The diversification dilemma : structural vulnerability and policy frontiers in small states : a case study of Seychelles

Abstract

Small Island Developing States (SIDS) demonstrate that high income can exits alongside deep structural fragility. With Seychelles as a case study, this paper demonstrates how a ‘triple bind’ limits diversification: (1) intrinsic small-state constraints of scale, remoteness, and narrow resource bases; (2) a high-income classification that limits access to concessional, longterm finance needed for high-risk, transformative investments; and (3) increasing climate change impacts that threaten critical core sectors (tourism, fisheries) as well as the primary diversification pathway, the Blue Economy, and create complex ‘blue monocultures.’ Building on the diversification, product-space and small-state literatures, the paper outlines the path-dependent development of Seychelles, exploring macro-structural inflexibilities in trade and debt, and evaluating policy responses relative to capacity and governance bottlenecks. Comparative evidence from Mauritius and the Maldives illustrates the importance of institutions and human capital in enabling geography-agnostic diversification and the risks of debt-driven, sector concentrated growth. The paper urges moving from income-based eligibility to a Multidimensional Vulnerability Index (MVI), along with institutional change, counter-cyclical buffers, and tailored enhancements for non-marine tradable services in SIDS. The redefined goal of diversification, which is resilience, enables the strengthening of domestic institutions and the redesign of global SIDS financing to structural income to reflect vulnerabilities rather than solely income.