## 1. Expenditures for Small and Large States, 1990-2004

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### Context, objectives, and dataset
- Context and motivation:
  - Small states face higher per capita costs in providing public services because of limited economies of scale; inverse relationship between country size and size of government (Alesina and Wacziarg, 1998; Alesina and Spolaore, 2003).
  - Small states are more open and exposed to external shocks and may require a bigger government to insulate the economy (Rodrik, 1996).
  - Customs revenues tend to be a larger share of total revenues and income taxes a lower share in small states (Easterly and Rebelo, 1993; Borg, 2006).
  - Since the early 1990s many small states experienced growing public debt problems worsened by sluggish growth and shocks (Dodhia, 2005; Browne, 2006; Sahay and others, 2006).
- Objectives:
  - Extend studies of government size in small states to analyze public debt levels.
  - Draw policy recommendations for fiscal tightening to reduce vulnerabilities from high public debt and volatility.
- Main dataset and scope:
  - New fiscal dataset for 42 small states; comparative focus between small states and 25 large developing/emerging-market countries; time frame 1990–2004 (with some series to 2005).

### Definitions and measurement
- Definition of small states:
  - Developing and emerging-market countries with population of about two million or less; exceptions: Jamaica and Papua New Guinea included for shared characteristics.
  - Sample: 42 small states (14 Africa, 9 Asia Pacific, 4 Europe, 2 Middle East, 13 Western Hemisphere); 26 islands and 4 landlocked.
- Large-country sample:
  - Population over two million; 25 developing and emerging-market countries used for fiscal-data comparators.
- Fiscal dataset and measurement:
  - Primary data: country economists and IMF staff reports (data collected in first half of 2006).
  - Most small states report central government data; small European states reported general government data except Cyprus.
  - Detailed breakdown by economic classification; public/external debt from WEO database, staff reports, country economists.
  - Domestic debt often estimated as residual (total public debt minus total external debt); early 1990s gaps in public-sector debt data.

### Fiscal indicators — expenditures, revenues, grants, balances, debt
- Expenditures:
  - 2004: total expenditures in small states ≈ 37 percent of GDP on average.
  - Trend: marginal downward trend in total expenditures since early 1990s, largely due to decline in capital spending.
  - Small states: higher current expenditures and capital spending than large countries.
  - Within current spending: goods and services, and salaries and wages higher in small states.
  - Interest spending higher in large states.
  - Cross-country variation (2000–2004 averages):
    - São Tomé and Príncipe and Micronesia ≈ 70 percent of GDP total expenditures.
    - Seychelles ≈ 51 percent of GDP total expenditures.
    - Bahamas and Equatorial Guinea ≈ 20 percent of GDP total expenditures.
    - Capital spending: São Tomé and Príncipe ≈ 31 percent of GDP; Jamaica ≈ 2 percent of GDP.
  - Standard deviation of expenditure and most subcategories (except interest payments) was higher in small states than in large countries.
- Revenues and grants:
  - Revenues trending up since 2001; on average small states have higher revenues and grants than large states, partly due to international trade taxes.
  - Notable high-revenue cases: Gabon (oil), Seychelles, Malta.
  - Island states obtain more revenues from international trade taxes than mainland small states.
  - Landlocked small states obtain high proportions of revenue from customs (examples: Botswana, Lesotho, Swaziland via SACU).
  - Decline since 1990 in share of revenue from international trade taxes due to world trade liberalization.
  - VAT adoption examples: Fiji, Papua New Guinea, Samoa, Antigua and Barbuda, Barbados, Dominica, St. Vincent and the Grenadines, Cape Verde, Botswana, Gabon.
  - Grants:
    - Higher for small states but declined since 1990.
    - Grants averaged 2000–2004: Micronesia ≈ 45 percent of GDP; Solomon Islands ≈ 12 percent of GDP; Samoa ≈ 11 percent of GDP.
    - Other significant recipients: Bhutan, Cape Verde, Guinea Bissau.
- Fiscal balances and volatility:
  - Primary balances on average more expansionary in small states than in large states.
  - Including interest payments, large countries have larger fiscal deficits.
  - Fiscal positions improved for both groups since 2002.
  - Notable small states with deteriorated primary balances around 2000: Bhutan, Fiji, Maldives, Solomon Islands, Vanuatu, Antigua and Barbuda, Belize, Grenada, St. Kitts and Nevis, St. Lucia, Suriname, Cape Verde, Comoros, Guinea Bissau, Mauritius, Namibia, São Tomé and Príncipe, Swaziland.
- Public debt:
  - Debt above 50 to 60 percent of GDP generally considered high.
  - 2005: average debt for small states ≈ 84 percent of GDP, after peaking at 95 percent in 2002.
  - 2000–04:
    - 13 small states had total public debt over 90 percent of GDP.
    - 15 had public debt between 50 percent and 90 percent of GDP.
  - Countries with relatively low public debt often benefit from minerals or oil: Bahrain, Botswana, Equatorial Guinea, Namibia, Qatar, Trinidad and Tobago; Micronesia receives very high external grants.
  - Domestic debt estimates: small states on average ≈ 26 percent of GDP in 2005.
  - Domestic debt increased since 1990 in several small African states (Cape Verde, Djibouti, Gambia, Mauritius, Seychelles), Pacific Island states (Fiji, Solomon Islands, Tonga), and Caribbean countries (Antigua and Barbuda, Barbados, Jamaica, St. Kitts and Nevis).
  - Small states had more external debt compared to large states; many low-income and African small states are among HIPCs: Comoros, Gambia, Guinea Bissau, São Tomé and Príncipe.
  - Since 1990 average concessionality of total external debt declined for low and middle-income small states though it remains higher than for all low and middle-income countries — implying present value of external public debt likely rose.

