Small Islands and Economic Viability

ISLANDS of the WORLD VIII International Conference

“Changing Islands – Changing Worlds” 1-7 November 2004, Kinmen Island (Quemoy), Taiwan

Small Islands and Economic Viability Rose Marie Azzopardi University of Sussex., UK Mailing Address_41 Triq ta Gok, Xewkija, Gozo, Malta E-mail: [email protected]

ABSTRACT It is often taken for granted that living on a small island - geographically cut off from continental economic life - has to be a disadvantage. The two main reasons are small size and islandness. It is claimed that this disadvantage is due to diseconomies of scale, higher per unit transportation costs, increased volatility because of the openness of the economy, indivisibilities in both the public and private sector and limited local resources. Yet various empirical studies have shown that islandness as a variable does not appear to affect the growth and development of some small islands. Other studies maintain that in terms of GDP per capita, six out of the ten richest countries have populations below l million, while three more have less than 7 million people. Therefore, both size and islandness are not seen as affecting economic growth. Can we locate a paradox in these two opposing views? The paper tries to show that this apparent success is only because these small islands have managed to sidestep this “natural” disadvantage of size and insularity, by orientating their development strategies on economic activity that is not eroded by transportation costs, therefore focusing more on invisibles, rather than visible goods. Moreover, some countries have skimmed over the industrialization phase and concentrated more on the services sector. Some countries have also been aided by trade preferences and the non-regulation of certain international activity, especially in the financial sector. The paper analyses the economic structure of several islands, focusing on the role of exports, import content, transport costs and local value-added. It is argued that the engagement of small states in primary and secondary activity was minimal. Their development strategies were based on economic activities - such as offshore banking, call centres, back office work, financial investments, niche markets in tourist activities, and other not so conventional economic services - that focused on high value added which was not eroded by higher per unit transportation costs. However, the erosion of trade preferences, stricter rules in financial activities, and the widening remit of the WTO, may mean that even successful small islands need to reassess their position in the global economy for continued economic growth and development.

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Introduction It is often taken for granted that living on a small island - geographically cut off from continental economic life - has to be a disadvantage. The two main reasons are small size and insularity. It is claimed that this disadvantage is due to diseconomies of scale, higher per unit transportation costs, increased volatility because of the openness of the economy, indivisibilities in both the public and private sector and limited local resources. Yet various empirical studies have shown that islandness as a variable does not appear to affect the growth and development of some small islands. Other studies maintain that in terms of GDP per capita, six out of the ten richest countries have populations below l million, while three more have less than 7 million people. Therefore, both size and insularity are not seen as affecting economic growth. Can we locate a paradox in these two opposing views? The paper tries to show that this apparent success is only because these small islands have managed to side-step this “natural” disadvantage of size and insularity, by orientating their development strategies on economic activity that is not eroded by transportation costs, therefore focusing more on invisibles, rather than visible goods. Moreover, some countries have skimmed over the industrialization phase and concentrated more on the services sector. Some countries have also been aided by trade preferences and the non-regulation of certain international activity, in the financial sector in particular and in the services sector in general. The paper analyses the economic structure of 26 small independent island states, focusing on sectoral economic activities, employment, and the role of exports and imports within the economy. It is argued that the engagement of successful small states in primary and secondary activity was minimal. Their development strategies were based on economic activities - such as offshore banking, call centres, back office work, financial investments, niche markets in tourist activities, and other not so conventional economic services - that focused on high value added which was not eroded by higher per unit transportation costs. However, the erosion of trade preferences, stricter rules in financial activities, and the widening remit of the WTO, may mean that even successful small islands need to reassess their position in the global economy for continued economic growth and development. The paper is divided into three main sections, excluding this introduction and the conclusive comments. The first section deals with general issues regarding small islands, looking at some of the existing research, questioning the issue of whether researchers have found small islands to be helpless or if these islands have a different type of resourcefulness from that generally attributed to economic development strategies by textbooks. The second part looks at quantitative data as presented by the World Bank and the CIA World Factbook. The third part looks at other issues that are likely to effect small islands in the future. Some conclusive comments are presented in the final part.

