Small states and economic resilience : lessons for larger developing countries

Abstract

Given the high degree of vulnerability to external shocks, which characterise the economies of small states, it could have been expected that these states, more than any other group of countries, were to be highly adversely affected by the current turmoil. In reality, many small states have not been heavily impacted in their financial sector, the main reason being that these states tend not to be highly exposed to the main factors that led to the financial crises including excessive reliance on wholesale financing and collateralised debt obligations. However, many small states have been affected by the spill-over effects of the crises, which led to the global recession, and are experiencing, amongst other things, reductions in remittances (a major source of foreign exchange inflows in many small states), drops in income from tourism activity and other exports and a slowdown in construction activity linked to the tourist sector. However, it is likely that many small states will take appropriate action to mitigate the effects of such shocks. In a study by Briguglio et al (2009), it was found that many small states have developed a high degree of economic resilience, resulting from good economic governance, leading them to register relatively high GDP per capita, even though they are very exposed to external shocks. The paper will investigate whether there are lessons which larger developing states can learn from this reality.