INSULARITY, REMOTENESS, MOUNTAINS AND ARCHIPELAGOS: A COMBINATION OF ...

66 Pages·2004·0.37 MB·English

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INSULARITY, REMOTENESS, MOUNTAINS AND ARCHIPELAGOS: A
COMBINATION OF CHALLENGES FACING SMALL STATES?

Paper for Europe at the Margins: EU Regional Policy, Peripherality and Rurality
Regional Studies Association Conference
University of Angers
15-16 April, 2004.

H.W. Armstrong1 and R. Read2
1Department of Geography, The University of Sheffield, Winter Street, Sheffield S10 2TN,
United Kingdom
2Department of Economics, The Management School, Lancaster University, Bailrigg,
Lancaster LA1 4YX, United Kingdom.

Abstract
The European Union (EU) has in recent years developed special policies designed to assist in
the economic development of a number of ‘Outermost Regions’ (ORs) or ‘Ultraperipheral
Regions’, namely the Canary Islands, Guadeloupe, French Guyana, Martinique, Réunion, the
Azores and Madeira. With the advent of the enlargement of the EU to incorporate a further
ten central and eastern European countries in May 2004, it is likely that significant reductions
in Structural Funds budgets for disadvantaged regions of western Europe will occur once the
current budget periods ends in 2006. Since the ORs have been major beneficiaries from EU
Structural Funds, their financial assistance from the EU is under imminent threat. It is likely
that from 2007 onwards only those disadvantaged regions within western Europe which can
make a convincing special case will be likely to retain the coveted Objective 1 status from the
Structural Funds. The European Commission has recently undertaken research on the
economic challenges facing island regions (together with their adjacent littoral mainland
seaboard regions) and it is possible that some of these may become one of the special status
categories for the post-2007 Structural Funds. The ORs are all, with the exception of French
Guyana, island regions. To date, however, the justification for their special policy status
within the EU has been justified in terms of remoteness rather than insularity, as the names
‘outermost regions’ and ‘ultraperipheral’ suggest. As part of the on-going debate within the
EU, it has been suggested that the ORs are actually confronted with a set of no fewer than
four interlocking challenges – insularity, remoteness, being archipelagos (in many cases) and
being highly mountainous entities. Interestingly, this same argument can be applied to many
of the world’s very small states as well as to the EU’s outermost regions. This paper examines
the nature of the challenges posed by these four key characteristics and seeks to produce some
empirical evidence of how difficult to overcome these challenges have been. The focus of the
paper is on 126 very small states, dependent territories and highly autonomous regions drawn
from all parts of the global economy. The position of the EU’s seven OR’s within the results
for the wider set of small states is considered.

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INSULARITY, REMOTENESS, MOUNTAINS AND ARCHIPELAGOS: A
COMBINATION OF CHALLENGES FACING SMALL STATES?