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Small Islands - Helpless or Resourceful? Small islands are surrounded by a number of debatable issues, such as what actually constitutes an island and how small is small (Royle 2001). Different studies have used different criteria for inclusion in their particular research. Salvatore (2001:73) exclude from his analysis small nations with less than one million people, which “are often small island nations with only a few thousand people and little economic significance.” It may be possible that it is in fact this insignificance in the international arena that has helped some small nations to benefit and prosper. Small nations do not have any economic or political influence and often rely on astuteness and diplomacy to survive. The 20th century was faced with an increasing number of small states, either due to the disintegration of larger units (for example, Yugoslavia) or through requests for full or partial independence or autonomy (ex colonies), even though there was and still is a simultaneous increase in regionalism and various forms of economic integration. There appears to be a contradiction in trends towards political independence and economic interdependence. From a political science perspective, small size has also been given importance, in terms of political viability and manageability (Srebnik 2004). According to the Greek philosophers (Pericles, Plato, and Aristotle) a small polis was the best option, since this created the perfect environment for democratic values to be practised. Centuries later, the Enlightenment thinkers (Rousseau and Montesquieu) also put greater value in small states for the achievement of consensus, equality and participation of the people. In fact, Rousseau saw Corsica as providing the optimum characteristics for peace and democracy. Small states were considered as more manageable. The allure of small islands lies in the idyllic image that is projected of them. Even in fictional literature islands have always been depicted as mysterious and alluring, a microcosm in its own right. Swiss Family Robinson, Robinson Crusoe are only two classical examples of man living in isolation and cut-off from the rest of the world, yet surviving the ordeal. The fascination of islands is an important aspect of the marketing image for tourism related packages. And the reality of the picture is that one out of every nine persons lives on an island, that is a total of seven hundred million people. Most economic literature on the topic of small economies seems to conclude that they have apparent disadvantages that constrain economic performance (Kuznets 1960, Demas 1965, Dommen 1980, Selwyn 1980, Jalan 1982, Dommen and Hein 1985, Briguglio 1995, 1998, Streeten 1993, Commonwealth and World Bank 2000, Davenport 2001). Small states are deemed to be more economically vulnerable due to certain inherent characteristics which include: remoteness from larger markets and insularity which translate into higher transportation costs, increasing the cost of production and making local produce less competitive; a small internal market resulting in a lesser probability for exploiting economies of scale; both the private and public sectors suffer from indivisibilities resulting in higher per unit costs; due to lack of internal resources there is a higher dependence on imports and exports meaning that the smaller the economy the more likely it is to be open; a heavier dependence 4-4-A-1

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on foreign financing (whether foreign direct investment or external capital) coupled with the fact that this comes at greater difficulty as small states are considered as carrying a higher risk; for countries in temperate regions there are additional natural disasters of earthquakes and cyclones; man-made problems related with rising water levels; and political considerations of security, defence, clout, powerlessness and insignificance in the international sphere. All these disadvantages have propagated a mass of literature surrounded around the concept of vulnerability, resulting in various authors and institutions devising and developing a “Vulnerability Index” (Briguglio 1995, Atkins et al. 1998, Commonwealth Secretariat 1998, United Nations 2000, Briguglio and Galea 2003). Small states are also seen to have advantages and these include social cohesion, flexibility, openness of the economy, the very insignificance of being small, and the image of islands as gardens of Eden marketed mostly for tourist activities (Blazic-Metzen and Hughes 1982, Streeten 1993, Armstrong and Read 1995, Baldacchino 2000, Armstrong and Read 2002a). There are even those who go so far as to state that the very characteristics which some see as disadvantages “can equally well imply a proneness to spectacular growth” (Baldacchino 2000:67) In my opinion small economies do have advantages but since they do not form a homogenous group, it is not possible to generalize on them. Therefore, while there may be communities that do bind together and it is this social cohesiveness that forms part of their collective problem-solving, however not all small communities share this cohesion. Furthermore, what may appear as cohesiveness to an “outsider” is only the collective distrust of the unknown and foreign. Therefore, to an outsider, s/he might think s/he is accepted within the community, that s/he has managed to become a part of the community, can communicate and believes s/he can now understand the people. However, this may well be a false illusion, small communities remain distrustful of foreign intrusion and never show the real them to “outsiders”. It is this collective “knowledge” of the foreigner and the banding together in the face of the not-one-of-us that makes outside researchers think there is a collective cohesion within small states. Under normal conditions, when there is no foreign ‘threat’ to normal everyday life, people tend to be individualistic. Another issue that can be taken as social cohesion is the fact that people know about what happens in a small community, the news grapevine is very much active, and therefore it is difficult to keep secrets, therefore the idea of a shared lifestyle may make the outsider interpret this as cohesion, while in reality it is the inquisitive and curiosity elements within small communities. Regarding another advantage, flexibility, not all small states are in fact flexible, however, it is generally assumed that small is nimble and easier to adapt to changing circumstances. This may in part be true yet there is also the likelihood that small communities are conservative and therefore more resistant to change. If the community feels there is a collective danger of stagnation within the community and that all must put in their share of work for success, then flexibility and acceptance of change comes on the scene. Therefore, the issue is to engage everyone in the change process, which is not an easy task by any measure. The openness of the economy may be an advantage but not all small economies 4-4-A-1

