Small states : economic problems and prospects

Abstract

This paper concentrates on the economic problems and prospects of small states and their international policy implications. It touches also on the inter-relationships between economic and security issues. The size of states has important implications for their development prospects. Large-scale production and organization provide great cost advantages in most economic activities. Scale advantages can be had not only in manufacturing, agriculture and services but also in marketing, transportation, high-level training, administration, and research and development. Some of the constraints posed by small domestic markets and small populations can be eased by outward-looking economic policies and economic integration with neighboring states. In some sectors too, such as agriculture, optimum sized production units are possible even if production takes place mainly for the domestic market. And where there is population pressure on land, intensity of production could compensate for small acreage. In relation to mineral resources, the level of endowment in relation to land area need not be less than in larger states. With the extension of the Exclusive Economic Zone (EEZ) under the Law of the Sea Convention and taking into account prospects for other favorable factors - climate, beaches and marine resources - small island states need not be in a disadvantageous position in resource endowment per capita relative to larger states, even though their population densities tend to be higher. Small states do not stand out as being in any unfavorable position among developing countries in per capita income. However, even with relatively high levels of per capita income, small states tend to remain weak in terms of total economic size as well as bargaining power. Moreover, being relatively open, they are particularly vulnerable to external shocks and cyclical fluctuations in the world economy. Transformation to a more diversified and stable economic structure is more difficult for small states and may be impossible for mini-states. Thus. even with relatively high per capita incomes, small economies may continue to be characterized by economic instability and vulnerability. For these states. therefore, per capita income is not an adequate indicator of level of development.