Small states, big problems: size does matter

Wednesday, March 27, 2013

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FOR decades the small developing states of the world, led by the advocacy of Caricom, have been at pains to explain to the world that their economies are very vulnerable to adverse external events, to which they have severely limited capacity for adjustment.

On this basis their structural features, inability to attain economies of scale and their dependence on one or two sources of foreign exchange earnings, small developing countries have campaigned for special and differential treatment in the form of exceptions, lower obligations, concessions in market access to developed countries, longer implementation periods, extended adjustment schedules and development aid. Above all, these countries have made the case that one size does not fit all.

Small states and their spokespersons are often viewed by the developed countries and multilateral institutions, in particular the World Bank, as at best desultory and at worst disingenuous mendicants unwilling to fend for themselves. Economists, both in academia and in public policy, who explain the peculiar problems faced by small states are regarded as misguided.

But the purveyors of conventional economic "wisdom" counter that size does not matter. They proffer the transparently spurious argument that many small countries have high per capita incomes, do not need help and should be graduated from receiving aid and preferential trade arrangements. They hold up as examples Hong Kong, Singapore, Cayman Islands, Ireland, Iceland, Cyprus and Mauritius.

Some even go to the extreme of arguing that being small is an advantage, but this is so ridiculous that it needs no rebuttal. The point they deliberately overlook is that high per capita income is not coterminous with economic development and masks the far more fundamental issue of vulnerability to external events which have serious harmful consequences.

Hong Kong is a very special case; we all cannot be in the same business as the Cayman Islands or it would no longer be profitable; Singapore is the exception that proves the rule and Mauritius has done well which means it is possible but difficult.

The small developing states such as those in the Caribbean, were all encouraged to follow the policies of Ireland dubbed the "Celtic Tiger". In recent years, Ireland, Iceland and Cyprus have all gone bankrupt, joining the perennially impoverished Guyana which would be bankrupt if their debt had not been written off, and defaulting Belize. Small countries, including Jamaica, Barbados, St Kitts and Grenada have massive debt problems. They are all in good company since even Great Britain and the United States have been downgraded by rating agencies.

It is not that these economies are "too small to succeed", but that small size is an additional constraint on economic development. It is time for the international community to recognise the plight of small states because they have big problems which do not all originate with mismanagement of their economic policies.

The developed countries and the multilateral financial institutions, in particular the International Monetary Fund and the World Bank, need to develop policies and facilities specifically for small developing countries.

At the same time, governments in small states, knowing only too well their vulnerability, must manage more carefully and astutely.




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