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have managed to exploit this opening. Those islands that have led a sheltered and protected existence, and are pleased with their status quo, imagine they can go on thus sheltered, just as long as they can plead hard enough to be heard by their protectors, be they national governments, neighbouring larger countries or international institutions. Being small means that one has little clout but also little effect on events should one not adhere to certain rules. However, in recent years, being small has not stopped the OECD coming down heavy on tax havens, normally based on small island economies. As a group these small economies appear to be distorting the international financial scenario and in fact affecting larger countries. Therefore, for the last six years, there have been a number of international initiatives to control the issue of money laundering, tax haven practices and inappropriate financial regulation (Hampton and Christensen 2002). As to the exotic allure of holiday destinations, over-development of certain islands, or the vicissitudes of the industry are not always a guarantee of continued future viability. Terrorism, natural disasters, a downturn in the global economy leading to a decrease in disposable income, have all led to a decrease in tourism in recent years. Gal (2003) maintains that being small requires different policy considerations as these, in particular competition policy, are designed for large countries and may not be valid for small ones. However, Easterly and Kraay (1999) do not agree with this conclusion and sustain that there is no need for different policy advice. There is no consensus as to whether small economies are in fact helpless or if they have a non-conventional resourcefulness. There have been various case studies of small states. Hereunder are a few of these. Bertram and Watters (1985) studying five small South Pacific communities (Cook Islands, Niue, Tokelau, Tuvalu and Kiribati) have outlined the characteristics of the MIRAB (migration, remittances, aid and bureaucracy) model. Migration has always been seen as an outlet for excess labour by governments in small islands, however, migration in recent years has not been as open as in previous decades. There are stricter rules now in host countries. Remittances may still be important for some countries but there has also been some decrease in this aspect. There appears to be a general donor fatigue and while it is true that “small islanders have been the strongest per capita aid beneficiaries in the world” (Baldacchino 2000:67), it is also true that costs per capita are also higher, due to indivisibilities in both the public and private sectors. Baldacchino (2004:16) introduced the PROFIT model, which discusses five capacities that form “the distinct strands of a broad strategy for securing unorthodox economic development.” PROFIT stands for (P)eople considerations dealing with citizenship, residence and employment rights, (R)esource management, (O)verseas issues, (F)inance, and (T)ransportation. The whole issue surrounding small island economies appears to lead up to unconventional means of survival. Prasad (2004:42) elaborates on this by maintaining that some small states use their insignificant political status to influence their economic opportunities, by resorting to “non-market solutions or non-orthodox approaches, such as their power 4-4-A-1