### Factors explaining big government and high public debt
- Principal explanatory factors:
  - Limited economies of scale and remoteness (raise transport costs and isolate economies).
  - Lack of economic and export diversification; higher export concentration (2003 export concentration index: small states = 0.41; all developing countries = 0.24).
  - High degree of openness and reliance on foreign capital.
  - Greater output and fiscal volatility, and exposure to natural disasters.
  - Governance and transparency deficits.
  - Exchange rate regime choice.
- Remoteness and economies of scale (percentage deviations from median economy; Winters and Martins, 2004):
  - Airfreight average: Very small 4.1; Small -1.7
  - Seafreight average: Very small 70.5; Small 9.1
  - Telephone average (marginal costs): Very small 47.2; Small 9.0
  - Electricity (marginal costs): Very small 47.0; Small 9.4
  - Fuel average: Very small 28.3; Small 5.9
  - Personal air travel average: Very small 56.8; Small 11.0
  - Land rent average: Very small -17.2; Small -8.9
- Wage disadvantages (percentage deviation from median economy):
  - Unskilled wages average: Very small 31.6; Small 6.6
  - Semi-skilled wages average: Very small 12.1; Small 2.6
  - Skilled wages average: Very small 20.3; Small 4.3
- Vulnerability and volatility:
  - CVI ranks 111 developing countries; 31 of the 35 most vulnerable are small states.
  - Examples: Vanuatu (most vulnerable), Antigua and Barbuda, Tonga, Botswana.
  - Higher volatility leads to higher volatility in government revenues and expenditures (standard deviation 1990–2004 higher for small states).
- Governance and transparency:
  - Better governance raises sustainable public debt threshold; institutional quality linked to more prudent borrowing and countercyclical policy.
  - Transparency supports fiscal adjustment via public support, investor assessment, and donor confidence.
  - Small internal markets increase monopoly prevalence and rent-seeking risks.
- Exchange rate regime:
  - 35 of the 42 small states use a fixed exchange rate regime.
  - Fixed regimes limit monetary-policy tools; empirical views differ:
    - Some research links fixed exchange rates with worse fiscal outcomes (Tornell and Velasco, 2000; Alberola and Molina, 2004; Duttagupta and Tolosa, 2006; Sahay, 2005).
    - Theory: fixed regimes may encourage fiscal laxity by postponing inflation tax costs.
    - Alternative view: fixed regimes can encourage fiscal discipline because collapse of the peg is heavily penalized.

### Empirical approach and key regression results
- Methodology:
  - Cross-sectional OLS regressions using five-year averages for 1990–1994, 1995–1999, 2000–2004, and 1997–2004; Eicker-White robust standard errors used.
  - Independent variables: population (log), population density (log), per capita income (log), government effectiveness index (governance), trade openness (imports+exports/GDP), area and geography dummies (island, landlocked).
  - Governance treated via multiplicative dummies (small governance = small dummy * governance; big governance = big dummy * governance); governance and per capita income estimated in separate equations due to collinearity.
  - Dependent variables: total government expenditure and subcategories (percent of GDP); gross public debt and external public debt (percent of GDP). Exchange regime dummy = 1 if de facto fixed exchange rate.
- Size of government — selected regression findings (2000–04 OLS, Table 4):
  - Log of population coefficients (selected, absolute t statistics in parentheses):
    - Total Expenditure: -2.17 (2.76)***
    - Capital Expenditure: -0.96 (2.90)***
    - Wages and Salaries: -0.75 (2.45)**
    - Goods and Services: -1.10 (2.27)**
  - Log of per capita income:
    - Capital Expenditure: -2.28 (2.75)***
  - Trade openness: coefficients near zero and not significant (example: -0.01 (0.23) for Total Expenditure).
  - Interpretation:
    - Government size and country size are negatively related; smaller countries have larger governments and higher subcomponent spending.
    - For small states governance is not a significant determinant of government size; for large countries better governance is associated with lower total expenditure and capital spending.
    - Trade openness generally not significant in explaining government size.
- Public and external debt — selected regression findings (2000–04 OLS, Table 5):
  - Log of population:
    - Gross Public Debt: -23.36 (2.42)**
    - External Public Debt: -25.07 (2.30)**
  - Log of per capita income:
    - Gross Public Debt: -32.30 (2.34)**
    - External Public Debt: -41.98 (2.79)***
  - Change in terms of trade: -3.16 (1.96)*
  - Exchange regime dummy: -81.15 (1.85)*
  - Log of population density: 9.63 (1.99)*
  - Multiplicative governance:
    - Small governance: -54.09 (2.56)** for Gross Public Debt (example specification).
    - Big governance: -59.15 (1.91)* for Gross Public Debt (example specification).
  - Interpretation:
    - Smaller countries tend to have higher public and external debt (negative log population coefficients, though relationship less robust than for government size).
    - Poorer countries (lower per capita income) have significantly higher total and external public debt.
    - Higher governance scores are linked to reduced levels of public and external debt, particularly for small states.
    - Fixed exchange rate regimes show some evidence of being associated with lower public debt in the sample (sample biased toward small states with fixed regimes).
    - Trade openness generally not significantly correlated with public or external debt.
    - Worsening terms of trade associated with higher debt (negative change in terms of trade coefficients).

### Episodes of large fiscal adjustment and growth evidence
- Definition of large fiscal adjustment:
  - Average primary balance (percent of GDP) for a three-year period at least 10 percentage points greater than previous three-year average.
- Episodes:
  - 12 episodes involving nine small states between 1990 and 2004.
  - Outcomes across episodes:
    - In 67 percent of episodes economic growth increased.
    - Average change in growth across episodes: 1.3 percent (annual percentage change).
    - In 58 percent of episodes primary and fiscal balances improved.
    - In 92 percent of episodes revenues rose.
    - In 67 percent of episodes expenditures fell.
  - Table 6 averages (percent of GDP unless indicated):
    - Average primary balance: -0.6
    - Average fiscal balance: -4.34
    - Average revenue: 41.74
    - Average expenditure: 46.13
    - Average growth: 3.5
    - Average change: Primary balance 12.1; Fiscal balance 12.5; Revenue 2.6; Expenditure -9.9; Growth 1.3
  - Note: two episodes were for two-year periods; oil exporters excluded starting in 1999; 67 percent of episodes saw growth increase; only one episode displayed negative average growth (Seychelles 2003-04).

