Small states’ economy §

Theories of Economic Growth §

• Lewis Model of Industrialization: emphasize important role of industrailization and mass production as the determinant of economic growth.

  • Process of turning low productivity labour-surplus agriculture to more technologically intensive large scale manufacturing
  • Moving unskilled and under employed low-productivity labour from the agricultural sector to manufacturing
    • Raising industrial productivity
    • Without reducing agricultural production

• Inapplicability of Lewis Model to small states

  • It assumes large population
  • Existance of large agricultural sector
  • Existance of large labor force

• New Growth Theory & Endogenous Growth Models

  • More domestic variables into calculation
  • More modern and accurate to modern world

Determinents of Economic Growth in Small States §

• Population, GDP/GNP, The Terms of Trade, Composite size & characteristics measures are the characteristics of small states.

• The smallness of markets in small states make it so its hard to grow

  1. Limited domestic demand for efficient output
  2. Disadvantage in promoting R&D, technical progress & technology
  3. …

• Structural challenges of the market makes small economies hard to grow

• Vulnerability sources

  • Economic: external trade, exogenous shocks, isolation, limited policy autonomy
    • Inability to take advantage of return to scale
    • Rely disproportunately on foreign imports
  • Political & Strategic: limit foreign policy, external pressures, excessive defense costs
  • Environmental: natural disasters, climate change

• Location or geographic characteristic of small states

• Human capital

• Social Cohesion: not accepted empirically as important

• Political & Economic Policy Autonomy: decision-making without outside pressure.

  • Sacrificing sovereignty for more economic growth. It doesn’t reduce growth. Small states can benefit from this relationship
    • Rent seeking
    • Free riding

• Globalization

Small Island Developing State (SIDS) §

• Vulnerability Index of small island states to natural disasters and climate change must be

• 5 vulnerability or challenges to SIDs

  • Small size
  • Insularity and remoteness
    • High per-unit transport
    • Uncertainties of supply
    • Large stock
  • Proneness to natural disaster
    • Cyclones, earthquakes -> Economic cost
  • Environmental factor
    • Pressure arising from economic development: economic cost of environmental protection
    • Environmental characteristic of SIDS:
  • Other characteristics
    • Dependence on foreign sources of finance
    • Demographic factor