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to negotiate aid, to provide an emigration outlet for their population… finding loopholes in the international system, seeking leniency and special arrangements or derogations with developed or metropolitan countries.” and would suffer were they to abide by the rules of larger countries. Prasad (2004:43) calls small states “violators of global trading rules” and suggests that rule-bending may in fact be one of the development strategies of small states. Some conventional strategies include: export processing zones (Mauritius, Fiji); offshore financial centres (Barbados); remittances (Antigua, Samoa), aid, and rent-seeking. Other unconventional strategies include: selling sovereignty (through for example votes in international institutions); serving as military bases (Palau, Marshall Islands); selling fishing rights within the 200 mile Exclusive Economic Zone (Tuvalu); flags of convenience and shipping registers (Panama, Liberia): the sale of passports to wealthy investors (St Lucia, Kiribati); philatelic activities (Sao Tome and Principe); the setting up of special trust funds as interest earners (Nauru); selling of the international telephone routing code (Tuvalu, Guyana) and of internet domain names (Moldova, Niue, Tonga); claiming and then selling orbital satellite slots to telecommunications carriers (Tonga); and the supply of troops for peacekeeping operations (Fiji). Taken from the opposite perspective, small states accuse rich big countries of “the most blatant disregard for the rules of international law” maintaining that “only might is right” as the Prime Minister of Antigua and Barbuda has been quoted as saying during a United Nations summit (Economist 2000). As Mark Twain (1889) so aptly put it, “(m)any a small think has been made large by the right kind of advertising.” Small economies seem to be innovative in devising ways of rent-seeking rather than investing in traditional productive sources, and according to Prasad (2004) this is due to ‘necessity for survival’. Therefore, more out of necessity rather than choice, small economies have managed to develop ways and means of acquiring revenue, not through the sale of conventional goods and services but rather through the exploitation of less traditional resources, more based on services rather than mainstream productive value-added, therefore overriding the issue of higher per unit transportation costs. Within this context, it remains an open question of whether small independent island states are in actual reality helpless or whether they have an inherent or an acquired type of resourcefulness that provides them with a different kind of economic viability.

Small Independent Islands – The Hard Facts Empirical research has shown that size does not appear to be a special handicap to economic growth (Milner and Westaway 1993, Armstrong and Read 1995, 1998, 2002b). If anything small states have higher income per capita than other countries in their region, while insularity and size have not been found to be statistically significant (Armstrong and Read 1998). Alesina and Spolaore (2003) maintain that six out of the ten richest countries are very small states with populations of less than 1 million, even though the authors fail to substantiate this affirmation. Furthermore, none of the small rich countries are independent islands, which is the concern of this 4-4-A-1

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paper. According to the World Bank database of 208 economies, the first small independent island (Cyprus) ranked 42 in 2003. Armstrong and Read (1998) see regional location as constituting the main explanation for growth performance, with natural resources, tourism and financial services also being significantly related, whereas agriculture is negatively correlated with economic growth. Liou and Ding (2002) are not in total agreement with the regional location conclusion. They assert that small states may be similar to others in different regions, depending on socioeconomic characteristics. For the purpose of this paper, a list of 26 independent island states, measuring less than 30 thousand square kilometers and with populations of less than 1.5 million, is presented below. The choice of these thresholds is partially arbitrary. The 1.5 million population threshold is that adopted by some researchers (eg Crowards 2002) and also by some international institutions (eg. the Commonwealth). The cut-off point of land area excludes only Iceland, (103,000km²). The islands of Nauru (12,809 people) and Tuvalu (11,468 people) would have qualified under this definition but the World Bank database excludes countries with a population of under 20,000 people and for this reason, these two independent islands have been omitted from the analysis. The list of islands presented in Table 1 is divided by region and shows Table 1 – Small independent islands by region - 2003

Region

Land Area Km²

Populati on (2003)