1. Introduction
The European Union (EU) has in recent years developed special policies designed to assist in
the economic development of a number of ‘Outermost Regions’ (ORs) or ‘Ultraperipheral
Regions’, namely the Canary Islands, Guadeloupe, French Guyana, Martinique, Réunion, the
Azores and Madeira. With the advent of the enlargement of the EU to incorporate a further
ten central and eastern European countries in May 2004, it is likely that significant reductions
in Structural Funds budgets for disadvantaged regions of western Europe will occur once the
current budget periods ends in 2006. Since the ORs have been major beneficiaries from EU
Structural Funds, their financial assistance from the EU is under imminent threat. It is likely
that from 2007 onwards only those disadvantaged regions within western Europe which can
make a convincing special case will be likely to retain the coveted Objective 1 status from the
Structural Funds.
The European Commission has recently undertaken research on the economic challenges
facing island regions, together with their adjacent littoral mainland seaboard regions, and it is
possible that some of these may become one of the special status categories for the post-2007
Structural Funds (European Commission 2003a). The ORs are all, with the exception of
French Guyana, also island regions. To date, however, the justification for their special policy
status within the EU has been in terms of remoteness rather than insularity, as the names
‘outermost regions’ and ‘ultraperipheral regions’ suggest. As part of the on-going debate
within the EU, it has recently been suggested that the ORs are actually confronted with a set
of no fewer than four different, but interlocking, challenges – insularity, remoteness, being
archipelagos (in many cases) and being highly mountainous entities.
Interestingly, this very same argument can be applied to many of the world’s very small states
as well as to the EU’s outermost regions. For example, at the global level the case made for
special assistance to very small developing states has tended to be made with respect to their
insularity (as with the UN’s small island developing states – the SIDs) or in terms of their
vulnerability to external forces (e.g. the vulnerability indexes used by the UN and
Commonwealth). However, as this paper shall show, many of the world’s very small states
share the set of four characteristics on which the EU is now beginning to focus. This paper
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seeks to build on previous work by the authors to examine the nature of the interlocking
challenges posed by these four key characteristics of insularity, remoteness, being
mountainous and being archipelagos. The paper seeks to explore how difficult to overcome
these challenges have, or have not, been. The paper concentrates on data sets comprising 126
very small states, dependent territories and highly autonomous regions drawn from all parts of
the global economy.
The paper begins in section 2 with a review of the previous literature concerning the
determinants of the economic performance of very small states. This is followed in section 3
with a discussion of the extent to which small size, insularity, remoteness, being an
archipelago and being mountainous represent different challenges and in what ways they may
have interlocking (i.e. mutually reinforcing) effects. In section 4 the methodology employed
in the empirical research is presented, together with a discussion of the limitations of the
available data sets and a brief review and up-dating of the previous research undertaken by
the authors. In section 5 the effects of insularity, remoteness, being archipelagos and being
mountainous are examined, using data for a full set of 126 global small state entities. The
conclusion (section 6) returns to the situation facing the ORs and seeks to develop an agenda
for further research.
2. Theoretical Determinants of the Economic Performance of Micro-States and Islands
There is now a quite extensive research literature on the economic performance of very small
states (however defined). Interestingly, this research literature:
• Has tended to concentrate on the apparently many problems faced by small states and
islands in seeking to attain economic prosperity. A growing body of evidence that in
reality many of these entities actually do well has led to the more recent research seeking
to identify the advantages which small states and islands enjoy, but the balance of the
literature is still very much that they face a set of formidable economic challenges.
• Has tended to treat small states and islands as if they face an identical set of challenges.
Quite why this is done is rarely made clear, but implicitly seems to be the result of the
view that since both small states and islands tend to be small, open economies they ought
to face the same types of challenges. Landlocked states are also often grouped into this
same set of entities, again for reasons rarely made clear. Very little of the research
literature deals explicitly with mountainous states and the issue of whether archipelagos
have distinctive problems is also rarely addressed. Where they are mentioned there tends
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to be a presumption, as with geographical remoteness from the main centres of the global
economy that these characteristics are associated with detrimental effects, and hence are
challenges rather than opportunities.
• Has tended to utilise the UN definition of sovereignty to separate sovereign small states
from those islands and other regions which are part of larger states (i.e. sub-national
regions). The bulk of the research has been on sovereign small states, the majority of
which as it happens are also islands. Research on islands which are sub-national regions
(of the EU or elsewhere) has been much less extensive.
• Has neglected research on entities which lie somewhere between sovereign small states
and sub-national regions. In particular, two groups of entities are seriously under-
researched and, indeed, often deliberately excluded from the research which has been
undertaken. These are (a) the dependent (or ‘overseas’) territories of former colonial
powers, and (b) sub-national regions within the EU which enjoy an unusually high degree
of economic and/or political autonomy (henceforth dependent territories and highly
autonomous regions). The paucity of research on these entities is particularly unfortunate
since there are a surprising large number of them globally, and most have attained local
political and economic decision making powers which are quite close to those enjoyed by
fully sovereign small states.
More recent research has tended to cast doubt on the view that small states and islands face
insurmountable problems. The set of world small states and islands contains within it some of
the most successful economies of all, such as Singapore and Luxembourg. In Western Europe,
where small states and islands are present in large numbers, most seem to perform better in
terms of per capita incomes and unemployment rates than the larger states (Armstrong and
Read 1994, 1995). While this is less obvious elsewhere in the global economy, it is