### Policy considerations and recommended fiscal adjustment measures
- Objectives for fiscal adjustment in small states:
  - Reduce vulnerability associated with high output volatility and high public debt.
  - Support higher economic growth by crowding in private investment and reducing uncertainty.
- Vulnerability reduction measures:
  - Target low public debt and sound fiscal positions to preserve countercyclical policy flexibility.
  - Use present value of public external debt when targeting public debt ratios because small states borrow externally on concessional terms.
  - Minimize fiscal rigidities: reduce large wage bills, earmarked revenues, and nondiscretionary entitlements.
  - Fiscal policy emphasized over monetary policy for countercyclical response given prevalence of fixed exchange rate regimes.
- Growth-supporting adjustment: empirical evidence and instruments
  - Evidence: growth is higher in small states with smaller government and lower public debt (Figure 9).
  - Most effective adjustment approach: reduce spending — majority of large adjustment episodes involved substantial expenditure cuts in both current and capital spending, with revenue increases less frequent and smaller.
  - Curtail current spending (particularly transfers and subsidies) while maintaining capital spending to support sustainable adjustment.
  - Reductions in current expenditures on goods and services, transfers and subsidies, and wages are associated with higher growth; high-growth small states had lower spending in these categories and higher capital spending.
  - Maintain social safety nets given limited economies of scale and social needs.
- Revenue strategy:
  - Avoid excessive revenue increases unless revenues are very low.
  - Broaden tax base, strengthen administrative capacity, and implement domestic tax reforms (rely more on VAT, sales tax, and a low flat tax on imports).
- Regional cooperation:
  - Pool fixed costs of public goods/services (examples in source: Eastern Caribbean Central Bank, Eastern Caribbean Telecommunications Authority, Pacific air traffic control).
- Governance, transparency, and technical assistance:
  - Improve governance and transparency to reduce public and external debt and enhance fiscal adjustment credibility.
  - Technical assistance to raise public sector skills, address limited institutional capacity and outward migration, and improve economic data quality and transparency.

### Conclusions and implications
- Key takeaways:
  - Both size of government and public debt tend to be larger in the sample of small states relative to large countries.
    - Total revenues, current expenditures, and capital spending are higher in smaller states; within current spending, goods and services and wages and salaries are higher.
  - Explanatory factors: higher input costs, lack of economies of scale, worse primary balance positions, and lower growth contribute to higher public debt in small states; greater reliance on external borrowing consistent with openness and limited domestic markets.
  - Empirical confirmations:
    - Confirms Alesina and Wacziarg (1998): government size has a significant negative correlation with country size.
    - Finds evidence of a negative correlation between country size and total public and external debt.
    - Trade openness does not impact size of government or public debt in this sample (contrary to Rodrik, 1996).
  - Policy implications:
    - Fiscal adjustment can reduce vulnerability and can be growth-supportive; large adjustments may improve growth by crowding in private investment.
    - Adjustment is best achieved through cuts in current primary spending rather than revenue increases, while safeguarding capital spending and social safety nets.
    - Improving governance supports debt reduction and fiscal adjustment.
    - Fixed exchange rate regimes are correlated with lower public debt in the sample; exchange rate regimes should not substitute for fiscal adjustment.
  - Suggestion for future research:
    - Investigate whether the negative relationship between country size and debt extends to a larger sample of developing and emerging-market countries.

*Source: _wp0839 - 1. Expenditures for Small and Large States, 1990-2004*

### 1. Expenditures for Small and Large States, 1990-2004 ...................................................7

### 1. Expenditures for Small and Large States, 1990-2004

### Context and motivation
- Small states face higher per capita costs in providing public services because there are limited economies of scale, leading to an inverse relationship between country size and the size of government (Alesina and Wacziarg, 1998; Alesina and Spolaore, 2003).
- Small states are more open and more exposed to external shocks, and may therefore require a bigger government to provide an insulating role (Rodrik, 1996).
- Customs revenues tend to be a larger share of total revenues and income taxes a lower share because it costs less in overhead to collect customs tax than income tax (Easterly and Rebelo, 1993; Borg, 2006).
- Since the early 1990s, in many small states a growing public debt problem has been worsened by a slowdown in growth rates, partly due to the erosion of trade preferences and to shocks (Dodhia, 2005).
- Sluggish growth and fiscal pressures have emerged in some Pacific islands (Browne, 2006), and rising debt has been especially pronounced in the Caribbean countries (Sahay and others, 2006).

### Objectives of the study
- Extend previous studies of the size of government in small states to a close analysis of public debt levels.
- Draw policy recommendations for fiscal tightening from the experience of small states so they can reduce the vulnerabilities stemming from high public debt and economic volatility.

### Main dataset and scope
- Uses a new fiscal dataset for 42 small states.
- Comparative focus: small states versus large countries; time frame indicated by chapter title: 1990-2004.

### Key empirical findings
- Confirms a significant negative correlation between country size and size of government.
- Presents new evidence of an inverse relationship between country size and the amount of both public debt and external public debt in the small-state and large-country samples.
- Small states tend to have higher government spending on goods and services, wages and salaries, and capital investment.
- Fresh evidence shows that in small states weak governance (or low government effectiveness) is associated with higher total public and external debt.

### Policy implications and recommendations
- Although structural factors contribute to higher government spending in small states, many small states can use fiscal tightening to boost their flexibility in response to shocks.
- The study presents evidence that drastic fiscal adjustment can support growth in small states, although in some cases socio-political changes can also impact the growth outcome.
- Improving governance and transparency can help lower public and external debt.

### Structure of the report (as presented)
- Section II: Defines small states, reviews their fiscal indicators, and compares them to those of large countries.
- Section III: Presents characteristics of small states that explain high government spending and, to a degree, high public debt.
- Section IV: Lays out groundwork empirical analysis of the link between government size, debt, and country size.

*Source: _wp0839 - 1. Expenditures for Small and Large States, 1990-2004*

### Section V expounds policy considerations and measures for fiscal adjustment in small states.

### _wp0839 - Section V expounds policy considerations and measures for fiscal adjustment in small states.

### Definition of Small and Large States
- Small states are defined here as developing and emerging-market countries that have a population of about two million or less.
- Jamaica and Papua New Guinea are included despite higher populations because they share many economic and physical characteristics of small states.
- The study sample: 42 small states (14 Africa, 9 Asia Pacific, 4 Europe, 2 Middle East, 13 Western Hemisphere); of the 42, 26 are islands and 4 are landlocked.
- Large countries: defined as population over two million; the large-country sample consists of 25 developing and emerging-market countries used for fiscal-data comparators.

### Fiscal Dataset and Measurement
- Primary data sources for small states’ revenue and expenditure: country economists and IMF staff reports (data collected in the first half of 2006).
- Most small states report central government data; small European states reported general government data except Cyprus.
- Innovation: use of a detailed breakdown of government expenditures by economic classification.
- Public/external debt data sources: IMF World Economic Outlook database, staff reports, and country economists.
- Domestic debt often estimated as residual: total public debt minus total external debt; public-sector debt dataset contains substantial gaps, especially in early 1990s.

