Economic Challenges Faced by Small Island Economies: An Overview

As pointed out in this article, small island economies are diverse in their nature and in the challenges they face. A taxonomy of these economies is provided. The overview takes account of small island economies that are satellites of large countries as well as those which are independent nation states. Nevertheless, the emphasis here is on small island economies that are remote from central economies or disadvantaged in other ways. These include many island nations in the Pacific and elsewhere. Such economies suffer from diseconomies of scale in economic activity, are prone to imperfect market competition, and experience high transport and trading costs for a variety of reasons which are outlined. The gravitational pull of stronger central economies and central places favours net out migration from these economies, particularly a brain drain, as well as net private capital outflows. These tendencies often stifle local economic development. Such economies frequently depend on aid from foreign or overseas places for maintaining the levels of income of their inhabitants; income levels which in many cases are relatively low. Income levels may be precarious in such economies because they are vulnerable to variations in economic, natural and political forces. They usually lack diversity in their natural resources and in their exports. A natural disaster can devastate their whole island economy so that little resilience remains to deal with the disaster by relying on the island’s own resources. Whether or not such economies are particularly prone to political disturbances is unclear, but when such disturbances occur they tend to impoverish those areas because net migration and net capital outflows increase and inbound tourism (which is often an important source of income for such economies) dwindles. The environmental situation facing small island economies varies. Some have undergone rapid urbanisation and centralization of their populations and this has caused significant pollution problems and water availability problems. Furthermore, some are at considerable risk from climate change. Using mathematical relationships, it is demonstrated that small island nations will lose (on average) proportionately more of their land mass as a result of sea-level rises than larger nations. Increased urbanisation of such economies usually increases their economic vulnerability because it is normally associated with greater dependence on international market exchange and results in increasing urban-bias in politics.

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Working or Discussion Paper
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ISSN: 1444-8890 (Other)
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Economic theory, Applications and Issues Working Paper

 Record created 2017-04-01, last modified 2018-01-22

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