nevertheless clear that different small states exhibit every bit as much diversity as we see
among larger states.
The evidence for the relatively successful performance of small states is replicated by
research on growth rates as well as cross-sectional analysis of levels of economic
performance. It is invariably found that when country size variables are inserted into formal
tests of growth models, they have almost no statistically significant influence on growth rate
differences between countries (e.g. Milner and Westaway 1993).
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To the extent that any sort of consensus can be said to exist at the present time, it is probably
that small states and islands do indeed face very serious challenges, but that they have found
mechanisms and policies which have allowed them to successfully overcome these
challenges. When one considers the long list of challenges which are thought to confront both
small states and islands, it is interesting to note that it is the combination of small size and a
high degree of openness which lies at the heart of the problem. Small size and openness result
in an unusual degree of exposure to external forces.
It has also sometimes been misleadingly argued that small states and islands have been the
first set of entities to become truly ‘globalised’. While there is a kernel of truth in this, it is
probably more realistic to say that small states and islands have been among the first to have
to face up to the kinds of pressures which globalisation is bringing in its wake. In fact,
previous research by the authors and that of others suggests that small states and islands
would probably be better described as highly ‘regionalised’ (in terms of global regions such
as Europe, East Asia etc.) rather than ‘globalised’.
The combination of small size and extreme openness has led to a growing recognition that
small states and islands face severe challenges as a result of their vulnerability to external
forces. The recent research on vulnerability indexes has thrown valuable new light on this
issue. The political and strategic vulnerability of small states has long been understood
(Harden 1985; Hintjens and Newitt 1992; Wood 1967). Perhaps more importantly still for the
subject matter of this paper is the array of external economic forces which are almost
completely outside of the control of small states and islands. To these must be added a series
of environmental, climatic (e.g. hurricanes) and other factors (e.g. volcanic activity) which
may trigger major shocks within small land areas and which can have massive knock-on
impacts on their economies (Briguglio 1995; Holmes 1976; Bune 1987; Atkins et al 2000).
The research literature identifies no fewer than eight main economic challenges facing small
states and islands:
• The small size of the domestic market. This is seen as a particular problem facing
manufacturing industry, but is also known to cause difficulties for certain types of service
sectors. The latter include wholesaling and retailing, where the inability to exploit
economies of scale may be one of the reasons for the widely observed phenomenon of
higher price levels in many small states and islands (Armstrong et al 1993). Where local
manufacturers are forced (by inadequate domestic demand) to operate at less than the
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minimum efficient scale (MES) of production, higher production costs and hence
damaged competitiveness is the result. It is also possible that R&D is made more difficult
to fund as a result of a small domestic market, weakening the development of indigenous
technologies and restricting the emergence of high-tech industrial sectors (Briguglio 1995;
Kuznets 1960; Thomas 1982). These problems are frequently exacerbated by the
extremely limited access to local capital in small states and island economies. Small
market size problems can, in principle, be overcome by an aggressive export-led strategy
which opens up much larger markets for small state and island producers. Many small
states and islands appear to actively pursue just such an approach as a way of
circumventing this key obstacle to progress. Globalisation is also steadily assisting small
states in this process. However, it is evident that inadequate demand may continue to be of
particular importance for island economies anywhere, but particularly for those in the
most remote areas of the world such as the Pacific (Knox 1967). Any small states which
find themselves outside a major regional trade bloc and granted only limited or restricted
access will also find themselves facing major MES challenges.
• Limited natural resource bases Interestingly, quite a number of small states and islands
are resource-rich, particularly in respect of access to valuable fish stocks and offshore
mineral wealth. Some have on-shore resource endowments of considerable value too.
These small states and islands, as would be expected, perform well. Many small states and
islands, however, are resource poor, and the smallest ones have extremely serious
agricultural and development land constraints. In these cases the limited resource base is a
major challenge, and one which can give rise to serious environmental as well as
economic problems (e.g. on some islands the construction of a major international airport
can absorb 10% or more of the land area). Once again, however, as always with small
states, it can be dangerous to generalise too far. Some small states and islands with a large
natural resource base perform badly (especially if it is foreign owned), while others such
as Singapore without a resource base have performed exceptionally well. A key finding
which is particularly important for the vulnerability index research is that even those small
states and islands rich in natural resources typically have an undiversified resource
endowment. As a result, their economies have a heavy over-reliance on a single export-
earning resource, and one moreover which is typically shipped to a single country market
(often the former colonial power), giving them a double threat of vulnerability.
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• Land area constraints. As noted earlier, in geographically small states and islands the land
base will, by definition, be tightly constrained. In many developing small states the
agricultural sector often absorbs a very high proportion of the available land area. This in
itself is not a problem unless it results in alternative activities being constrained
(Commonwealth Secretariat 1996). Small states and islands do, of course, have the option
of switching almost completely to imported agricultural products, freeing up their limited
land area for higher value-added manufacturing and services (as in Mauritius and
Singapore). The problem of a limited land area may well therefore be more apparent than
real. Probably much more significant is the problem that a limited land area combined
with a small labour force, prevents the agricultural sector playing its traditional role of
freeing up resources as part of the structural transition necessary for industrialisation. On
the other hand, the absence of a large backward agricultural sector is surely no bad thing