### Fiscal Indicators — Expenditures
- In 2004 total expenditures in small states were about 37 percent of GDP on average.
- Trend: marginal downward trend in total expenditures since the early 1990s, largely due to a decline in capital spending.
- Both current expenditures and capital spending were higher in small states than in large ones.
- Within current spending, subcategories higher in small states include spending on goods and services and on salaries and wages.
- Interest spending on government debt was higher in large states.
- Considerable cross-country variation among small states:
  - Total expenditures in 2000–2004: São Tomé and Príncipe and Micronesia ≈ 70 percent of GDP; Seychelles ≈ 51 percent of GDP.
  - Low end in 2000–2004: Bahamas and Equatorial Guinea ≈ 20 percent of GDP.
  - Capital spending in 2000–2004: São Tomé and Príncipe ≈ 31 percent of GDP; Jamaica ≈ 2 percent of GDP.
- Standard deviation of expenditure and most subcategories (except interest payments) was higher in small states than in large countries.

### Fiscal Indicators — Revenues and Grants
- Revenues in small states trended up since 2001; on average small states have higher revenues and grants than large states, partly due to customs or international trade taxes.
- Notable cases of substantial revenues: Gabon (largely due to oil revenues), Seychelles, Malta.
- Island states obtained more revenues from international trade taxes than mainland small states.
- Landlocked small states obtained the highest proportion of revenue from customs taxes; Sri examples: Botswana, Lesotho, and Swaziland due to SACU revenue-sharing.
- The share of revenue from international trade taxes has been declining since 1990 due to world trade liberalization.
- VAT adoption examples: Fiji, Papua New Guinea, Samoa, Antigua and Barbuda, Barbados, Dominica, St. Vincent and the Grenadines, Cape Verde, Botswana, Gabon.
- Grants:
  - Higher for small states reflecting greater openness and reliance on aid, though grants have declined since 1990.
  - Grants averaged for 2000–2004: Micronesia ≈ 45 percent of GDP; Solomon Islands ≈ 12 percent of GDP; Samoa ≈ 11 percent of GDP.
  - Other significant grant recipients: Bhutan, Cape Verde, Guinea Bissau.

### Fiscal Indicators — Fiscal Balances and Volatility
- Primary balances have on average been more expansionary in small states than in large states.
- When interest payments are included, large countries have larger fiscal deficits.
- Fiscal positions for both groups improved since 2002.
- Small states with pronounced deterioration in primary balances starting around 2000 include: Bhutan, Fiji, Maldives, Solomon Islands, Vanuatu, Antigua and Barbuda, Belize, Grenada, St. Kitts and Nevis, St. Lucia, Suriname, Cape Verde, Comoros, Guinea Bissau, Mauritius, Namibia, São Tomé and Príncipe, Swaziland.
- Average real GDP growth series presented for 1990–2005 shows small states vs large countries (figure referenced).

### Fiscal Indicators — Public Debt
- Debt above 50 to 60 percent of GDP is generally considered high.
- 2005 average debt for small states stood at about 84 percent of GDP, after peaking at 95 percent in 2002.
- For 2000–04:
  - 13 small states had very high debt of over 90 percent of GDP.
  - 15 had high debt (50 percent to 90 percent).
- Countries with relatively low public debt often benefit from minerals or oil revenues: Bahrain, Botswana, Equatorial Guinea, Namibia, Qatar, Trinidad and Tobago; Micronesia receives very high external grants.
- Domestic debt estimates: small states on average about 26 percent of GDP in 2005.
- Domestic debt increased since 1990 in several small African states (Cape Verde, Djibouti, Gambia, Mauritius, Seychelles), Pacific Island states (Fiji, Solomon Islands, Tonga), and Caribbean countries (Antigua and Barbuda, Barbados, Jamaica, St. Kitts and Nevis).
- Small states had more external debt compared to large states; many low-income and African small states are among the highly indebted poor countries (HIPCs): Comoros, Gambia, Guinea Bissau, São Tomé and Príncipe; also substantial external debt in Cape Verde, Djibouti, Seychelles, Antigua and Barbuda, Belize, Dominica, Grenada, Guyana, St. Lucia.
- Since 1990 the average concessionality of total external debt has declined for low and middle-income small states, though it remains significantly higher than for all low and middle-income countries — implying present value of public external debt likely rose.

### Factors Explaining Big Government and High Public Debt
- Principal explanatory factors: limited economies of scale, remoteness, lack of economic and export diversification, high degree of openness, greater output volatility, governance issues, and possibly exchange rate regime choice.

Remoteness and Limited Economies of Scale
- Remoteness raises transport costs and isolates economies, especially island and some landlocked small states.
- Fixed costs in public institutions and services imply higher per-person costs in small states.
- Table 2 (Winters and Martins, 2004) — percentage deviations of costs for very small and small economies from the median economy:
  - Airfreight average: Very small 4.1, Small -1.7
  - Seafreight average: Very small 70.5, Small 9.1
  - Telephone average (marginal costs): Very small 47.2, Small 9.0
  - Electricity (marginal costs): Very small 47.0, Small 9.4
  - Water (marginal costs): Very small 0.0, Small 0.0
  - Fuel average: Very small 28.3, Small 5.9
  - Personal air travel average: Very small 56.8, Small 11.0
  - Land rent average: Very small -17.2, Small -8.9

Lack of Economic and Export Diversification
- Small states have higher export concentration: 2003 export concentration index for small states = 0.41; for all developing countries = 0.24.
- Typical reliance on one to three dominant export sectors (tourism, canned tuna, timber, fish, bananas, primary commodities).
- Tourism is a major export in many Caribbean, Indian Ocean, and Pacific small states.
- Limited human resources and “brain drain” inflate wages and limit public and private sector capacity.
- Table 3 (Winters and Martins, 2004) — wage disadvantages (percentage deviation from median economy):
  - Unskilled wages average: Very small 31.6, Small 6.6
  - Semi-skilled wages average: Very small 12.1, Small 2.6
  - Skilled wages average: Very small 20.3, Small 4.3

High Degree of Openness
- Small states have high external trade-to-GDP ratios and reliance on foreign capital.
- Openness helps overcome scale constraints but increases vulnerability to external shocks.
- Composite Vulnerability Index (CVI) and average trade openness figures show higher vulnerability and openness for small states compared with large countries.

