World Development Vol. 32, No. 2, pp.

365378, 2004
2004 Elsevier Ltd. All rights reserved
Printed in Great Britain
0305-750X/$ - see front matter

www.elsevier.com/locate/worlddev

doi:10.1016/j.worlddev.2003.08.007

The Implications of Increasing Globalization

and Regionalism for the Economic Growth
of Small Island States
ROBERT READ *
University of Lancaster, Lancaster, UK
Summary. This paper provides an overview of the implications of globalization and increasing
regionalism for small island states in the context of the critical determinants of their economic
growth. A brief outline of the globalization process is provided followed by a discussion of
regionalism and the trend in subnational regional autonomy. This is followed by an overview of the
empirical literature on the critical factors determining the growth of small states. Next is an analysis
of the implications for small island states of increasing globalization and regionalism in the context
of the critical growth factors identied in the preceding section. The paper concludes by proposing
an agenda for further research into the implications for small island states of the impact of
globalization on specic growth factors.
2004 Elsevier Ltd. All rights reserved.
Key words small island states, globalization, regionalism, economic growth

1. INTRODUCTION
Many small states have demonstrated strong
economic growth and social development over
the last three decades in spite of their size. This
growth performance provides compelling evidence that small size does not preclude sustained growth success in spite of the many
challenges faced by small states. The process of
globalization suggests that the challenges in
attaining future growth and prosperity, particularly for developing states, will continue to
intensify regardless of a countrys size. In this
light, it is perhaps unsurprising that many
countries have sought or are seeking strategic
refuge in regional trade agreements (RTAs)
with neighboring states. Globalization represents a particularly signicant threat to the
continued survival of many successful small
island states as independent entities given the
greater susceptibility of their economies to
changes in the international system. At the
same time, however, a failure to engage with
globalization may mean that small island states
remain isolated from many of its positive eects
and are stranded precariously on the economic
and geographic periphery.
365

This paper considers the implications of the

increasing trends in globalization and regionalism for small island states in the context of
empirical explanations for their growth success
to date. It then identies the critical economic
challenges facing small island states and proposes an agenda for future research on their
growth prospects. Section 2 provides a brief
summary of the key characteristics of globalization and regionalism and their implications.
This is followed by a review of the empirical
literature on the determinants of growth in
small states. Section 4 analyzes the implications

* An earlier version of this paper was rst presented in a

Plenary Session on Globalization at the Islands VII
Conference New Horizons in Island Studies, University
of Prince Edward Island, Charlottetown, Canada, June
26, 2002. The author is grateful for comments and
constructive criticism from participants in this Conference, in particular Godfrey Baldacchino and Geo
Bertram, and also Harvey Armstrong. The constructive
comments of two anonymous referees are also
acknowledged. Any remaining errors and inconsistencies
are the sole responsibility of the author. Final revision
accepted: 7 August 2003.

366

WORLD DEVELOPMENT

of globalization and regionalism for small

island states in the context of these key growth
determinants and identies critical issues for
further research. Brief conclusions are presented in Section 5.
2. CRITICAL ISSUES IN
GLOBALIZATION AND REGIONALISM
It is useful at the outset to elaborate upon the
concepts of globalization and regionalism given
that their meanings have been undermined by
intensive and frequent misuse in recent years.
(a) Globalization
The underlying meaning of the concept of
globalization has been almost completely
obscured by its ubiquity and its use to describe
all manner of contemporary economic, political
and social ills. In the context of the discussion
of the economic eects of globalization, the
relevant dimensions are the increasing degrees
of international integration, interaction and
interdependency between countries and other
economic agents in the world economy. Globalization in the economic sense therefore comprises several separate but interrelated facets:
The liberalization of international trade,
facilitated by the strengthening of the rules
under GATT 1994. An increasing proportion of world trade is determined by fundamental comparative advantage rather than
being the result of distortions brought about
by patterns of national and regional protectionism.
The liberalization of international capital
ows and exchange rate regimes, leading to
increasing international capital mobility
and rising ows of international capital,
both short-term (portfolio investment) and
long-term (foreign direct investmentFDI).
The widening basis of international production as developing countries industrialize, exemplied by the growth of Newly
Industrializing Economies (NIEs), e.g., in
Southeast Asia. Global output of industrial
goods and services is rising rapidly and
wealthy new and emerging markets for
these products are being created. Further,
the success of the NIEs provides a strategic
blue-print for growth in other developing
countries.
Developments in communications technology, such as the e-revolution, are facili-

