This week I continue the presentation of the arguments that small states have advanced in support of their case for special and differential treatment, focusing on those pertaining to the intrinsic problems these states face in the present global trading environment. I had earlier stressed that many of the arguments relate tothe development problems these countries encounter, implying thereby that trade-related problems are similar to those facing their overall development. I had grouped these problems under five broad headings and have so far concluded the discussion on two of these, namely, 1) problems of factor endowment and natural resources, and 2) problems of their economic structure and pattern of economic growth. This week we consider the remaining three items.
Macroeconomic management
All economies face the problem of maintaining 'internal and external balance' as they grow. By 'internal balance' economists refer to economic growth that is non-inflationary and which at the same time maximises the 'potential' of the economy to maintain full employment of its productive factors. This implies, therefore, that over the long-run there should be the smallest possible variations in the size and duration of economic fluctuations as a result of 'shocks' to the economy. Thus, for example, double-digit unemployment rates and economic growth of less than half of one per cent (0.4) such as we have had in Guyana on average since 1998 would mean that 'internal balance' has not been maintained. And, although there is on-going debate about the 'potential' growth rate of our economy, it is certainly not likely to be less than 3-4 per cent per annum. By 'external balance' economists mean a zero balance on the current account of the balance of payments after accounting for independent and autonomous capital inflows from overseas.
For small economies it can be formally demonstrated that the monetary and fiscal authorities (usually the central bank and ministry of finance) cannot pursue an independent exchange rate, domestic interest rate and monetary supply policies in order to maintain both 'internal and external balance,' without considerable discretionary intervention in their financial and foreign exchange markets. However, most small economies no longer practise such interventionist policies, and indeed rely exclusively on market-based instruments. To the extent that this is the case, the authorities cannot therefore pursue 'internal and external balance' as separate and independent targets. One has to be sacrificed for the other.
As we also saw last week, small economies are very open. This creates another problem of macroeconomic management in that the transmission of foreign effects (shocks) to the domestic economy is both immediate and pervasive. Further, the very small size of some states means that governments cannot 'afford' certain public services, no matter what is the level of taxation on citizens. The reason for this is that some of these services are indivisible in that they must be provided at a minimal scale. And, because of the absolute size of the government budget, they simply cannot be 'afforded.' This situation forces dependence on foreign private investments or official concessional inflows, but more usually the latter, which has declined substantially in recent years.
Readers should also note that the global trading environment I am investigating places a heavy premium on negotiations, obligations, rights and duties.
All of these are very complex and highly technical, making for high transactions costs for all participating countries. In these circumstances one can anticipate, therefore, that for small countries such transactions costs will be distributionally more burdensome than for their larger counterparts. Indeed, this consideration also holds true for all poor nations as against rich nations. In this regard, as we have noted already many small states presently rely on special preferential arrangements inconsistent with the WTO system. Investors may therefore feel that these would be phased out over the long run. This situation invariably creates uncertainty and further redounds to the disadvantage of small states.
Social and cultural capital
Alongside the recent rise into prominence of considerations of governance as a leading factor in development, social and cultural factors have similarly come to the fore. As this column has repeatedly indicated, it is the World Bank, one of the bastions of orthodox economics no less, which has declared "corruption is the single biggest obstacle to development," a point long ago established in 'alternative' economics. In similar fashion, the concept of social capital, developed in 'alternative' social science, has been embraced by the World Bank, and is now advocated by it as one of the main foundations for successful development. Small states have used this concept in support of their case. Two examples of how this is done will suffice.
One of these is the obvious consideration that small countries have a limited capacity to restrict/channel/constructively engage the growing influence of foreign cultures and behaviour on their own societies. In most instances these cultures, particularly those of the major powers, exercise an 'over-determining' influence on their societies. This has been considerably aided by the fact that several small states were, until recently, colonies, and more so, as we noted, several still retain their colonial ties.
Secondly, while one might have expected that in small states their populations would be homogeneous and live in close harmony with each other, in truth, in several of them the populations are culturally, socially, and religiously quite diverse. Regrettably, interpersonal relations have in some instances exacerbated the potential for rivalry and conflict inherent in this diversity. The consequence of this has been frequently demonstrated in particularly destructive conflicts leading to dramatic polarisation of population groups in small states.
Vulnerability
The last and most important class of arguments has been those based on the vulnerability of small states. The most widely accepted definition of vulnerability refers to the 'proneness of small states to the adverse effects of changes in their environment and insufficient resilience to overcome these adverse effects on their own.' In this definition, vulnerability twins a limited capacity to respond with exposure to shocks. In turn, it has been argued that vulnerability manifests itself in four major dimensions of small states, namely, the economy, environment, society, and the institutional framework of these societies.