotiations; similarly, while per capita aid allocations to the small states remain high relative to other developing countries, and progress