Greater Output and Fiscal Volatility
- Output in small states is more volatile due to greater openness, lack of diversification, and susceptibility to natural disasters.
- CVI ranks 111 developing countries—31 of the 35 most vulnerable are small states.
- Examples of highly vulnerable small states: Vanuatu (most vulnerable), Antigua and Barbuda, Tonga, Botswana.
- Volatility leads to higher volatility in government revenues and expenditures (standard deviation 1990–2004 higher for small states).
- Greater fiscal volatility increases likelihood of revenue shortfalls and expenditure overruns, reinforcing macro instability.

Governance and Transparency
- Improving governance raises the public debt threshold sustainable without debt distress; institutional quality associated with more prudent borrowing and countercyclical fiscal policy.
- Small states have more to gain from better governance due to higher public debt.
- World Bank government effectiveness indicator used to compare small states; governance varies across small states.
- Transparency can support fiscal adjustment by increasing public support, aiding investor assessment, and enhancing donor confidence in grant use.
- Internal market smallness increases prevalence of monopolies and potential for rent-seeking.

Exchange Rate Regime
- 35 of the 42 small states use a fixed exchange rate regime, often implying monetary integration with a large currency area.
- Fixed regimes limit endogenous monetary-policy tools and can reduce room for interest/inflation adjustment.
- Empirical views differ:
  - Some research finds fixed exchange rates associated with worse fiscal outcomes (Tornell and Velasco, 2000; Alberola and Molina, 2004; Duttagupta and Tolosa, 2006; Sahay, 2005).
  - Theory: fixed regimes may encourage fiscal laxity because inflation tax costs are postponed.
  - Alternative view: fixed regimes can encourage fiscal discipline because collapse of the peg would be punished; pegging to a main trading partner can stabilize growth and reduce transaction costs if business cycles are synchronous.

### Empirical Evidence — Groundwork and Approach
- The paper investigates empirically:
  - Relationship between country size and size of government.
  - Relationship between country size and levels of public/external debt.
  - Net impact of trade openness.
  - Relationship between exchange rate regime and debt.
  - Whether better governance is associated with lower government spending and public debt.
- Modeling follows Alesina and Wacziarg (1998) with updated data and emphasis on small states.
- Dependent variables: total government expenditure, expenditure subcategories by economic classification, and public debt.
- Analysis period: 1990 to 2004; country sample includes both large and small developing countries.

*Italic source: _wp0839 - Section V expounds policy considerations and measures for fiscal adjustment in small states.*

### Appendix I) but is focused on small states because the new fiscal database on 42 small states

### _wp0839 - Appendix I) but is focused on small states because the new fiscal database on 42 small states

### Data and Methodology
- Sample: new fiscal database on 42 small states; cross-sectional OLS regressions run for periods 1990–1994, 1995–1999, 2000–2004, and 1997–2004. Five-year (and eight-year) averages used to eliminate business cycle effects.
- Heteroskedasticity: Breusch-Pagan tests indicated heteroskedasticity; Eicker-White (robust) standard errors used to calculate t-statistics.
- Independent variables: population, population density, per capita income, index of government effectiveness (governance), trade openness (imports and exports of goods and services over GDP), area dummies, geographical dummies (island and landlocked).
- Governance treatment: multiplicative governance dummies (small governance = small dummy * governance; big governance = big dummy * governance). Governance and per capita income estimated in separate equations due to high collinearity.
- Dependent variables in main regressions: total expenditure, capital expenditure, wages and salaries, and goods and services (all as percent of GDP). For debt regressions: gross public debt and external public debt (as percent of GDP).
- Exchange regime: a dummy equal to one if country has a de facto fixed exchange rate regime (monetary policy that uses an exchange rate anchor).

### A. The Size of Government — Key Empirical Findings
- Main result: government size and country size are negatively related; relationship is statistically significant across periods.
- Table 4 (OLS Regressions for 2000–04, selected coefficients; absolute value of t statistics in parentheses):
  - Log of population:
    - Total Expenditure: -2.17 (2.76)***
    - Capital Expenditure: -0.96 (2.90)***
    - Wages and Salaries: -0.75 (2.45)**
    - Goods and Services: -1.10 (2.27)**
  - Log of per capita income:
    - Total Expenditure: -1.82 (1.12)
    - Capital Expenditure: -2.28 (2.75)***
    - Wages and Salaries: 0.26 (0.63)
    - Goods and Services: 0.33 (0.62)
  - Trade openness: coefficients near zero and not significant (examples: -0.01 (0.23) for Total Expenditure).
  - Log of population density: coefficients small and generally not significant (example: 0.92 (1.05) for Total Expenditure).
  - Observations and R-squared (example, first specification): Observations 67; R-squared 0.26.
- Multiplicative governance results (2000–04):
  - Small governance: effects not statistically significant for total and subcategory expenditures (example: Total Expenditure 0.40 (0.15)).
  - Big governance: associated with lower expenditures in some cases (example: Total Expenditure -5.76 (2.01)**; Capital Expenditure -2.53 (2.36)**).
- Results for 1997–2004 confirm negative coefficients on log of population (examples):
  - Total Expenditure: -2.28 (2.58)**
  - Capital Expenditure: -1.07 (3.20)***
  - Wages and Salaries: -0.82 (2.50)**
  - Goods and Services: -1.12 (2.15)**
- Interpretation:
  - Smaller countries have larger governments (higher total expenditure and higher subcomponents: capital, wages and salaries, goods and services).
  - For small states governance is not a significant determinant of government size; for large countries better governance is associated with lower total expenditure and capital spending.
  - Trade openness generally not significant in explaining government size; high collinearity between openness and country size complicates conclusions.