GNI per Capita US$

Export s of goods and service s % of GDP

Import s of goods and service s % of GDP

High

45¤

48¤

High

88*

80*

High

81*

65*

Low

13

25

Lower Middle

86*

65*

59

57

Income Group

(2003) Mediterranean Sea Cyprus** Malta

9,250

770,000

320

399,000

12,320 # 9,260*

Indian Ocean and Persian Gulf Bahrain Comoros Maldives Mauritius 4-4-A-1

710

712,000

2,230

600,000

300

293,000

11,260 *

2,040

1,225,00

450* 811



450

Seychelles

0 83,689

Caribbean Sea Antigua & Barbuda

430

Dominica

750 340 360

St Kitts and Nevis

620

St. Lucia

390

St. Vincent & Grenadines

5,130

4,030

Cape Verde

960 &

Pacific Ocean

55*

54

62

47*

57*

46*

71*

53*

57*

48*

59*

51

42

na

na

31

65

42

111

73#

66#

27ª

67ª

High

na

na

Lower Middle

17*

82*

33ª

82ª

na

na

13#

58#

47¤

61¤

24*

23*

22*

22*

39*

33*

Upper Middle

104,614 46,710 160,588

9,160

Upper Middle

9,270

Upper Middle

3,360

Upper Middle

3,790

Upper Middle

6,880

Upper Middle

4,050

Upper Middle

3,300

Upper Middle

109,164

317,000 470,000 157,000

18,270

7,260 835,000

Kiribati

181

96,000

Marshall Islands

460

53,000

Palau

2,840

20,000

Samoa

28,900

178,000

750

457,000

12,190

102,000 210,000

Vanuatu

52*

7,480

71,079

730

Tonga

68*

271,000

Fiji

Solomon Islands

60*

4,090

Upper Middle

13,806

Bahamas The

Sao Tome Principe

78,580

1,313,00 0

Trinidad & Tobago

Atlantic Ocean

77

Upper Middle

440

Barbados

Grenada

77

2,300

15,110 *

Low

1,490 320

Lower Middle Lower Middle

World Average High 4-4-A-1

Income

6.3 billion 2,360 812

Lower Middle



Average

880

Upper Middle

Middle

335 million

2,710

Lower Middle

Income

2655 million

7,500

2310 million

1,600

Upper Income Av.

Middle

966 million

Lower Income Av. Low Average

29*

26*

20

23

Low Lower Middle Lower Middle

600 1,490 1,180

5,500 28,550 5,340 1,480 450

Source: World Bank ¤ figures are for 1999 ª figures are for 2000 # figures are for 2001 •

figures are for 2002 ** only the Greek side of the island is taken into consideration.

Population, land area, GNI per capita, income group (high, upper middle, lower middle and low) and exports and imports as percentages of GDP. The total population of these islands is a mere 0.145% of total world population while their total GNI is 0.178% of total world GNI. Table 1 shows that both the islands in the Mediterranean Sea are high-income 4-4-A-1

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countries, while all the islands in the Caribbean are upper middle. Except for Palau, all the islands in the Pacific are in the lower end of the income groups. Bahrain in the Persian Gulf is in the high group while the range varies for islands in the Indian Ocean. The three islands in the Atlantic Ocean also vary in the income group classification. Geographical position within the region also has an effect on the economies. Those islands nearer to successful countries are better off than islands nearer poor countries, therefore there could be a spillover effect from nearby economies. All islands in the Pacific Ocean have a lower GNI per capita than the nearest neighbouring country, while those in the Indian Ocean and Persian Gulf are all above those of the closest country. In the Caribbean six islands have lower GNI while two islands have higher GNI than their neighbours. From the three islands in the Atlantic Ocean only one has a higher GNI than its neighbour, while in the Mediterranean one island has a higher while the other has a lower GNI per capita than closest country. Out of a total of 208 countries, (in purchasing power parity rank order) there are 78 countries in the high-income group and the four islands comprise 5.1% of this group. In the upper middle group small islands comprise 17.2% (or 11 out of 64 states), in the lower middle group the figure decreases to 13.8% (or 8 out of 58 countries) while in the low income group the percentage increases to 37.5% (or rather 3 out of 8). All 26 islands (for which data is available) import more than the average of their respective groups, thus confirming the issue of lack of internal resources due to small size. Only 4 islands (for which data is available) export less than the respective income group average. This confirms the higher dependence on trade that small islands face. Table 2 provides the list of islands by income group, sectoral division of the economy, the world rank in purchasing power parity taken from the World Bank database for 208 countries, and the last column shows the openness of the economy (average of exports and imports as a percentage of the GDP). In terms of the primary sector, the majority of islands are above the average of their respective income groups (excluding Sao Tome & Principe, Cape Verde, Bahrain and five islands in the upper middle group). This shows that most islands depend more on agriculture, fishing and forestry either as subsistence or for exports. These primary commodities (sugar, bananas, fish, copra, cocoa) in fact make up a high proportion of the economy as shown in more detail in Table 3. Regarding the secondary sector, almost all countries (excluding Seychelles, Trinidad and Tobago, and Bahrain) are below the respective income group average. This sustains the assumption that due to issues of economies of scale,

