Market reform and resilience building in small developing countries

Abstract

This chapter, while associating market reform with resilience in that it facilitates adjustment to external shocks due to improved flexibility, argues that the market mechanism can fail in certain circumstances due to the presence of externalities in both production and consumption, asymmetric information on the part of market participants, limited competition owing to scale and scope economies over the relevant range of production, indivisibilities and the existence of risk and uncertainty. These realities are likely to be more prominent in small states than in larger ones, due to the thinness of the domestic markets and the need to achieve a certain minimum efficient scale of operations, limiting the market domination by a few number of operators. The chapter analyses market reforms in the Caribbean region and comes to the conclusion that the experience in the region suggests that such market reforms have not been sufficiently focused on resilience building. A pragmatic approach to market reforms in small states is proposed, given their special characteristics.