Small developing economies: characteristics and vulnerability[109]

1. Introduction

It is generally recognised that small developing economies (SDEs) suffer specific handicaps arising from the interplay of several factors related to their size. They have in common a number of structural problems: their populations, and therefore their markets, are small; their resource base is narrow, fragile and prone to disruption by natural disasters; they typically depend for foreign exchange on a small range of primary product exports; and they generally have limited local capital for productive investment. In short, their base for revenue generation is narrow. Agriculture constitutes the backbone of many SDEs, providing the main source of livelihood for the population and being a major export earner.

The changes that are occurring in the international trade environment for agriculture, including changes arising from the WTO Agreement on Agriculture, present particular challenges for the SDEs. They create opportunities for all countries to benefit from more competitive and fairer trade, but some of the specific characteristics of SDEs may constrain their ability to take advantage of such opportunities.

2. Common economic characteristics

There is no single definition of a small economy, but size of population and level of GDP generally underlie almost all definitions.

Table 1 ranks countries according to the size of the population, and shows several other indicators related to the size of the economy and the importance of agriculture. As shown in the table, of the 188 countries for which data was available, 83 have a population of less than 5 million and 40 have less than 1 million people. Out of the 40 smallest economies, 36 are developing countries, of which 31 are small island developing States (SIDs)[110].

Data for these 36 countries illustrate that they are diverse in terms of their levels of economic development and the importance of agriculture in the economy, but they share common characteristics of smallness, limited natural resource base, and high degree of openness to trade.

• Small domestic market - Because of the small population and GDP the domestic market is also small, suggesting limited supply of labour, few firms and thus low domestic competition. The GDP level for all of the 36 countries for which data was available was, with four exceptions, below US$700 million. It is worth noting that the importance of agriculture is very much related to the level of GDP. In the few countries with GDP above US$1 000 million (e.g. Bahrain, Barbados) the agricultural sector (including fisheries and forestry) typically plays a relatively small role in the economy, supplying less than 10 percent of GDP in most cases. At the opposite end of the scale, countries with GDP levels below US$200 million (e.g. Sao Tome and Principe, Kiribati, Tonga, Samoa, Comoros) rely on agriculture for as much as 20-40 percent of GDP.
• Limited natural resources - The land area available for productive purposes is limited. All except two of the 36 SDEs have a land area of less than 30 000 square km (the largest of the group are Guyana and Suriname - above 150 000 square km). In addition, water resources are generally scarce, often limited to thin sheets of freshwater floating on seawater, recharged by rainfall. Climate variability and change, sea level rise and vulnerability to natural disasters are of particular concern.
• High degree of openness to agricultural trade - SDEs are highly dependent on the international trading system, especially in agriculture; the ratio of agricultural trade to GDP ranged from 10 percent to 52 percent in 22 out of the 27 SDEs for which data was available (Table 1). In addition, most SDEs depend on a single or a few export commodities for a high proportion of their export earnings, making them particularly vulnerable to changes in world markets. The major export crops of SDEs include bananas, sugar cane, cocoa, coffee and coconuts. Most of the SDEs are net food importers, with food constituting a large share of their total imports.

3. Economic and environmental vulnerability

The interplay of the above-mentioned factors created specific handicaps for SDEs.