### B. Public and External Debt — Key Empirical Findings
- Main result: some evidence of a negative and often statistically significant relation between country size and gross public and external public debt in 2000–04 — smaller countries tend to have higher public debt, though relationship less robust than for government size.
- Debt regressions (selected coefficients from Table 5):
  - OLS Regressions for 2000–04 (Gross Public Debt; External Public Debt):
    - Log of population: -23.36 (2.42)** ; -25.07 (2.30)** respectively.
    - Log of per capita income: -32.30 (2.34)** ; -41.98 (2.79)*** respectively.
    - Trade openness: -0.29 (1.51) ; -0.24 (1.49) — not significant.
    - Change in terms of trade: -3.16 (1.96)* ; -2.08 (1.19).
    - Exchange regime dummy: -81.15 (1.85)* ; -76.11 (1.53).
    - Log of population density: 9.63 (1.99)* ; 8.10 (1.63).
    - Observations 64;63. R-squared 0.50;0.50.
  - Multiplicative governance (2000–04 / 1997–04 examples):
    - Small governance: -54.09 (2.56)** ; -58.54 (2.23)** for Gross Public Debt in different specifications.
    - Big governance: -59.15 (1.91)* ; -44.17 (0.82) for Gross Public Debt in different specifications.
  - Other specifications show:
    - Log of population coefficients ranging from -22.22 (1.81)* to -30.62 (1.84)* across samples.
    - Log of per capita income coefficients large and negative (examples: -44.73 (2.39)** ; -55.59 (2.79)***).
    - Exchange regime dummy sometimes large negative (example: -123.05 (1.91)*).
    - Observations and R-squared vary by specification (examples: Observations 63/62; R-squared 0.52/0.47; other specs Observations 51/51; R-squared 0.43/0.38).
- Interpretation:
  - Gross public debt and external public debt are significantly negatively related to per capita income — poorer countries have higher total and external debt.
  - Higher governance scores are linked to reduced levels of both public and external debt, particularly in small states (small governance multiplicative dummy often negative and significant).
  - Fixed exchange rate regimes show some evidence of being associated with lower public debt in the sample (sample biased toward small states with fixed regimes).
  - Trade openness generally not significantly correlated with public or external debt.
  - Change in terms of trade often negative and significant: worsening terms of trade may have led to higher debt.

### V. Policy Considerations for Fiscal Adjustment — Summary of Recommendations and Evidence
- Objectives for fiscal adjustment in small states:
  - Reduce vulnerability associated with higher output volatility and high public debt.
  - Support higher economic growth via crowding in private investment and reducing uncertainty.
- Vulnerability reduction:
  - Low public debt and sound fiscal position give policymakers flexibility to respond countercyclically.
  - Small states borrow more externally on concessional terms at lower interest rates; present value of debt should be used in targeting public debt ratios.
  - Minimize fiscal rigidities: high public employment (large wage bill), revenues earmarked for specific expenditures, large nondiscretionary expenditures (entitlements).
  - Fiscal policy more important than monetary policy for countercyclical response because most small states have fixed exchange rate regimes and limited monetary autonomy.
- Growth support:
  - Evidence that growth is higher in small states with smaller government and lower public debt (Figure 9).
  - Since about 1993, high-growth small states on average have had lower revenues and grants, lower expenditures, stronger fiscal balances, and lower public debt than medium- and low-growth small states.
  - Episodes of large fiscal adjustment (definition: average primary balance as percent of GDP for a three-year period at least 10 percentage points greater than previous three-year average) — 12 episodes involving nine small states between 1990 and 2004:
    - In 67 percent of episodes, economic growth increased.
    - Average change in growth across episodes: 1.3 percent (annual percentage change).
    - In 58 percent of episodes primary and fiscal balances improved.
    - In 92 percent of episodes revenues rose.
    - In 67 percent of episodes expenditures fell.
    - Table 6 summary (percent of GDP unless otherwise indicated):
      - Average primary balance: -0.6
      - Average fiscal balance: -4.34
      - Average revenue: 41.74
      - Average expenditure: 46.13
      - Average growth: 3.5
      - Average change: Primary balance 12.1; Fiscal balance 12.5; Revenue 2.6; Expenditure -9.9; Growth 1.3
      - Median values also reported (examples: median primary balance 0.3; median change in growth 0.7).
    - Note: two episodes were for two-year periods; oil exporters excluded starting in 1999; 67 percent of episodes saw growth increase; only one episode had negative average growth (Seychelles 2003-04).
- Adjustment instruments and related measures:
  - Most effective approach: reduce spending — majority of large adjustment episodes involved substantial expenditure cuts in both current and capital spending; revenue increases less frequent and smaller.
  - Curtailing current spending (particularly transfers and subsidies) while maintaining capital spending supports more sustainable adjustments.
  - Reduce current expenditures in goods and services, transfers and subsidies, and wages — associated with higher growth; high-growth small states had lower spending in these categories and higher capital spending.
  - Caution on public employment levels since small states may reflect absence of economies of scale; need for appropriate social safety nets during adjustment.
  - Revenue strategy: avoid excessive revenue increases unless revenues are particularly low; broaden the tax base; strengthen administrative capacity; implement domestic tax reforms (rely more on VAT, sales tax, and a low flat tax on imports).
  - Regional cooperation: pool fixed costs of public goods/services (examples given in source: Eastern Caribbean Central Bank, Eastern Caribbean Telecommunications Authority, air traffic control in the Pacific).
  - Governance improvements: enhance government effectiveness to reduce public and external debt — increase institutional capacity, improve quality of public services and civil service, increase accountability to fiscal targets, regular publication of economic data, improve transparency.
  - Technical assistance: help raise public sector skills, address limited institutional capacity from small size and outward migration, and boost transparency and quality of economic data.

### VI. Conclusion — Key Takeaways
- Both size of government and public debt tend to be larger in the sample of small states relative to large countries.
  - Total revenues, current expenditures, and capital spending are higher in smaller states.
  - Within current spending, goods and services, and wages and salaries are higher in small states.
- Explanations: higher input costs, lack of economies of scale, worse primary balance positions, and lower growth contribute to higher public debt in small states; greater reliance on external borrowing consistent with openness and limited domestic markets.
- Empirical confirmations:
  - Confirms Alesina and Wacziarg (1998): government size has a significant negative correlation with country size.
  - Finds certain evidence of negative correlation between country size and total public and external debt.
  - Unlike Rodrik (1996), trade openness does not impact size of government or public debt in this sample.
- Policy implications:
  - Fiscal adjustment can reduce vulnerability and can be growth-supportive (large adjustments may improve growth by crowding in private investment).
  - Fiscal adjustment is best achieved through cuts in current primary spending rather than revenue increases, while safeguarding capital spending and social safety nets.
  - Improving governance supports debt reduction and fiscal adjustment.
  - Fixed exchange rate regimes are correlated with lower public debt in the sample; however, exchange rate regimes should not be used as substitutes for fiscal adjustment.
- Suggestions for future research:
  - Investigate whether negative relationship between country size and debt extends to a larger sample of developing and emerging-market countries.

