• SmallStates:
• About Small States

About Small States

Thirty-two of the Commonwealth's 53 members are defined as small states. The majority have populations of less than 1.5 million and they are characterised by their vulnerability in the areas of defence and security, environmental disasters, limited human resources, and lack of economic resources. They range in size from micro-states such as St Kitts and Nevis, Nauru, Niue, and Tuvalu with less than 50,000 people each, to countries like Botswana, The Gambia and Mauritius.

In addition to using the total population size to define small states, other measures of economic size include GNP and total arable land. A composite index of all three indicators (unweighted) ranks countries in terms of size in much the same way as ranking according to population. Population can therefore be used as a proxy for economic size.

Countries should be regarded as lying along a continuum, with a number of larger states sharing some or all of the same characteristics. In the Commonwealth, four larger countries - Jamaica, Lesotho, Namibia and Papua New Guinea - are considered to share the same characteristics of smallness and are included in the small states grouping.

Characteristics

The common characteristics shared by most small states include:

• remoteness and insularity
• susceptibility to natural disasters
• limited institutional capacity
• limited diversification
• openness
• access to external capital
• income volatility
• poverty

Remoteness and insularity

The remoteness and isolation of many small states has significant economic and administrative implications.  Isolation from major centres of trade and commerce makes it difficult for them to turn to world markets. Transportation costs are high because of the distance of these countries from principal export markets and suppliers. In cases where small states are made up of dispersed groups of islands, such constraints affect the development of even a small domestic market.

Susceptibility to natural disasters

Many small states are in regions frequently affected by adverse climatic and other natural events which can impact on the entire population and the economy. Many are also susceptible to severe environmental and ecological threats.

Limited institutional capacity

Weaknesses in both public and private sector capacity are a key problem for most developing countries. Smallness of size adds a further dimension. This is compounded in states, such as the Pacific islands, where internal distances are large and the population is scattered. As they face the challenges and opportunities of globalisation, small states are finding that they do not have sufficient institutional capacity to participate fully in international finance and trade negotiations.

Limited diversification

Many small states, because of their small domestic markets, are relatively undiversified in their production and exports. If one dominant activity declines, it must be replaced with another. This makes them vulnerable to changes in the external market.

Openness

A high degree of openness to the rest of the world brings benefits. Small economies tend to rely heavily on external trade and foreign investment to overcome their inherent scale and resource limitations. While this can prove beneficial in exposing them to outside competition and ideas, it leaves them vulnerable to external economic and environmental shocks, particularly where the domestic economy is undiversified.

Access to external capital

Access to global capital markets is important for small states and is one way to compensate for adverse shocks and income volatility. But the evidence is that private markets tend to see small states as more risky than larger ones, so that spreads are higher and market access more difficult.

Income volatility

Residents of small states experience higher volatility in their incomes than those in larger states. The standard deviation of annual real per capita growth is around 25 per cent higher. There are three causes of this year-to-year volatility: (i) the economies are more open to fluctuations in world market prices because in small states a much larger share of domestic economic activity is accounted for by exports and imports than in larger economies; (ii) small states by their nature have relatively undiversified production and exports; and (iii) many of the small states are particularly prone to natural disasters which, because of small size, affect the whole community. For most of the poorer small states, small size is associated with relatively high specialisation in production and trade. Some states however - Cyprus and Malta - are both very open to trade and have relatively more diversified economies.

Poverty

There is evidence that poverty levels tend to be higher and income distribution more uneven, in smaller than in larger states. Where this is the case, income volatility can create additional hardship as the poor are less able to weather negative shocks to their incomes.