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Table 2 – Independent islands by income group

Income Group

Island

Primary Sector

Secondary Sector

Tertiary Sector

% of GDP

% of GDP

% of GDP

Openness of the Economy

PPP 208 countries

(X+M/2 % of GDP)

20

25

25

50

Comoros

41

12

47

168

19

Sao Tome&Principe

19

18

63

na

76.5

(42)

(11)

(42)

175

na

34

55

19

75

111

48

27

51

112

69.5

11

75

na

47

(18)

(62)

na

75.5

16

70

na

na

(23)

(63)

108

57.5

15

56

90

35.5

5

76

143

55.5

34

60

21

75

77

64

21

73

57

53.5

21

60

115

58

23

69

93

52

31

63

68

58

13

83

na

49.5

35

62

55

77

Low income $765 and under

World Rank

Solomon Islands Lower Middle 11

$766 to $3035

8

Cape Verde Fiji

16

Kiribati

14 (20)

Maldives Marshall Islands

14

Samoa

(14)

Tonga

29

Vanuatu

15

Upper Middle 6

$3036 to $9385 Antigua Barbuda Barbados Dominica Grenada Mauritius 4-4-A-1

&

4 6 19 8 6 4 815

24

33.5



Palau

3

30

67

70

58.5

Seychelles

3

19

74

114

55

7

25

64

96

53.5

11

41

58

78

46.5

27

71

2

(7)

(90)

54

na

(3)

42

57

52

73

1

20

76

42

46.5

4

21

73

46

88.5

28

68

St Kitts Nevis

and

St Lucia High Income $9386 and over

1

St Vincent & Gren. Trinidad Tobago

Bahamas The Bahrain

&

22

6

Cyprus Malta World $5,500

4

Source: World Bank Na: not available Brackets show that data is from CIA World factbook

Small islands do not favour large-scale manufacturing enterprises, or rather large scale does not favour small sized islands (Briguglio 1998). Industry requires scale to be competitive which may be compounded by additional transportation costs especially if the product is bulky and heavy. Bahrain’s high industrial sector is due to petroleum products and aluminium, while Trinidad and Tobago also concentrate on petroleum products, chemicals and steel. Seychelles has a high concentration on the production of canned tuna and frozen fish. In respect of the tertiary sector, only five countries (Comoros, Solomon Islands, Fiji, Trinidad and Tobago, and Bahrain) are below the respective group average. This shows that islands have a higher concentration on services, which however includes government services. Almost all islands have tourism as one of their main industries, followed by offshore banking. Only nine out of 26 islands are above the world GNI average of $5,500. 4-4-A-1

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23.5



Furthermore, whereas the high income average is $28,550, the four islands within this group range from $9,260 to $15,110, all below the group average. Except for the case of Comoros, all countries have very open economies, well above the world average and the average of each respective income group. This further sustains the assertion that small countries are likely to be more open than larger states, that they are more dependent on trade due to lack of internal resources. Table 3 gives more details on each country’s main industries and main exports, already referred to above. The final three columns show labour force employment by sector. Only the four islands in the high-income group have a Table 3 – Main industries, exports and employment structure (continued on next page)

Labour force employment Island by Income Group

Main industries

Main exports

Agriculture, Industry, Services Percentages Agric.

Industry

Services

High Income Bahamas The

Bahrain

Tourism, offshore banking

Fish, rum, chemicals

Petroleum production/refining

Petroleum products, aluminium

Tourism,

Food, pharmaceutics

Tourism, manufacturing

Machinery & transport equipment

Cyprus

Malta

90

5 5

*

1 *

75

5 19

71

5 24 Petroleum mfg, machine equip.

