In recent weeks this column has focused on the many arguments advanced by small states in making their case for special and differential treatment (SDT) in trading arrangements. As I have described it, SDT is their 'big-prize' in the sense that it is the most important single objective. Winning acceptance of this, as a fundamental principle would mean its application to all trading sectors, all WTO related agreements, as well as other trading arrangements at the hemispheric and regional levels. For convenience I had grouped these arguments under five headings for discussion and last week concluded by introducing the fifth and final grouping, vulnerability, indicating that this week's article would continue the discussion on this topic.
Although introduced last, the arguments based on vulnerability of small states are in my judgment likely to be, over the long run, the most potent and effective. As was stated before, the most widely accepted definition of vulnerability is 'proneness of small states to the adverse effects of changes in their environment and insufficient resilience to overcome these adverse affects on their own.' In referring to this definition I had been careful to note it twins "a limited capacity to respond" together with "exposure to shocks," and is directed at four major dimensions of small states, namely, economy, environment, society and the institutional framework. In what follows, its meaning for each of these dimensions will be discussed in turn.
Economic vulnerability
Put simply, economic vulnerability refers to the greater than average risk small economies face from exogenous shocks, (that is shocks over which they have no control in determining their occurrence), and which adversely affect their incomes, employment, output, markets, consumption and wealth. Furthermore, their capacity to deal with these shocks is limited because of the size of their economies. These shocks can literally emanate from anywhere. They can be due to natural events, for example bad weather affecting a major crop, mines being flooded, or a horrible national calamity. They can be due to purely economic events, like the collapse of global stock markets and a financial crisis that spreads to the small state. They can also be due to social and political factors, like riots and industrial conflict.
Statistics show that the economic vulnerability of small states is concentrated in three major areas. One is their 'economic exposure.' This concept captures the trade openness of these economies, their high concentration on just a few export items; the instability of their export earnings on account of frequent volume and price changes for exported items; the heavy reliance on access to external capital; and, their dependence on importing key inputs such as energy, medicines, and essential foods. The second area is their 'remoteness and insularity.' Several small states are located in geographical areas far from the major markets of North America and Europe. This makes transport and communications costs a considerable fraction of their selling price. Moreover, distance adds to delays and uncertainties in servicing export markets. The third area is 'proneness or susceptibility to natural and environmental hazards,' which impedes their economic growth and stability.
When studies are conducted for a large number of countries it was found that although there was no significant difference between growth rates for small and large countries, in the case of the former, the volatility of output has been significantly greater.
Environmental vulnerability
This also refers to the greater than average risk small economies face of damage to their natural eco-systems. There are considerable data in support of the fact that eco-systems of small states are unusually fragile. In addition, a significant number of small states are located in natural disaster-prone areas where drought, floods, hurricanes, volcanoes and earthquakes are serious hazards. And, because of their small size, when a natural disaster strikes, the economic damage and destruction are proportionately far greater than would be the case for a similar disaster in a larger and more diversified economy. It goes without saying also that being small, governmental budgets and resources are limited so that these states are also far less able on their own to respond to what is for them, major natural disasters.
Social vulnerability
This is the greater than average risk posed by both internal and external factors in undermining social cohesion, introducing systemic social pathologies, and eroding social capital. A wide range of examples of these can be found, all of which have been propelled by external factors combining with internal ones: drugs and other related forms of organised corruption; trade in sex-workers; violence; and HIV-AIDS. In several of these states there is also a high 'recurrence rate' where these factors are concerned, and the capacity of the state to deal with these phenomena is often woefully inadequate. Also, for historical reasons several small states are multiracial and multicultural societies, where smallness and inter-personal factors have worsened the propensity for conflict based on diversity.
Institutional vulnerability
This also refers to the greater than average risk posed by the limited capacity of domestic institutions to respond to the complexity and intensity of the pressures flowing from globalisation. One of the dramatic consequences of globalisation, including the complex and technical external global negotiations it has made necessary in all areas of economic activity, is the burden of transactions' costs all states must now carry, just to stay involved. For small countries, even their most developed institution - the state - lacks that capacity. For other institutions, especially the private sector and civil society, which are expected to be involved in negotiations, the situation is far worse.
Observations
There are two earlier observations worth recalling at this stage. One is that the arguments under the heading 'vulnerability and small states' are unique in that they introduce a set of characteristics that are qualitatively different for small states as compared to their larger counterparts. The arguments advanced under the other four headings, focus on characteristics that when examined closely also exist in large developing countries, including LDCs.
The second observation is that these arguments have been advanced in an international community that still appears to be unimpressed, if not downright sceptical, about the merits of the special case small-states are making. And, as I already noted, the WTO has blown 'hot and cold' on the small state issue. On the one hand recognising the need to encourage a work programme for small states within the WTO, but also making it very clear that it is not in support of any case "to create a separate sub-category of small states in the global trading framework."