• Competitiveness and economies of scale - Because of their size SDEs face a number of challenges in achieving and retaining competitiveness in international markets for agricultural products. The small size and geographic isolation present particular challenges in terms of achieving sufficient economies of scale to enable producers to compete in international markets or, in many cases, to compete with imported commodities in the domestic market. Scale diseconomies make them dependent on imports for most of their consumption and investment needs as well as on a narrow range of export products, resulting in a high vulnerability to external economic shocks.
• Vulnerability to changes in world markets - Agriculture, tourism and fisheries are normally the prime economic activities, accounting for a substantial part of GDP and exports in SDEs. Each of these sectors is highly sensitive to changes in world market conditions. The small economies that are most dependent on agricultural exports for a significant part of their export earnings have suffered from a long-run decline in real world market prices and a slow growth in world demand for their major agricultural products. In addition, their agricultural exports are highly reliant on preferential agreements and thus they are exposed to some risks from multilateral trade liberalization. Some of them fear that the new round of negotiations on agriculture will increase their exposure to such risks, which would in turn affect their import capacity, including that for food. In general, high dependence on world market makes the achievement of sustainable agriculture and food security for these countries more complex and difficult than for other countries.
• Environmental vulnerability - SDEs’ geographical location and size account for their ecological fragility, particularly to inclemency of weather (e.g. tropical storms) and geological forces (e.g. volcanic eruptions) because when damage occurs, it occurs on a national scale. Epidemics introduced from outside quickly devastate fragile ecosystems and put endemic species at particular risk of extinction. Land erosion, as a result of sea waves and winds, is higher than in other countries because of relatively larger exposure of coasts in relation to land mass. The adverse impact of economic activities (that pervade the entire land area) on the natural environment is felt more than in other countries.

Natural disasters exacerbate economic vulnerability because they create additional costs and divert resources from directly productive activities, as well as disrupting the whole economy. Besides, counteracting vulnerability requires a capacity to adapt and to increase resilience that depends on certain features of the economic system. Thus, economic and environmental vulnerability are inter-twined.

In sum, SDEs share some specific characteristics that may constrain their integration into the global economy and their ability to take advantage of opportunities arising from the multilateral liberalization of agriculture:

• limited population size, making economies of scale and labour specialization impossible;
• a narrow resource base, creating a dependence on imports of consumer and capital goods and exposing the economies to natural disasters and hazards; and
• high concentration of exports on a few primary products from agriculture, forestry, fisheries, and mining, which make SDEs prone to considerable fluctuations in output and prices.

Table 1. Some indicators related to the size of the economy and the importance of agriculture

