Professional Documents
Culture Documents
365378, 2004
2004 Elsevier Ltd. All rights reserved
Printed in Great Britain
0305-750X/$ - see front matter
www.elsevier.com/locate/worlddev
doi:10.1016/j.worlddev.2003.08.007
1. INTRODUCTION
Many small states have demonstrated strong
economic growth and social development over
the last three decades in spite of their size. This
growth performance provides compelling evidence that small size does not preclude sustained growth success in spite of the many
challenges faced by small states. The process of
globalization suggests that the challenges in
attaining future growth and prosperity, particularly for developing states, will continue to
intensify regardless of a countrys size. In this
light, it is perhaps unsurprising that many
countries have sought or are seeking strategic
refuge in regional trade agreements (RTAs)
with neighboring states. Globalization represents a particularly signicant threat to the
continued survival of many successful small
island states as independent entities given the
greater susceptibility of their economies to
changes in the international system. At the
same time, however, a failure to engage with
globalization may mean that small island states
remain isolated from many of its positive eects
and are stranded precariously on the economic
and geographic periphery.
365
366
WORLD DEVELOPMENT
many small states, however, are highly globalized, particularly (but not solely) in terms of
their trade/GDP ratios.
Globalization presents several critical challenges to the continued survival of nation
states, regardless of their size, because it is
eroding national policy autonomy. Many
countries are therefore increasingly reliant
upon the supranational governance of the
international institutions to provide a level
playing eld through the eective enforcement
of international agreements, rules, undertakings and protocols to discourage opportunistic
behavior by other countries. The creation of the
WTO in 1994 to strengthen the GATT rules for
the conduct of international trade and the
current moves to establish an International
Court are examples of such necessary multilateral institutions. Increasing economic interdependence as a result of globalization
improves the growth prospects of all countries
but also increases the risk of contagion from
international economic and nancial instability. In the absence of appropriate international
macroeconomic coordination and supervision,
this can be expected to lead to increasing
volatility in national growth rates.
Standard economic growth models posit the
convergence of income levels between countries
as well as within them. There are fears, however, that the globalization process is a source
of increasing national and international divergence based upon a widening wealth gap
between developed and developing countries, in
spite of the success of the Southeast Asian
NIEs, as well as growing inequality within
countries. Empirical studies of the impact of
globalization on international inequality and
national income distribution, however, nd no
signicant evidence of increasing divergence
(see Barro, 2000; Bourguignon & Morrisson,
2002; Dollar & Kraay, 2002). Nevertheless,
these ndings remain controversial, particularly
with regard to concerns about increasing inequality in access to education, health and
other social opportunities in developing countries as well as their reliance upon unsustainable growth strategies. Many small states
however, perform well in terms of income distribution and other social indicators as measured by the Human Development Index
(UNDP, 2003). A critical issue is whether this
can be sustained given increasing globalization.
Unfettered globalization is not necessarily a
universal panacea for all of the worlds economic and social problems in that it comes with
367
368
WORLD DEVELOPMENT
369
370
WORLD DEVELOPMENT
growth of small states although their participation in regional convergence clubs is likely to
be particularly important. Nevertheless, regional
interaction may be very dicult for relatively
remote and isolated small island and archipelagic states as opposed to those small states on
the littoral of larger land masses. The empirical
analysis of the impact of location on the growth
of small states nds that the broader World
Bank regions have a signicantly positive eect
on their per capita income (Armstrong et al.,
1996, 1998; Armstrong & Read, 2001). Broader
regional markets and forces therefore continue
to have a very powerful inuence on the growth
of small states in spite of the globalization process but may have uneven eects because of
dierences in their relative accessibility.
(f) Political sovereignty and growth
Small size imposes critical constraints on
growth yet many small states retain a limited
degree of jurisdictional policy autonomy determined by their political sovereignty. In spite of
the success of many small states in overcoming
these constraints, the growth contribution of
policy sovereignty and the issue of the quality
and eectiveness of endogenous policy formulation and implementation have yet to be fully
investigated. Political sovereignty, however, has
been found to have a signicantly negative
relationship with growth in small states (Armstrong & Read, 2000; Bertram & Karagedikli,
2002) although it is unclear whether this is the
direct outcome of poor policy formulation.
