Managing small states: It’s not easy!

by Nilio Gumbs Fri, Nov 25, 2010

SIDS is the acronym for Small Island Developing States (SIDS), and also for Sudden Infant Death Syndrome, which metaphorically seems to typify “Small Island Developing States”, given the plethora of natural and structural deficits that besiege their economic development, questioning their viability and survival as nation states.{{more}}

There is no clear definition of what is a small island state. The United Nations has designated 29 countries as Small Island Developing States. The grouping includes Papua New Guinea (bigger than New Zealand) but excludes developing countries such as Bahrain, Haiti, Dominican Republic – and Malta and Cyprus (European Union member states) because of their classification as developed nations.

Of the 193 members of the United Nations, there are 45 developing states with a population of 1.5 million or less; and there are 26 states with a land area less than 386 square miles.

The Caribbean region and the Pacific Ocean have the highest concentration of small island states on the planet and the highest number of states in the SIDS categorization.

The SIDS classification emphasizes economic size rather than any geographical feature. The UN uses three ways to capture economic size: their gross domestic product, the population, or share of world trade.

Small Island Developing States (SIDS) face many challenges, making them vulnerable, according to the United Nations. A study by the Commonwealth Secretariat/International Monetary Fund (IMF) indentifies some of these as follows: Undiversified domestic economies both in their production and exports; a heavy reliance on taxing imports as a major source of revenue; a narrow resource base and small domestic market; a relatively large public sector; susceptibility to natural disasters and environmental change; difficulties in accessing capital and the lack of proximity to major international markets (Pacific Islands).

The natural and structural deficits identified are further compounded by globalization, trade liberalization and the erosion and loss of preferential treatment, which mitigate their economic development and participation into the global economy on a level playing field. They in effect create other extraneous social and economic factors that small island states have to grapple with: high tax base, vast pool of unskilled labour, a miniscule private sector, a growing informal economy, high unemployment, crime, drugs and HIV-Aids.

The source of much of the malaise of these small states lies in their small populations and private sector which could only generate a limited revenue stream relative to their development needs, forcing government to borrow domestically and on the regional capital market. According to the Commonwealth Secretariat/IMF report, the small size of these economies often means that international financial institutions are skeptical of lending to small island states, obviously, questioning their ability to meet their repayment obligations.

It is no wonder that 10 out of the 15 most indebted nations in the world are in the Caribbean, thus forcing many to seek the IMF succor. St. Kitts and Nevis, Jamaica, Antigua and Barbuda, Grenada and Belize are all debt to GDP centurions, with St. Kitts and Nevis recording a high of 160 per cent in 2006. This predicament has forced many Caribbean countries to sign off on the International Monetary Fund standby Arrangement Facility Program. And with all the fears surrounding Greece, Spain and Italy’s high sovereign debt, they are in a much better fiscal position than most Caribbean countries.

Is managing small states an exercise in futility? Or are our political leaders in the Caribbean and other small states among the best stewards of a nation state, given the plethora of natural and structural deficits and by extension the political, social and economic factors that stymie small states economic development?

The natural and structural inhibitors affecting small Island Developing states may not hold true for Mauritius, a 788 Square mile island state off Africa. With a population of 1.3 million (68 per cent of Indian decent) it offers a ray of hope for small states that planned and are fiscally prudent in their economic behavior.

When Mauritius became independent in 1968, pundits wrote it off as an untenable state. However, sound economic management has given it the distinction of being the first developing country to have achieved full employment at any one time. It has successfully diversified its mono-crop economy (sugar cane) to include textiles, offshore and onshore financial services, information technology and tourism.

The government is now attempting to make the country the leading educational centre of learning in Africa, hoping to attract 200,000 foreign students by the year 2020. Today it boasts the highest GDP per capita of any African nation.

Sadly, it must be stated that despite the natural and structural deficits of small states, many of the problems they encounter economically are of their own making, bringing into focus their viability as nations states.

Many of our political leaders in the region have placed political expedience over economic prudence, a point a CARICOM President and former Prime Minister in Guyana and Jamaica had alluded to in a BBC ‘s Davos debate and a domestic political forum.

They have created a system of political patronage resulting in the wastage of scarce resources as cost /efficiency is not the overriding consideration in tendering process- if such is ever held.

A few have virtually created welfare states and a rapacious culture of dependency which amounts to nothing more than wholesale bribery, where poverty reduction programs have been transformed into instruments of vote buying rather than social intervention.

Some have also marginalized a large segment of their populace because of their perceived political disloyalty, which only leads to a loss in productivity and output in such micro states.

In a fit of “irrational exuberance”, upon gaining power, one Caribbean leader in his quest to rewrite the wrongs of history compensated estate workers deemed to be exploited by a colonial planter class.

If that is not bad enough, well, one Caribbean Island has shown that you do not need to have oil money or be rich to shower or hand out money to at least one-third of the population. If anyone believed that only oil rich Saudi Arabia or Kuwait could give away money to all its nationals (in their case to keep them in abeyance and not follow the example of their Arab brothers in Tunisia and Egypt) – they have to be kidding!

As a good friend in academia and well connected to one of the leading Central Banks in the region euphemistically stated – “His best bet is that all CARICOM countries would all end up there”. Where? To the IMF.