Make the Most of What You’ve Got: Small States in the Spotlight

IMF Blog, April 1, 2013

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Make the Most of What You’ve Got: Small States in the Spotlight

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Bibliographic details

• Authors: Min Zhu
• Published: April 1, 2013

Small can be complicated

• More than a fifth of IMF members are countries with populations of under 1.5 million.
• Three out of four small states are islands or widely dispersed multi-island states; others are landlocked, and some are located far from major markets.
• Microstates: populations below 200,000 and face fairly unique and at times more difficult economic circumstances.
• Examples:
  • Tuvalu: land area of 10 square miles, roughly one-seventh the size of Washington, D.C., which makes it difficult to produce agricultural goods.
  • Kiribati: population of 100,000 people is spread over 3.5 million square kilometers of ocean—an area about the size of the Indian subcontinent.

Why size matters — intrinsic characteristics and development challenges

• Higher fixed and variable costs of providing public goods, with little scope to exploit economies of scale.
• Private sector: higher costs have led to concentrated markets with less competition.
• Very high shares of imports and exports in most small states help overcome weak competition and invigorate growth, but:
  • High degree of openness heavily exposes them to external shocks in global markets.
• Limited scope to diversify into a wide range of activities, increasing vulnerability to shocks.
• Domestic financial markets tend to be shallow.
• Less favorable access to global capital as investors often perceive them to be more risky.
• Exposure to natural disasters and climate change:
  • Micro states in the Caribbean and the Pacific suffer annual costs equivalent to some 3 to 5 percent of GDP because of natural disasters.
  • United Nations Intergovernmental Panel on Climate Change expects Kiribati to be the first country to see its entire territory disappear underwater as a result of global climate change.

Make the most of what you’ve got — outcomes and strategies

• Long-term economic performance: generally good; per capita income levels and social indicators broadly match those of larger peers.
• Success factors observed in some small states:
  • Higher levels of openness.
  • Improved education.
  • Financial development.
• Key strategy: pursue policies that exploit advantages and offset disadvantages.
• Regional integration and cooperation as an offset to size disadvantage:
  • Example: Eastern Caribbean Currency Union’s Regional Government Securities Market aims to integrate national securities markets into a single regional market to exploit economies of scale in financial markets.
• Despite potential, since the late 1990s most small states have experienced slower and more volatile growth than larger peers and, with higher public spending, a number now face high debt burdens.

IMF engagement, tools, and policy recommendations

• Increased IMF engagement driven by internal and Executive Board interest:
  • Informal working group on economic issues in small states.
  • Internal small islands group to facilitate sharing of insights and lessons learned by staff working on small states.
• Financing instruments and emergency assistance:
  • Use of IMF financing instruments including the Rapid Credit Facility, a type of emergency assistance, to weather natural disasters and other external shocks.
• Capacity building and technical assistance:
  • Delivery of technical assistance and training, particularly through regional technical centers, plays a vital role in building small states’ capacities.
  • Staff exchanges involving national governments, regional entities, the IMF, and other international organizations may help strengthen institutions.
• Collaboration with other international institutions and development partners to meet small states’ needs and learn from their experiences.
• Planned IMF actions:
  • Pursue analytical work on issues affecting small states.
  • Maintain an active dialogue with country and regional officials.
  • Continue to help build capacity.
  • Over time, these efforts should help reduce small states’ vulnerability and increase their resilience.

Source: Make the Most of What You’ve Got: Small States in the Spotlight — Min Zhu, April 1, 2013.

Content in this bundle

• 1. Small States: Selected Indicators
  • 1. Small States: Selected Indicators (Markdown version)
  • 1. Small States: Selected Indicators (PDF)
• Executive Summary
  • Executive Summary (Markdown version)
  • Executive Summary (PDF)
• Caribbean Small States: Challenges of High Debt and Low Growth; IMF Policy Paper; February 20, 2013
  • Caribbean Small States: Challenges of High Debt and Low Growth; IMF Policy Paper; February 20, 2013 (Markdown version)
  • Caribbean Small States: Challenges of High Debt and Low Growth; IMF Policy Paper; February 20, 2013 (PDF)