Small islands and economic viability

Abstract

It is often taken for granted that living on a small island - geographically cut off from continental economic life - has to be a disadvantage. The two main reasons are small size and islandness. It is claimed that this disadvantage is due to diseconomies of scale, higher per unit transportation costs, increased volatility because of the openness of the economy, indivisibilities in both the public and private sector and limited local resources. Yet various empirical studies have shown that islandness as a variable does not appear to affect the growth and development of some small islands. Other studies maintain that in terms of GDP per capita, six out of the ten richest countries have populations below l million, while three more have less than 7 million people. Therefore, both size and islandness are not seen as affecting economic growth. Can we locate a paradox in these two opposing views? The paper tries to show that this apparent success is only because these small islands have managed to sidestep this “natural” disadvantage of size and insularity, by orientating their development strategies on economic activity that is not eroded by transportation costs, therefore focusing more on invisibles, rather than visible goods. Moreover, some countries have skimmed over the industrialization phase and concentrated more on the services sector. Some countries have also been aided by trade preferences and the non-regulation of certain international activity, especially in the financial sector. The paper analyses the economic structure of several islands, focusing on the role of exports, import content, transport costs and local value-added. It is argued that the engagement of small states in primary and secondary activity was minimal. Their development strategies were based on economic activities - such as offshore banking, call centres, back office work, financial investments, niche markets in tourist activities, and other not so conventional economic services - that focused on high value added which was not eroded by higher per unit transportation costs. However, the erosion of trade preferences, stricter rules in financial activities, and the widening remit of the WTO, may mean that even successful small islands need to reassess their position in the global economy for continued economic growth and development.