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Building Resilience in SIDS for Trade & Climate Change Policies. Robert Read Lancaster University Management School, UK. Key Elements of the Size-Growth Relationship. Key economic characteristics of small size:
Lancaster University Management School, UK
Key economic characteristics of small size:
Empirical analyses of the growth of small economies, notably by Armstrong & Read, consistently find that three sectors are key to economic growth success and higher incomes:
The contribution of Manufacturing is consistently insignificant while a greater dependence upon Agriculture is associated with significantly lower growth and incomes.
Small economies are highly open to international trade because of their limited ability to produce a broad range of goods and services domestically. This ‘structural’ openness has important implications:
for domestic policy-making as well as comparative advantage and exposure to exogenous (external) terms of trade shocks.
Openness to trade gives rise to several structural sources of growth volatility in small economies:
Large-scale studies of the impact of growth volatility, irrespective of its causes, find that volatility tends to reduce the long-run average rate of economic growth, notably because of the ‘negative ratchet’ effect. The adverse growth effects of volatility tend to be greatest for:
There is also some degree of correlation between low incomes and weak institutions/poor governance.
Analyses of the impact of growth volatility on small economies is more limited but the available evidence (notably, Easterly & Kraay, 2000; Cavallo, 2007) suggests that:
Small island and littoral economies are among the most vulnerable environments to the effects of natural disasters and the long-term effects of climate change because of their size, location and topography. Further, developing ones (SILDEs) probably have the least resource capacity (resilience) to deal with their consequences. In addition, they tend to specialise in sectors particularly affected by long-term climate change: agriculture, fisheries and tourism.
Although it is conceptually difficult to quantify environmental vulnerability, it is very clear that additional resilience capacity and policy strategies are required for SILDEs, over and above those for dealing with economic volatility.
The EVI has environmental vulnerability data for 235 states (www.vulnerability.index.net), classifying them as Extremely Vulnerable (EV), Highly Vulnerable (HV),Vulnerable (V), At Risk (AR) and Resilient (R).
(SIDS comprise several non-sovereign states included in the EVI and which tend to be smaller and even more vulnerable.)
The EVI has three components – Hazards, Risks and Resilience –only the latter is state-specific. Therefore expect some semblance of a regional pattern of geology and climatic conditions.
This exercise using EVI data suggests that SILDEs in the Indian and Pacific Oceans are more vulnerable/less resilient than those in the Caribbean or Sub-Saharan Africa.
Resilience refers to the resource capacity of economies to deal with and ameliorate the impact of their vulnerability to economic and natural shocks:
Growth volatility and resilience capacity is therefore primarily a critical challenge for poorer less well-managed small economies.
Resilience can be enhanced by developing local capabilities to close the ‘knowledge gap’ to aid diversification, improve productivity and increase value added. In the context of climate change, this includes the incorporation of adaptation and mitigation technologies into domestic productive activities.
The challenge of enhancing resilience by improving local technological capacity in small economies is daunting:
Services provides a relatively scale neutral means for diversification in small economies. A critical distinction needs to be made between the environmental implication of activities within the service sector:
Growth, international competitiveness and resilience can be enhanced by improving the depth and quality of domestic linkages – up- and down-stream – to develop local supply chains:
Narrow/shallow economic structures and a lack of absorptive capacity can severely constrain linkage development in small economies. Many have also failed to maximise potential linkages, reflecting institutional and/or policy weaknesses. Linkage creation is likely to be confined to specific sectors, notably:
Foreign direct investment (FDI) offers an important additional means to enhance supply-side capabilities and resilience in small economies because inflows embody technology, know-how and market access.
Inflows of FDI to small economies are unexpectedly high given their size, primarily because of their high openness to trade – openness to trade and FDI inflows are strongly related. Evidence suggests that the fundamental policy issue for small economies is not attracting FDI inflows but rather maximising their local growth effects.
People are small economies’ most important asset. They are the principal determinant of their international competitiveness and a key component in building resilience. Human capital formation through education and training is essential to improve absorptive capacity and facilitate the assimilation of new technologies. Many small economies have invested heavily in their human capital but several critical issues arise:
Good governance and social capital are key to optimal policy-making and building resilience capacity generally. Khan (2007) identifies three key institutional-building and objectives:
Arguably, small economies are well-placed with respect to their social capital and good governance:
Small economies however, are not homogenous and some suffer from internal strife.
On the plus side is their sectoral structure, generally reliant –with the exception of some natural resource processing activities – on ‘cleaner’ technologies. This includes crop rather than large-scale livestock production in agriculture, small manufacturing sectors and large service sectors although attention needs to be paid to the ‘carrying capacity’ for tourism. To this can be added bio-diversity which is a natural resource asset in its own right.
On the negative side are the pressures of social and economic development on fragile environments susceptible to the long-term effects of climate change.