Economic Development in Small States. Tarmo Kalvet Ragnar Nurkse School of Innovation and Governance

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1 Economic Development in Small States Tarmo Kalvet Ragnar Nurkse School of Innovation and Governance

2 Structure of Seminar 1. Definition 2. Small states as weak states?! 3. Success/failure of small states in the world economy 4. Democratic corporatism 5. Vulnerability and resilience 6. Changes in the international economy > Challenges to existing theories?

3 Definition of Small States in Economic Approaches 1 mil: Hein mil: Commonwealth Consultative Group mil: Commonwealth Advisory Group 1997, Commonwealth Secretariat/World Bank Joint Task Force (2000) 3 mil: Armstrong et. al 1993; Armstrong et al mil Collier and Dollar 1999, Forsyth mil: Kuznets 1960, Chenery and Taylor 1968, Chenery and Syrquin mil: UNIDO 1979 Edquist and Hommen 2008

4 Relational understanding of small states being a small state is tied to a specific spatio temporal context and that this context, rather than general characteristics of the state, defined by indicators such as its absolute population size or size of GDP relative to other states, is decisive (Steinmetz and Wivel, 2010: 7).

5 Small states and economic dev. mixed findings in theory Smallness is neither a necessary nor sufficient condition for slow economic development (Srinivasan, 1986) Small States, Small Problems? No different from large states, and so should receive the same policy advice that large states do. (Easterly and Kraay, 1986) The challenge of economic growth is much more difficult for small nations than it is for large nations (Robinson, 1963) The general inference of the theoretical literature is that the disadvantages of small size, ie of economic sub optimality, outweigh any potential advantages. (Armstrong and Read, 2003) Economic flexibility and democratic corporatism (Katzenstein, 1985)

6 Handel 1990

10 6.1 mln 4.4 mln 22.7 mln 48.6 mln

12 Main research streams on small states Why small states have been successful? > democratic corporatism Why small states are failing? > concept of vulnerabilities

13 Advanced industrial nations, Katzenstein, 1985

14 International liberalization Although the small states may have influences the tone, they did not determine the substance of tariff negotiations Protection rises the prices of intermediate goods > undermines the competitiveness of exports Adoption of protectionist policies sets a bad precedent in domestic politics Fear of retaliation of other governments Katzenstein, 1985

15 Domestic compensation Political laissez faire is a luxury of large industrial countries, a luxury in which the small European stales cannot indulge. The elements of domestic compensation, regarded as important to counter some of the harmful effects of international liberalisation, are employment and investment support, incomes policies, etc. Sweden s investment reserve the use of foreign workers as a buffer (notably in Switzerland) growth in public sector employment, vocational training and temporary employment measures (for example the Netherlands and Norway). Katzenstein, 1985

16 Flexible industrial adjustment Frogs can escape snakes, and the small corporatist states can continue to prosper not because they have found a solution to the problem of change but because they have found a way to live with change. the small European states 'adjust to economic change through a carefully calibrated balance of economic flexibility and political stability' (p. 29). Katzenstein, 1985

17 Democratic corporatism the voluntary, cooperative regulation of conflicts over economic and social issues through highly structured and interpenetrating political relationships between business, trade unions, and the state, augmented by political parties (p. 32) social partnership expressed at the national level relatively centralized system of interest groups voluntary and informal coordination between interest groups, state bureaucracies, and political parties. vs authoritarian corporatism, corporate capitalism Katzenstein, 1985

18 Small Island Developing States (SIDS)

19 Vulnerability and resilience Vulnerability proneness to harm or damage originating from external forces (Briguglio, 2003: 3) vulnerability is not the same thing as poverty or economic backwardness There are a number of SIDS Singapore, Cyprus and Malta are prime examples that are very economically vulnerable, but have managed to generate high income per capita in spite of this condition. building resilience the ability of an economy to withstand or bounce back from external shocks (Briguglio et al., 2010: 1) Briguglio, 1995; 2003; 2007; Briguglio, Cordina, Vella, Vigilance (2010) Profiling Vulnerability and Resilience: A Manual for Small States

20 Vulnerability index

21 Developments since the 1980s Liberalisation of international trade Liberalisation of international investment Liberalisation of international finance Globalization = expansion of economic activities across national boundaries, a process associated with increasing economic openness, growing economic interdependance and deepening economic integration in the world economy.

22 Changes in the world economy MASS PRODUCTION FLEXIBLE PRODUCTION CLOSED PYRAMIDS OPEN NETWORKS STABLE ROUTINES CONTINUOUS IMPROVEMENT HUMAN RESOURCES HUMAN CAPITAL SUPPLIERS AND CLIENTS VALUE NETWORK PARTNERS FIXED PLANS FLEXIBLE STRATEGIES INTERNATIONALIZATION GLOBALIZATION Source: Carlota Perez

23 Existing theories on small states invalid? (1) 2008 economic crisis was particularly deep in Estonia and Iceland because non corporatist neo liberal political features deepening it (Thorhallsson and Kattel, 2012).

RESILIENCE BUILDING IN VULNERABLE SMALL STATES. Lino Briguglio University of Malta

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