10° 40' N, 61° 30' W

Friday, April 25, 2003

Small States, Small Problems?

The above is the title of a 2000 World Bank working paper by William Easterly and Aart Kraay. Their conclusion:

Our analysis suggests that small states have perhaps received excessive attention from the literature – notwithstanding our own addition to the literature!--as special cases calling for special policy measures. We find that small states have, if anything, significantly higher per capita income than others in their region. There is no significant difference in growth performance between large and small states. It is true that growth volatility and volatility of terms of trade shocks as percent of GDP is higher in small states, but this is largely due to their greater trade openness – and the net benefits of openness on growth are positive. The one missing piece in the current situation of small states is that they are not fully exploiting the potential to diversify their risks by opening up to international capital movements. But even the payoff to filling in this last missing piece is unclear from evidence in the literature.

This is not to say that small states are free of economic problems! Many small states are still poor, and promoting growth as a means to alleviate poverty is as important in small poor states as it is in other poor countries. The good news is that the lessons of growth experience from all countries seem to be applicable to small states, so they can benefit from the large amount of cross-country evidence on the determinants of long-run growth.

This basic conclusion: aside from some volatility, small countries are basically the same as everywhere else--they need no special theory to describe their situation, nor any special treatment as a result. Economics was, and remains, universal.

Small countries, led in part by the member states of the Caribbean Community have been fighting a long battle for special treatment. The Commonwealth, dominated by small states, even has a programme dedicated to their condition. The whole notion of being "small and vulnerable" is a huge part of their worldview. Take the words of Antigua's former high commissioner to London, Sir Ronald Sanders in 1997:

SMALL STATES are in a worse position today than they were in 1985 when the Commonwealth produced a study of their vulnerability. International terms of trade have badly affected their economies and guaranteed markets and preferential prices for their principal exports are being eroded. Caribbean small states are being pressured by the United States to enter into treaty arrangements undermining their sovereignty. Appeals to international organisations are futile since these organisations themselves have been severely weakened. New developments such as drug trafficking, money laundering and an increase in the frequency and intensity of natural disasters make Caribbean small states more vulnerable than in the past. Consequently, the capacity of small states to adequately serve the needs of their communities has been weakened. There is an urgent need for small states to form an alliance in every international forum. The world’s richer nations also need to take action on trade, debt relief and the provision of resources to small states. If not many small states may become ‘failed states’ and redeeming them will be at great cost to the international community.

These words could have been said by any Caribbean leader. Look at the language, though. The tone suggests that stuff just happens to these countries, and that there is nothing that they could do about them. Nothing said in Sanders's paper (read the rest of it) though, explains why other countries are not affected by these changes, and, if so, how those countries deal with them. No; small countries are "special".

The lobbying effort had a huge step forward in 1994, with the Barbados Programme of Action of the Global Conference on the Sustainable Development of Small Island Developing States. The Programme says what the lobbying is probably really about:

The international community should cooperate with small island developing States in the implementation of the Programme of Action for the Sustainable Development of Small Island Developing States by providing effective means, including adequate, predictable new and additional financial resources in accordance with chapter 33 of Agenda 21; facilitating the transfer of environmentally sound technology, including on concessional and preferential terms as mutually agreed, taking into account the need to protect intellectual property rights as well as the special needs of developing countries; and promoting fair, equitable and non-discriminatory trading arrangements and a supportive international economic system. [emphasis added]

Easterly and Kraay are right in that small countries have higher per capita income than most developing countries, and that many of their problems could be alleviated by increased trade and improved risk management--the same things other counties do. The whole exercise of lobbying looks to be just a means of maintaining aid flows when there is an increasing international focus on the least developed countries.

Did Easterly and Kraay affect World Bank policy? Given that the Bank's purpose is to lend, the outlook does not bode well. This is something the research staff can't do much about; this is clearly James Wolfensohn's area. While he has tried differed ways of reforming the banks management and processes, in seven years Wolfensohn has done little about the Bank's sometimes unproductive lending practices. The official report of the Bank's Task Force on Small States, though, has the final answer:

The report concludes that developing small states do share a number of characteristics that pose special development challenges. They are especially vulnerable to external events, including natural disasters, that cause high volatility in national incomes; many of them are currently facing an uncertain and difficult economic transition to a changing world trade regime; and they suffer from limited capacity in the public and private sectors.

An possible example of institutional capture, a problem in principal-agent theory. The communiqué-driven aid "shakedown" continues.