Upper Middle Antigua & Barbuda

Barbados

Tourism, manufacturing Tourism, light mfg, sugar

Bananas, vegs,

Agriculture

Bananas, cocoa,

Tourism, mfg Dominica 4-4-A-1

Sugar, rum, food, chemicals

Cloth, textiles, sugar

Tourism, banking,

82 7

11

75 10

15 28

817



Grenada Mauritius

sugar, textiles Tourism, Agriculture, fishing

Palau

Tourism, tuna fishing

Seychelles

Tourism, sugar, mfg offshore banking Banana, offshore banking, tourism

St Kitts and Nevis Tourism, agriculture St Lucia

St Vincent & Gren.

Lower Middle Cape Verde

Tourism, commerce

Kiribati

Maldives

Machinery, food, electronics

Banana,dasheen, tennis racquets Petroleum prods. Chemicals, steel

62

24

14

50

14

36 na

20

71 10

na na

22

na

25

Sugar, garments, gold, fish

Sugar, tourism, agriculture

Fish, clothing Copra cake, coconut oil, fish

Tourism, fishing

Fish, cocoa oil & cream, copra

Agriculture, small scale industry

Squash, fish, vanilla, beans

Agriculture, food processing, tourism

Copra, beet, cocoa, kava

57 26

17 64

10

26

na na

na na

70~

na na

na

na 62

Tourism, fishing

Agriculture, fishing, offshore banking

Vanilla, ylang-ylang, cloves,

20

18

21

21

66

na

Cocoa, copra

Agriculture, fishing, hunting,

Timber, fish copra, palm oil 818

58

na

na 65

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19

Shoes, garments, fish

Copra, coconuts, seaweed, fish

Tonga

Vanuatu

na

53

Marshall Islands

Samoa

32

Bananas, clothing, cocoa

Transport

Copra, fishing, tourism Fiji

Tuna, frozen fish, cinnamon bark

40

Offshore banking Oil, gas, tourism

Trinidad & Tobago

Shellfish, tuna, copra, garments

na 30



forestry

65

5

Agriculture Low Income Comoros

Agriculture, fishing, forestry

na 80

na

Sao Tome& Prinicipe ¤

Solomon Islands

42 75

11

Source: CIA World Factbook

* 20% government service, 79% industry and services ~ includes subsistence agriculture ¤ population mainly in subsistence agriculture and fishing

Low percentage of people working in the primary sector. In the other three income groups double digits emerge. Islands with at least 64% of employment in the services sector are either in the high or upper middle groups and their GNI per capita income is above $7000. However, one must remember that services includes the government sector which is normally high in small islands as governments are normally responsible for a plethora of services since it would not be viable for the private sector to enter certain type of markets, due to economies of scale and indivisibilities. As mentioned above, except in the case of three islands, industrialization is not heavy on small islands. In most cases industrialization engages food processing and textiles. Some islands also have machinery parts, assembly points, pharmaceuticals, in essence light industry. Other Issues The above picture is what comes through from official quantitative data available. However, other aspects or some sources of revenue may be less evident in specific figures, that are less quantifiable but may nonetheless be significant. There are five main themes that need to be looked into in order to grasp better the situation in small islands. These are: the issue of tax havens, trade concessions, donor fatigue, regionalism and the informal economy. 4-4-A-1