Country*	Total population (000’s)	Land area (km2)	Arable and permanent crop land as percent-age of land area	GDP (million US$)	Share of agriculture in GDP (%)	Ratio of agricultural trade/GDP (%)	Share of top single agricultural commodity in total merchandise export earnings a (%)	Share of top three agricultural commodities in total merchandise export earnings a (%)	Share of food imports in total imports (%)
	1999			1998	1998	1998	1997-99	1997-99	1997-99
Niue	2	260	27	na	na	na	71	75	7.7
Tuvalu	10	30	na	na	na	na	na	na	14.3
Nauru	12	20	na	na	na	na	na	na	9.4
Palau	19	460	22	133	5.8 c	na	na	na	na
Cook Islands	20	230	30	na	na	na	4	6	12.9
Liechtenstein	32	160	25	na	na	na			na
St Kitts and Nevis	38	360	22	291	4.6	13.4	35	38	13.1
Faeroe Islands	46	1 400	2	na	na	na			9.0
Marshall Islands	51	180	17	97	15.0 d	1.5	na	na	na
Antigua and Barbuda	65	440	18	617	4.0	5.7	1	1	9.2
Dominica	71	750	20	250	20.2	21.6	27	31	17.5
Seychelles	80	450	16	535	4.1	9.7	<1	<1	12.4
Kiribati	83	730	51	45	20.7	34.3	42	42	25.7
Grenada	94	340	32	343	8.4	15.3	38	49	16.2
Tonga	99	750	64	173	38.3	15.8	44	61	25.5
St Vincent & Grenadines	113	390	28	316	10.9	24.8	37	68	16.3
Micronesia	123	700	51	213	na	11.9	6	11	17.0
Sao Tome and Principe	138	960	43	41	21.3	41.4	69	70	24.6
Saint Lucia	148	620	27	610	8.1	19.7	54	62	18.4
Samoa	159	2 840	43	175	42.0 f	18.6	12	33	20.4
Vanuatu	197	12 190	10	241	25.0 b	18.3	43	66	11.9
Belize	226	22 960	4	680	18.7	22.3	26	51	11.6
Barbados	267	430	40	2 268	6.6 c	7.5	12	22	11.0
Iceland	277	103 000	0	8 268	na	2.8			5.3
Maldives	291	300	10	368 b	16.4	16	na	na	10.4
Bahamas	304	13 880	1	na	na	na	3	3	9.0
Brunei Darussalam	328	5 770	1	na	2.8	na	1	1	7.4
Malta	388	320	28	na	na	na			7.9
Suriname	417	163 270	0	808 b	6.7	30.0	10	19	19.9
Cape Verde	427	4 030	10	496	12.2	14.8	1	1	24.2
Solomon Is	447	28 900	2	301	na	18.7	10	18	11.4
Equatorial Guinea	457	28050	8	456	21.8	6.4	2	2	22.8
Qatar	565	11 000	2	na	na	na	<1	<1	7.9
Djibouti	632	23 200	na	519 b	3.7 b	22.0	18	24	29.8
Bahrain	640	690	9	5 350	1.0 d	7.5	<1	<1	7.8
Comoros	706	2 230	53	196	38.7	11.3	34	49	39.9
Guyana	761	214 970	2	721	34.7	40.0	24	40	7.9
Cyprus	784	9 250	15	na	na	na	39	42	7.1
Fiji	814	18 270	16	1 577	19.5	17.5	23	25	10.8
Swaziland	925	17 360	10	1 221	16.0	51.7	20	32	14.4
Mauritius	161	2 040	52	4 199	8.6	17.1	20	21	10.7
Guinea-Bissau	1 199	36 120	10	206	62.4	22.8	48	51	22.3
Gabon	1 230	267 670	2	5 518	7.3	2.8	1	na	8.8
Trinidad and Tobago	1 294	5 130	24	6 382	1.8	8.7	2	4	8.9
Gambia	1 303	11 300	18	416	27.4	26.0	20	34	37.0
Estonia	1 411	45 100	25	5 200	6.4	23.6			11.1
Botswana	1 541	581 730	1	4 876	3.6	9.3	3	4	12.3
Namibia	1 757	824 290	1	3 092	10.0	9.1	5	11	6.7
Kuwait	1 914	17 820	0	na	0	na	<1	<1	13.4
Slovenia	1 991	20 250	10	19 586	4.2	5.8			5.2
FYR of Macedonia	2 022	25 710	25	3 449	12.2	19.9			15.5
Lesotho	2 035	30 350	11	792	11.5	21.2	2	3	13.3
Bhutan	2 085	47 000	3	398	38.2	9.1	4	7	8.5
Latvia	2 435	64 600	29	6 084	4.3	15.8			11.4
Mongolia	2 533	1 566 500	1	916	32.8	21	7	15	11.0
Oman	2 538	212 460	0	14 962	3.3 e	7.5	2	3	10.7
