Despite their small size, island economies have certain advantages over their larger competitors and can use these to further growth in the volatile global economy.
[dropcap]I[/dropcap]sland economies are often seen as the underdogs in the global marketplace, but being small has its advantages. With the proper policies in place, small economies can be nimble, flexible and responsive. In a rapidly-changing world, they can pivot for success—diversifying, modifying and getting the jump on bigger, older and more entrenched systems.
STRONG PERFORMANCE
In the past, small economies around the world have waxed and waned with the political and economic climate. In the 19th century heavy industrialisation favoured major players such as the United States and the United Kingdom, which saw soaring productivity and greater trade. The 20th century brought bigger changes with the Great Depression bracketed by two world wars, and the new millennium ushered in another global downturn leaving economies large and small struggling to survive the crisis.
Coming out of the 2008 recession, however, small economies suddenly found themselves poised for growth and ready to take advantage of increased globalisation. Emerging markets in South America and Asia began to boom. Today, small economies such as Switzerland, Luxembourg and Singapore continue to overperform. And small economies are on the rise with Ghana, Ethiopia and Bhutan among the world’s top 10 fastest-growing economies in 2018.
“The evidence speaks loud and clear: small economies do grow fast and many are already among the world’s most prosperous,” said The World Bank’s Deputy Economist for Latin America and the Caribbean Daniel Lederman, addressing the Caribbean Development Bank’s annual meeting last year. “This is not to say that these economies do not face challenges and that we can be complacent, but believing we can overcome them is a starting point.”
UNIQUE CHALLENGES
Bigger isn’t necessarily better, but that doesn’t mean small economies are guaranteed success. With smaller scale production and productivity, these countries face a unique set of challenges. As evidenced in the Caribbean, smaller economies tend to suffer from a lack of resources. A smaller population means a reduced labour force which in turn impacts productivity. In addition, many Caribbean islands struggle with a lack of space—it’s difficult to accommodate large-scale operations when physical amenities such as land are scarce.
Economies in the Caribbean also carry a high debt to GDP ratio with the region’s worst offenders being Barbados, Jamaica and Belize. This debt, combined with a lack of domestic savings, makes states that much more vulnerable to the peaks and troughs of the global economy and is particularly dangerous given the area’s propensity to natural disasters. Hurricanes Irma and Maria, which blew through the islands in September 2017, had a devastating effect on the region’s economic performance overall.
The Caribbean is also hindered by its propensity to overspend on the public service. Large governments and high levels of public expenditure siphon off much-needed revenue from the public purse.
FLEXIBLE AND RESPONSIVE
Overcoming these obstacles will take work but Caribbean countries can look to other small states for inspiration.
The most successful small economies are those that understand their natural assets, and leverage them. Being small means being open—to both trade and Foreign Direct Investment (FDI). The latter can be a powerful impetus for growth in Caribbean economies, improving quality of life, increasing employment opportunities and encouraging innovation. Saint Lucia is expecting to receive US$1.5bn in FDI by 2019.
Trade is also crucial for small island states, who need to have a foothold in both regional and international markets. In general, small economies can afford to be more specialised in their exports—focusing on more unique and profitable items. They can also change up their export baskets more readily than larger economies, diversifying to find niches with the best market potential. “Small economies appear to have an uncanny ability to reinvent themselves more quickly and more often than large economies,” says Lederman. “Simply put, they are more likely than large economies to innovate by introducing new exports and letting go of old ones.”
An important element of a robust trade regime is the ability to trade with regional partners. Being small doesn’t mean standing alone. Caribbean economies can overcome many of their challenges by becoming more integrated and building linkages between states. Greater intra-regional trade would help the region’s small producers scale up, increase productivity and raise their standards. A united front would also help the Caribbean break into international markets and increase exports abroad. Regional infrastructure would help islands recover more quickly from natural disasters as those countries least affected could provide economic relief for their neighbours.
INNOVATIVE GROWTH
Small economies require policymakers with vision as the ability to innovate can mean the difference between stagnation and growth. “Small economies have found a way by being open and nimble, but to create nimble economies, small economies must innovate,” says Lederman.
Investing in entrepreneurs, business development and R&D can help the Caribbean become more innovative. Harnessing the power of the region’s creative SMEs and MSMEs to drive up employment, trade and wages would make it more competitive in the fierce global economy and ensure healthy growth numbers for years to come.
The Caribbean is expected to grow by 2 per cent this coming year, according to the Caribbean Development Bank, and Saint Lucia is forecast to be one of the region’s best performers, achieving 3.1 per cent growth in 2018.
With stable leadership, reduced public debt, greater innovation and an emphasis on remaining flexible and open, small island developing states can demonstrate that being small is no impediment to growth.