(g) Economic sovereignty and growth
Economic sovereignty refers to the extent of
autonomy over economic policy formulation
and implementation as opposed to ultimate
territorial ownership. This suggests that the
growth focus should be on economic sovereignty, specically domestic autonomy over
revenue-raising (notably taxation), expenditure,
the regulatory environment and the determination of monetary, scal, trade and exchange rate
policies. Nevertheless, de jure economic sovereignty does not necessarily imply de facto policy
autonomy given the economic constraints on
small states imposed by their size. Again, this is
a relatively neglected area of the growth analysis
of small states. Any such discussion also needs
to consider the scope for opportunistic behavior
by small states driven by national-self interest
international political economy, through inter-
371
372
WORLD DEVELOPMENT
373
374
WORLD DEVELOPMENT
direct benets to them of deep economic integration are more debatable. Nevertheless, small
island states may be left with little choice but
to join RTAs given the increasing domination
of the international economic environment by
powerful regional blocs.
(b) Globalization and small island states: critical
issues (a research agenda)
The discussion of the determinants of growth
in small island states highlights several critical
issues requiring further research in the context
of the impact of globalization. This has important policy implications given the need to
anticipate new challenges and to formulate an
eective policy response.
(i) The role of human capital in small island
states
Human capital is a key determinant in
endogenous growth models, regardless of the
size of a country, but a critical factor for small
island states, primarily because it is a fundamental source of their comparative advantage
given the relative scarcity of labor. To date,
many small island states have built their economic growth upon investment in the accumulation of human capital through education,
training and skills acquisition and the promotion of export-oriented, skill-intensive sectors
such as oshore nance, insurance and data
processing. If this international competitiveness
is to be maintained and enhanced in the face of
globalization, a fuller understanding is needed
of the specic contribution of human capital to
growth in small island states. Any discussion of
human capital accumulation in small island
states must also address its growth interaction
eects with labor migration. This has two
facets. For many SIDS, notably the Pacic
MIRAB economies, increased investment in
domestic human capital may simply result in
greater outows of educated labor (the brain
drain), compensated for by increased inows of
worker remittances. This suggests that many
SIDS may be locked-in to the MIRAB
structure as exporters of human capital with
low domestic economic activity and a continued dependence on remittance inows. Many
successful small states however, have made very
eective use of selective in-migration policies to
overcome their labor supply constraints, with
respect to the domestic scarcity of both specialist skills and relatively unskilled labor.
These have made use of restrictions on the
375
allocation of work permits, the mobility of nonnationals, the ownership of property and residency to control the domestic supply of labor.
The stark contrast in the direction of labor
ows between SIDS and more successful small
states suggests the existence of some growth
threshold above which the direction of
migration is reversed. The nature and level of
such a threshold remains to be established.
(ii) Technology and human capital in small
island states
Rapid developments in the IT sector are
creating a widening productivity gap between
the leading industrialized and developing
economies, the digital divide, because of the
latters lack of a critical mass of infrastructure
to support e-commerce and capture potential
growth spillovers. The expansion of IT provides an important opportunity for isolated
small island states to overcome spatial barriers
to their international economic interaction.
Failure to take full advantage of these advances, however, may mean that some small island
states will continue to be insulated against both
the benecial and adverse eects of globalization such that they remain isolated on the
periphery of international economic activity.
The key to this opportunity lies in the need to
establish a critical threshold of physical IT
infrastructure coupled with attaining a requisite
level of absorptive capacity in their human
capital. This can be expected to have two
complementary eects; modifying their underlying comparative advantage through the upgrading of the domestic stock of human capital
stock and the generation of positive growth
interaction eects between IT technology,
human capital and trade. The key technological
and skill thresholds along with the potential
magnitude of the growth eects need to be
established and to derive appropriate policy
implications. For many SIDS, lack of resources
may suggest that regional cooperation in infrastructural provision and skills acquisition
may be the rst step in bridging this digital
divide.
(iii) Crossborder economic interaction and
potential regional growth eects in small island
states
The broader regional location of small island
states is a critical determinant of growth, particularly with respect to the prosperity of
larger neighboring states and regional convergence eects through crossborder economic
376
WORLD DEVELOPMENT
REFERENCES
Armstrong, H. W., Jouan de Kervenoael, R., Li,
X., & Read, R. (1996). The economic performance of micro-states. Report for the UK ODA
(DfID).
Armstrong, H. W., Jouan de Kervenoael, R., Li, X., &
Read, R. (1998). A comparison of the economic
performance of dierent micro-states and between
micro-states and larger countries. World Development, 26(4), 539556.
Armstrong, H. W., & Read, R. (1995). Western European micro-states and EU autonomous regions: the
advantages of size and sovereignty. World Development, 23(8), 12291245.
Armstrong, H. W., & Read, R. (1998). Trade and
growth in small states: the impact of global trade
liberalisation. World Economy, 21(4), 563585.
Armstrong, H. W., & Read, R. (2000). Comparing the
economic performance of dependent territories and
377
378
WORLD DEVELOPMENT