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The OECD’s tax havens 1998 list includes fifteen out of the twenty six islands, while three more “were able to persuade the Fiscal Affairs Committee to remove their names from the list in the period prior to its publication” (Hampton and Christensen 2002). The eight islands excluded are the three in the low income group, three from the lower middle group and two from the upper middle group. Can this imply that the islands in the higher income groups have been able to improve their situation through these “harmful tax practices”? Could this therefore have been one of the foundations of economic viability of small islands? Another issue for discussion must be the concessions that over the years small islands, precisely because of colonial lineage or preferential trading agreements, have been able to glean from ‘benefactors’. However, these concessions are not eternal and are bound to change, diminish or discontinue in the near future, due to changes envisaged within the World Trade Organization environment. These changes will effect agreements that the developed world will have in the future with less developed countries. Such changes are expected to negatively affect the economic viability of small islands. There appears to be a general donor fatigue. “Official Development Assistance has declined by one-third in real terms in the 1990s” (World Bank 2004). One of the reasons is that aid may not be working so well. And while up to now small islands have been lucky to be recipients of such aid, there is no guarantee that such luck will continue. International organizations are placing stricter surveillance on aid and these packages are often coming with conditions of effectiveness attached. Another effect that will impinge on the economic viability of small islands is the ongoing trend of the world splitting up into large regional blocs (Read 2004, Salvatore et al 2001). When small countries are geographically near a regional bloc which is an inward-looking one, the latter “can easily inflict much more harm on economically smaller players that for one reason or another are not part of any big blocs.” (Das 2004:51). This is what Krugman (1991) refers to as “the innocent bystander” dilemma. In this regard, are small islands faced with a Hobson’s choice? Is this one of the underlying reasons behind the Mediterranean islands’ accession to the European Union? A less discussed topic is the heavy role the informal economy has in small islands. According to Eurisles (European Islands System of Links and Exchanges) “employment in the black economy which, in the case of the Mediterranean Region, can sometimes concern up to 15% of the jobless and sometimes even more” is a reality one cannot ignore. But perhaps what is more relevant for the discussion is the second-job syndrome which can be profuse in small islands in order to make ends meet. Furthermore, such jobs in order to avoid their financial erosion through the tax system, are normally in the black economy or in small family enterprises.

The crux of the matter is therefore, that while official statistics may be showing that small island states appear on average to have healthy looking economies, one must question whether such health is based on sound or shaky foundations. What will 4-4-A-1

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happen to these islands that have become dependent on revenue generated through the international non-regulation of taxing systems, on aid or trade concessions? What is the likely consequence of islands that in a regionalized world find themselves on the outside of economic inward-looking blocs? The black economy has survived up to now and may continue to do so in the future since man is ingenious in finding ways of sidestepping hurdles in his strive for survival, but where is the guarantee that loopholes in the system will continue? Moreover, economies based on the volatile ground of tourism need to be reassessed, because the competition in this sector is continuously getting fiercer. Sun, sea and sand are likely to remain attractive for tourism but other types of alternative tourism are making headway into the market for the intrepid and insatiable thrill-seeker.

Conclusion According to Alesina and Spolaore (2003:218) “…with completely free trade and economic integration, market size and country size are not correlated: for every country the size of the market is the world”. It may be true that an open economy has the possibility of a wider market for its goods, but the problem remains that small sized island states, cannot afford large-scale manufacturing enterprises due to lack of physical and human resources. Furthermore, the higher transportation charges make local products less competitive. Therefore, unless an island has a viable niche market such as Bahrain and Seychelles, economic activity in the secondary sector is not likely to be profitable. Most of the islands in the study have a higher proportion of their economy still based on the primary sector employing 20% or more of their human resources. Included in this is also subsistence agriculture and fishing. The four islands in the high-income group are more focused on the tertiary sector and within this sector there is more possibility of diversification in the services provided. This implies that in order to be successful small islands must either discover profitable niche markets or else focus on the services industry, though the latter should not be limited only to tourism since competition is driving down prices and decreasing profit margins. What the data is not conclusive about is the incongruity surrounding the helpless/resourcefulness dichotomy that surrounds small islands. While one strand of literature envisages small islands as helpless and at the mercy of bigger entities, another strand of literature discovers that some small islands possess a skill in devising ingenious schemes to raise revenue. What comes through is a mixture of external management blended with a variety of internal policies. What needs to be emphasized is the fact that the global arena is continuously changing and small islands need to adapt to new realities of diminishing aid and trade concessions, a more regulated international environment and a world that is invariably breaking up into regional blocs or exclusive economic integration arrangements. However, it is also true that modern technology has granted the possibility of lessening the impact of isolation, not only in terms of space but more especially in 4-4-A-1

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terms of time. It is important that small islands continue to make pressure for continued support from international organizations in order for their specificities to be taken into consideration in global decisions that may affect them harder than larger countries. Imported models of development constructed on different realities are not likely to benefit small islands. Small independent islands should assess their special unique contextual circumstances and design modes of development that are more relevant to their geographical, cultural and social settings, while remaining open to new ideas and engaging with the global economic environment on a wider scale.

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