*IMF staff estimates and regressions reported in the source document.*

### Appendix I: Details of Small States and Large Countries

### _wp0839 - Appendix I: Details of Small States and Large Countries

### Small country sample and classifications
- Sample: 42 small emerging-market and developing states used in the study.
- Regional groupings: Africa (AFR), Asia Pacific (AP), Europe (EUR), the Middle East (ME), and the Western Hemisphere (WH).
- External-indebtedness and income-level classifications: from the World Bank.
- Selected entries (country — region — income level — external indebtedness — other geography — population (millions, 2004) — official exchange rate regime):
  - Antigua & Barbuda — WH — upper middle income — less — island — 0.08 — monetary union ECCU, peg to US dollar
  - Bahamas, The — WH — high income — less — island — 0.32 — fixed peg to US dollar
  - Bhutan — AP — lower middle income — severely — landlocked — 0.75 — fixed peg to Indian rupee
  - Cape Verde — AFR — lower middle income — moderately — island — 0.47 — fixed peg to euro
  - Guinea Bissau — AFR — low income — severely HIPC — mainland — 1.54 — monetary union WAEMU, peg to euro
  - China, P.R.: Mainland — AP — lower middle income — less — mainland — 1307.99 — fixed
  - India — AP — low income — less — mainland — 1087.12 — managed float
  - Brazil — WH — lower middle income — severely — mainland — 183.91 — float
- Note: Table A1 lists official exchange rate regimes (As of mid-2005).

### Large country sample and data sources
- Sample: 25 large developing and emerging-market countries used in the study.
- Data sources for revenue, expenditure, public external debt, and total public debt: IMF Fiscal Affairs Department internal website and country desk economists.
- External-indebtedness and income-level classifications: from the World Bank.
- Selected large-country entries (country — region — income level — external indebtedness — geography — population (millions, 2004) — exchange rate regime):
  - Argentina — WH — upper middle income — severely — mainland — 38.37 — managed float
  - Mexico — WH — upper middle income — less — mainland — 105.70 — float
  - Indonesia — AP — lower middle income — severely — island — 220.08 — managed float
  - Nigeria — AFR — low income — moderately — mainland — 128.71 — managed float
  - Russia — EUR — upper middle income — moderately — mainland — 143.90 — managed float
  - Ukraine — EUR — lower middle income — less — mainland — 46.99 — fixed
- Note: Table A2 country data are as of mid-2005.

### Size of government and public debt in small states (Table A3; averages 2000–2004; percent of GDP unless noted)
- Total expenditure examples:
  - Antigua and Barbuda — 29.4
  - Bahamas, The — 19.5
  - Bhutan — 43.5
  - Micronesia — 68.4
  - São Tomé & Príncipe — 68.0
- Public debt (total public debt, percent of GDP) examples:
  - Antigua and Barbuda — 129.7
  - Bahamas, The — 33.5
  - Bhutan — 67.0
  - Cape Verde — 89.7
  - Comoros — 95.5
  - Cyprus — 102.9
  - Dominica — 112.7
  - Guyana — 185.4
  - Jamaica — 127.2
  - São Tomé & Príncipe — 297.6
  - Seychelles — 181.7
- Footnote: In Botswana, Comoros, Equatorial Guinea, Guinea Bissau, and São Tomé, there was no domestic debt data, so total public debt equals total external public debt.
- Sources: National authorities, and IMF staff estimates.

### Composite Vulnerability Index (CVI) for small states (Table A4)
- Source: Atkins, Mazzi, and Easter, 2000, "Small States: A Composite Vulnerability Index."
- Selected CVI rankings and index values (Rank — Country — CVI Index):
  - 1 — Vanuatu — 13.31
  - 2 — Antigua and Barbuda — 11.22
  - 3 — Tonga — 10.43
  - 4 — Bahamas — 10.44
  - 5 — Botswana — 10.25
  - 6 — Swaziland — 9.66
  - 7 — Gambia — 9.37
  - 8 — Fiji — 8.98
  - 9 — Maldives — 8.79
  - 10 — Solomon Islands — 8.41
  - 11 — Dominica — 8.11
  - 12 — Guyana — 7.91
  - 13 — Djibouti — 7.91
  - 14 — Grenada — 7.91
  - 15 — Bahrain — 7.81
  - 16 — São Tomé and Príncipe — 7.71
  - 17 — Jamaica — 7.5
  - 18 — St. Lucia — 7.5
  - 19 — Samoa — 7.4
  - 20 — Equatorial Guinea — 7.2
  - 21 — Malta — 6.9
  - 22 — Belize — 6.7
  - 23 — St. Vincent — 6.6
  - 24 — Namibia — 6.5
  - 25 — Mauritius — 6.5
  - 26 — Seychelles — 6.4
  - 27 — St. Kitts and Nevis — 6.3
  - 28 — Papua New Guinea — 6.3
  - 29 — Gabon — 6.2
  - 30 — Lesotho — 6.3
  - 31 — Barbados — 5.7
  - 32 — Cyprus — 5.5
  - 33 — Comoros — 5.4
  - 34 — Bhutan — 5.4
  - 35 — Trinidad and Tobago — 5.3
  - 36 — Cape Verde — 5.7
  - 37 — Suriname — 4.9

### Data and summary statistics (Table A5) — sample and descriptive statistics
- Note: Five-year averages (2000–2004) unless otherwise noted. As a percentage of GDP where indicated.
- Selected descriptive statistics (variable — # of observation — Mean — Std. dev. — Min — Max — Source):
  - Log of population 2000 — 67 — 7.88 — 2.61 — 3.74 — 14.06 — IMF
  - Log of per capita income 2000 — 67 — -6.14 — 1.09 — -8.75 — -3.56 — IMF
  - Log of population density 2000 — 67 — 3.99 — 1.58 — 0.14 — 7.15 — IMF
  - Governance 2002 — 66 — -0.07 — 0.65 — -1.42 — 1.38 — World Bank
  - Trade openness 2000 (two series shown) — 67/67 — 95.10 and 93.88 means — sources IMF and World Bank
  - Change in terms of trade — 64 — 1.10 — 5.44 — -6.94 — 28.21 — IMF
  - Total expenditure — 67 — 33.38 — 10.15 — 18.10 — 68.41 — IMF
  - Capital expenditure — 67 — 6.78 — 5.16 — 1.00 — 31.06 — IMF
  - Wages and salaries — 63 — 9.40 — 3.83 — 1.25 — 24.85 — IMF
  - Goods and services — 56 — 5.88 — 4.71 — 0.75 — 27.37 — IMF
  - Gross public debt — 67 — 84.06 — 79.80 — 5.33 — 550.23 — IMF
  - External public debt — 66 — 55.03 — 80.88 — 3.09 — 550.23 — IMF and World Bank

