Small states : challenges of political economy

Abstract

The smaller the state, the more dominant the role of the state in the local economy. Hence, even in circumstances where liberal economic theory is assumed to be best suited to suggest and inform development trajectories, what actually unfolds is often more akin to political economy (Bertram and Poirine, 2007). Creating and sustaining gainful employment, and producing goods and services, in small states are critically determined by political decisions in response to regional or global market conditions over which the small state itself may have little or no influence. Domestically, the state looms large as a significant actor: whether as a major – and typically, by far the largest – employer in its own right; as a facilitator and gatekeeper for inward investment; and as the allocator of scarce resources (such as land titles), contracts and licences to service providers, often in oligopolistic or monopolistic circumstances which distort competition (e.g. Baker, 1992). The private sector is often concentrated in one or a few economic sectors that are export-led, and may expect, and benefit from, special concessions or subsidies from the state. In addition, other small state citizens may work in the informal economy or in small and micro enterprises that are family run, usually servicing the small domestic market. A sizeable diaspora resident abroad may support the local economy with remittance transfers, or as tourists who tend to come on repeat visits and stay with relatives and friends when they do so.