for small states and islands. One implication of the lack of the traditional transition
process is that small states and islands are more likely to focus on investment in human
capital skills and physical capital (Bhaduri et al 1982).
• In many less developed small states and islands, the problems faced in trying to bring
about industrialisation has led to the kind of out-migration seen in many larger developing
states. These economies then become highly dependent on migrant remittances. For the
many small island states which were, or still are, colonial entities, the metropolitan
powers historically often encouraged large scale out-migration. This led to the emergence
of a very characteristic sub-set of small states and islands – those which were formerly
subsistence economies, or dominated by exports to the colonial power, and which evolved
as entities characterised by migration, remittances, aid and bureaucracy – Bertram’s
(1986) MIRAB economies. Yet again, however, it is important not to generalise too far.
MIRAB status is by no means the inevitable outcome. Where out-migration can be
avoided and economic development begins to progress, the successful small state can
overcome domestic scarcity of specialist skills and of relatively unskilled labour by
encouraging temporary in-migration of labour. Many successful small states and islands
pursue just such a managed temporary migration policy, usually by recourse to work visa
and residence status regulations. In this way they can overcome the problems of restricted
labour supply whilst at the same time avoiding being swamped by in-migrants and
simultaneously leaving themselves the safety valve of being able to ship out migrants
during economic downturns. This is undoubtedly one of the reasons why so many of
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Europe’s very smallest states have chosen not to join the EU, with its strong Single
Market regulations.
• Niche-market specialisation. Small size, openness to the outside world and constraints on
land, labour and other resources lead almost inevitably to small states and islands
concentrating on a narrow array of niche-market goods and services. These are also
invariably for export. Specialisation here, as with the resources exports discussed earlier,
has two distinct meanings. Firstly, the number of export products is very small. Secondly,
the number of markets at which these exports are targeted is also small. These two
characteristics significantly enhance the vulnerability of small states to exogenous
demand shocks. Production capacity constraints combined with deliberate niche-market
strategies restrict the number of products. Export markets tend to be small in number
partly because the firms and government have very limited resources available for
marketing, and partly because exports are usually channelled via adjacent large states
(typically those with the main ferry terminals) or through the distribution systems of
companies of adjacent large states. This in turn gives rise to a further major challenge
facing many small states and islands - access to wider global markets is both restricted
and channelled via restricted routes.
• An important effect of niche-marketing is unstable export prices and earnings. These
contribute to the vulnerability phenomenon so characteristic of small states and islands.
Moreover, ‘Dutch Disease’ challenges are an ever-present threat given the vulnerability of
the main niche-products to external shocks. With limited labour, capital, land and other
resources, a surge in demand for a major export product will trigger serious ‘Dutch
Disease’ effects (MacBean and Nguyen 1987; Corden and Neary 1982).
• The scope for import substitution is extremely limited in small states and islands. Since an
export-led niche-market strategy tends to dominate in most small states and islands, the
domestic sector becomes extremely small. Virtually all goods and services for the
domestic market are then imported, adding to vulnerability problems. Any restrictions on
imports have severe impacts since import substitution by the tiny domestic sector is rarely
an option. Two implications of this are (a) domestic price levels are determined by the
prices of imported goods in the ‘basket’ of goods and services consumed locally, and (b)
exchange rate devaluation is an almost totally ineffective policy option. Any currency
devaluation serves simply to directly drive up the domestic price level, and moreover
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import substitution will not occur on any large scale since the wholly domestic sector
from which resources would need to be freed up is so small. This is one of the reasons
why so many small states either choose not to have their own currency (e.g. Andorra) or
else keep their currency but operate with a rigidly fixed exchange rate and guaranteed
convertibility with the adjacent large state (e.g. Isle of Man).
• Very limited policy portfolio. The extreme openness of small states and islands to both
imports and exports greatly limits government policy options. Trade protectionism, like
exchange rate devaluation is rarely resorted to because of the impact it would have on the
domestic price level and on exporters’ competitiveness (through higher input prices).
Fiscal policy tends to be of limited value since there are very low multiplier effects of any
spending (the marginal propensity to consume locally produced goods and services, the
key determinant of the size of the Keynesian foreign trade multiplier, is almost zero). In
addition, any attempt to force up taxes risks the flight of businesses and residents. Not
surprisingly, most small states and islands voluntarily choose to operate a highly open
trading regime.
This is a long list of challenges, and not many advantages to counteract them. As noted
earlier, this originally caused a rather pessimistic tone to predominate when small states and
islands were discussed. Indeed, many of the colonial powers have either delayed de-
colonialisation for the smallest islands (hence the existence of so many dependent territories
of countries such as France and the UK), or else tried to artificially aggregate islands to create
bigger entities which could be granted independence. The difficulties faced between the
Comoros Islands and Mayotte, and between St Kitts and Nevis in the Caribbean are
manifestations of this hang up among policy makers with the ‘island problem’ (Marcy 1960;
Scitovsky 1960). More modern research has begun to respond to the overwhelming amount of
evidence of successful economic performance by small states and islands by asking what their
advantages must be.
Part of the explanation for the surprisingly good small states and island performance may
paradoxically lie in the fact that they have so few policy choices. An open, highly competitive
trading regime is forced upon them by their circumstances (Streeten 1993). As a result, they
have been fortunate in avoiding the protectionist trap which has hindered so many large states
in the developing world in recent decades (Chai 1998). Uncompetitive firms may simply get
wiped out in the harsh competitive environment which prevails. Only the most successful of
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