### Regression and empirical findings (selected coefficients and statistical significance)
- Table A6: OLS Regressions for Size of Government, 1995–99 (dependent variables: total expenditure, capital expenditure, wages and salaries, goods and services; percent of GDP)
  - Log of population coefficients (Total Expenditure / Capital / Wages / Goods):
    - -2.67 (Total Expenditure) — t-statistic (2.53)**  ; -1.12 (Capital) — (3.32)*** ; -1.05 (Wages) — (2.59)** ; -1.33 (Goods) — (2.39)**
  - Observations: 67/67/64/57 (shown as 67, 67, 64, 57)
  - R-squared: 0.26 / 0.38 / 0.38 / 0.35
  - Note: Significance codes: * significant at 10%; ** significant at 5%; *** significant at 1%.
- Table A7: OLS Regressions for the Size of Government, 1990–94
  - Log of population coefficients (Total Expenditure / Capital / Wages / Goods):
    - -4.45 — (3.58)*** ; -2.33 — (4.45)*** ; -1.16 — (2.62)** ; -1.47 — (2.30)**
  - Log of per capita income for Capital and Wages: -2.88 — (2.70)*** ; 1.85 — (3.02)*** respectively
  - Trade openness: -0.08 for Total Expenditure — (1.97)*; -0.05 for Capital — (2.08)**
  - Observations: 60/60/56/51
  - R-squared: 0.39 / 0.53 / 0.39 / 0.37
- Table A8: OLS Regressions for Gross Public and External Public Debt, 1995–99 (dependent variables: gross public debt and external public debt as percent of GDP)
  - All countries (first panel):
    - Log population: -17.65 (Gross Public Debt) — (1.42) ; -20.66 (External Public Debt) — (1.54)
    - Log per capita income: -42.97 — (2.30)** ; -52.41 — (2.55)**
    - Observations: 62 / 61 ; R-squared: 0.38 / 0.41
  - With governance split (second panel):
    - Log population: -14.19 — (1.04) ; -15.77 — (1.07)
    - Small governance: -47.40 — (2.02)** ; -55.01 — (2.21)**
    - Observations: 59 / 58 ; R-squared: 0.28 / 0.28
- Table A9: OLS Regression for Gross Public and External Public Debt, 1990–94 (All Countries)
  - Log of population: -27.06 — (2.03)** ; -27.40 — (1.89)*
  - Log of per capita income: -46.66 — (2.40)** ; -56.54 — (2.79)***
  - Exchange regime dummy: -110.22 — (1.74)* ; -100.65 — (1.46)
  - Observations: 54 / 54 ; R-squared: 0.50 / 0.51

### Episodes of large fiscal adjustment in small states (Table A10; period averages in percent of GDP unless otherwise indicated)
- Selected country episodes (Country — Years — Primary Balance — Fiscal Balance — Grants — Total Expenditure — Expenditure subcategories: Capital / Wages & Salaries / Transfers & Subsidies / Goods & Services — Growth (average annual percentage change)):
  - Cape Verde — 2002-04 — 0.5 — -2.1 — 31.1 — 33.2 — 12.0 — 11.2 — 4.7 — 1.2 — 4.8
    - Previous Period 1999-01 — -10.4 — -12.2 — 27.2 — 39.4 — 12.5 — 9.7 — 8.2 — 0.9 — 8.4
  - Guinea Bissau — 1994-96 — -1.1 — -7.4 — 25.8 — 33.2 — 16.8 — 2.0 — 2.3 — 3.8 — 3.8
    - Previous Period 1991-93 — -12.5 — -17.9 — 28.0 — 45.9 — 26.0 — 4.0 — 1.9 — 5.1 — 2.7
  - Malta — 1997-99 — -1.3 — -2.4 — 45.1 — 47.5 — 7.2 — n.a. — n.a. — n.a. — 4.1
    - Previous Period 1994-96 — -11.8 — -14.6 — 33.3 — 47.9 — 7.1 — n.a. — n.a. — n.a. — 5.2
  - Micronesia — 2002-04 — 4.3 — 3.6 — 67.7 — 64.1 — 9.7 — 25.2 — 3.4 — 25.0 — 0.8
    - Previous Period 1999-01 — -7.0 — -8.4 — 69.8 — 78.2 — 16.1 — 24.8 — 4.3 — 31.6 — 2.0
  - Samoa — 1994-96 — -0.2 — -1.1 — 44.3 — 45.4 — 16.6 — 11.6 — n.a. — n.a. — 6.7
    - Previous Period 1991-93 — -15.2 — -16.7 — 57.0 — 73.7 — 29.7 — 10.9 — n.a. — n.a. — 1.1
  - São Tomé and Príncipe — 1997-99 — -16.0 — -27.7 — 38.8 — 66.5 — 38.6 — 5.0 — 3.1 — 3.5 — 2.0
    - Previous Period 1994-96 — -26.5 — -37.5 — 35.9 — 73.4 — 46.0 — 1.7 — 3.3 — 3.6 — 1.9
  - Seychelles — 2003-04 — 8.6 — 1.2 — 49.9 — 48.7 — 3.3 — 14.9 — 11.9 — 11.2 — -4.2
    - Previous Period 2001-02 — -6.6 — -14.0 — 39.1 — 53.1 — 7.6 — 14.2 — 13.3 — 9.6 — -0.5
  - Solomon Islands — 2003-04 — 0.2 — 2.7 — 42.8 — 40.1 — 16.7 — 8.1 — 2.5 — 6.9 — 7.2
    - Previous Period 2001-02 — -9.5 — -11.8 — 21.2 — 33.0 — 6.0 — 11.3 — 1.6 — 5.0 — -5.3
  - Suriname — 2001-03 — 1.5 — -1.0 — 34.2 — 35.2 — 3.0 — 14.2 — 6.9 — 8.1 — 4.3
    - Previous Period 1998-00 — -9.9 — -10.8 — 29.4 — 40.2 — 7.3 — 14.0 — 5.9 — 11.7 — 0.2
- Source: National authorities and IMF Staff Estimate.
- Note: Growth is average annual percentage change.

### References and supporting literature (selected)
- Appendix includes a list of references cited in the study covering country size, small states vulnerability, fiscal policy, trade openness, and public debt. Examples: Alesina and Spolaore (2003); Atkins, Mazzi, and Easter (2000); Easterly (1993); IMF publications including World Economic Outlook (2003, 2006), and multiple IMF working papers.

*Source: IMF and World Bank; content extracted from _wp0839 - Appendix I: Details of Small States and Large Countries (as provided).*

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