Jamaica	2 576	10 990	25	6 418	8.0	11.4	7	13	11.3
United Arab Emirates	2 606	83 600	2	na	2.2 f	na	1	1	5.1
Mauritania	2 665	1 025 520	0	989	24.8	28.9	4	7	78.2
Panama	2 856	75 520	9	9 144	7.9	7.4	23	29	8.7
Liberia	2 913	111 370	3	na	na	na	9	10	14.3
Congo	3 018	342 000	1	1 961	11.5	7.9	3	4	17.9
Albania	3 131	28 750	24	3 058	54.4	8.1			20.8
Uruguay	3 337	176 220	7	20 578	8.5	9.5	10	20	7.3
Lebanon	3 496	10 400	30	17 229	12.4	7.5	3	7	11.8
Eritrea	3 659	117 600	4	650	17.1	10.0	4	8	10.8
Lithuania	3 701	65 200	46	10 747	10.4	10.3			6.2
Central African Rep	3 717	622 980	3	1 057	52.6	7.3	11	21	14.6
New Zealand	3 747	270 530	12	52 944	na	12.6			6.0
Ireland	3 763	70 270	15	86 265	na	10.9			5.1
Armenia	3 788	29 800	19	1 894	34.0	14.3			23.6
Bosnia and Herzegovina	3 846	51 130	13	4 058	15.8	13.8			na
Singapore	4 018	620	2	na	0.1	na	1	1	2.4
Costa Rica	4 024	51 100	10	10 479	15.2	24.7	21	40	8.1
Republic of Moldova	4 305	33 850	64	1 699	30.5	32.1			5.2
Sierra Leone	4 405	71 740	8	669	44.2	23	na	na	86.3
Norway	4 449	323 880	3	147 029	2.1	1.7			3.6
Togo	4 527	56 790	41	1 510	42.1	15.4	23	36	14.2
Turkmenistan	4 636	488 100	3	2 642	26.0	11.6			15.8
Croatia	4 653	56 540	28	20 931	8.9	4.6			5.7
Papua New Guinea	4 809	462 840	1	3 746	24.4	19.6	10	19	16.8
Kyrgyzstan	4 848	199 900	7	1 646	39.5	18.4			11.9
Jordan	4 913	89 210	4	7 393	3.0	17.3	5	10	19.1
Nicaragua	5 071	130 000	21	2 007	34.1	26.4	19	29	13.5
Finland	5 164	338 150	6	129 335	3.3	2.7			4.2
Lao PDR	5 279	236 800	4	1 261	52.6	4.3	4	6	2.6
Georgia	5 282	69 700	15	3 451	35.6	8.2			18.4
Libyan Arab Jam.	5 290	1 759 540	1	na	na	na	<1	<1	12.6
Denmark	5 305	43 090	53	173 683	2.5	8.3			5.6
Slovakia	5 394	49 010	33	21 308	4.2	6.5			4.2
Paraguay	5 496	406 750	6	8 608	24.9	16.9	39	53	6.1
Israel	5 910	21 060	21	100 733	na	3.0			5.2
Tajikistan	6 030	143 100	6	1 779	22.1	19.9			26.7
Benin	6 272	112 620	16	2 306	38.6	14.0	33	38	16.3
El Salvador	6 278	21 040	38	11 870	12.1	9.2	15	18	11.2
Burundi	6 356	27 830	40	885	54.2	10.4	75	89	14.5
Honduras	6 417	112 090	16	5 371	20.3	19.4	22	30	11.9
Switzerland	7 170	41 290	11	262 110	na	2.8			3.8
Rwanda	7 609	26 340	42	2 024	47.4	6.8	43	68	30.2
Chad	7 885	1 284 000	3	1 694	39.8	10.4	37	48	9.1
Azerbaijan	7 982	86 600	23	4 181	21.4	9.3			22.7
Bulgaria	8 039	110 910	41	12 258	18.7	8.9			4.9
Austria	8 085	83 860	a	210 913	2.2	3.4			4.5
Haiti	8 142	27 750	33	3 871	30.4	8.7	8	14	34.9
Guinea	8 154	245 860	6	3 598	22.4	6.9	3	5	14.8
Bolivia	8 329	1 098 580	2	8 586	15.4	6.6	10	19	8.4
Dominican Rep	8 373	48 730	32	15 853	11.6	6.8	13	24	9.5
Somalia	8 778	637 660	2	na	65.0	na	23	44	50.4
Sweden	8 850	449 960	6	237 765	na	2.6			4.1
Senegal	9 421	196 720	12	4 682	17.4	13.1	3	6	30.1
Tunisia	9 459	163 610	31	19 956	12.4	6.8	4	6	7.4
Portugal	9 996	91 980	29	110 872	3.5	5.1			7.5
Hungary	10 020	93 030	54	47 049	5.7	8.3			2.1
Belarus	10 225	207 600	30	24 798	12.5	6.2			7.6
Czech Republic	10 285	78 870	42	55 708	4.8	6.0			3.9
Zambia	10 421	752 610	7	3 352	17.3	8.5	2	5	17.3
Yugoslavia	10 567	102 170	37	na	na	na			7.2
Greece	10 591