tating rapid improvements in ows of

information and of goods and services.
These are leading to greater eciency in
coordination and reducing the cost of transacting as well as transport costs.
Multinational enterprises (MNEs) are the
key agents of international economic activity
and coordination as a consequence of the
liberalization of international capital ows
(primarily FDI), of national investment rules
and of international trade. The rst two factors reect the increasing realization by
many developing countries of the potential
growth eects of FDI on national economic
performanceproductivity is raised by inows embodying technology, managerial
know-how and information. The later is
enabling MNE activities to be reoriented
toward the global market based upon the
international division of labor and the
growth of intrarm trade.
Increasing intensity of international competition between both countries and between
rms. The former is being driven by trade
liberalization and the increasing importance
of comparative advantage as the determinant of national competitiveness. As more
countries liberalize, so the intensity of competition between them increases. Interrm
competition is being driven by interaction
between technological advance and liberalized capital movements, leading to the
increasing dominance of large-scale capital-,
technology- and R&D-intensive MNEs
internationalizing production based upon
the division of labor.
The increasing intensity of interrm competition is taking place between progressively fewer rms and with growing
barriers to entry. Many markets are becoming increasingly characterized by international oligopoly.
The best known measure of globalization is
the annual Kearney/Foreign Policy index, a
weighted composite of 13 economic, political
and technological indicators of globalization
calculated for 62 industrialized countries. Singapore and, more recently, Ireland have been
ranked as the worlds most globalized economies (Foreign Policy, 2003). Any composite
index is prone to major methodological problems relating to its variables, their weights and
sensitivity; the Kearney/Foreign Policy index is
no exception (for a critique, see Lockwood,
2001). Apart from Singapore, most small states
are not included in the index. The economies of

GLOBALIZATION AND REGIONALISM

many small states, however, are highly globalized, particularly (but not solely) in terms of
their trade/GDP ratios.
Globalization presents several critical challenges to the continued survival of nation
states, regardless of their size, because it is
eroding national policy autonomy. Many
countries are therefore increasingly reliant
upon the supranational governance of the
international institutions to provide a level
playing eld through the eective enforcement
of international agreements, rules, undertakings and protocols to discourage opportunistic
behavior by other countries. The creation of the
WTO in 1994 to strengthen the GATT rules for
the conduct of international trade and the
current moves to establish an International
Court are examples of such necessary multilateral institutions. Increasing economic interdependence as a result of globalization
improves the growth prospects of all countries
but also increases the risk of contagion from
international economic and nancial instability. In the absence of appropriate international
macroeconomic coordination and supervision,
this can be expected to lead to increasing
volatility in national growth rates.
Standard economic growth models posit the
convergence of income levels between countries
as well as within them. There are fears, however, that the globalization process is a source
of increasing national and international divergence based upon a widening wealth gap
between developed and developing countries, in
spite of the success of the Southeast Asian
NIEs, as well as growing inequality within
countries. Empirical studies of the impact of
globalization on international inequality and
national income distribution, however, nd no
signicant evidence of increasing divergence
(see Barro, 2000; Bourguignon & Morrisson,
2002; Dollar & Kraay, 2002). Nevertheless,
these ndings remain controversial, particularly
with regard to concerns about increasing inequality in access to education, health and
other social opportunities in developing countries as well as their reliance upon unsustainable growth strategies. Many small states
however, perform well in terms of income distribution and other social indicators as measured by the Human Development Index
(UNDP, 2003). A critical issue is whether this
can be sustained given increasing globalization.
Unfettered globalization is not necessarily a
universal panacea for all of the worlds economic and social problems in that it comes with

367

important caveats (see Stiglitz, 2002). The

magnitude of its impact and its distributive
eects depends in great part upon the preparedness of countriesand individuals, and
determined by their level of development and
the timing and sequencing of liberalization. The
least developed countries (LLDCs) are therefore least able to cope with the rigors of globalization. Constructive engagement rests upon
two critical points. The rst is the role of the
market and recognition that, in discussion of
developing countries in particular, ideological
faith in its primacy needs to be tempered by the
pragmatist axiom of market imperfections. The
second is the necessity for multilateral regulation such that the opportunities created exist
within a robust international legal framework
that is not subject to countervailing inuence.
A failure to countenance both of these points
would suggest that the impact of globalization
could have serious side-eects for many countries, and small states in particular.
(b) Regionalism
Regionalism refers to the growing preference
for RTAs between countries and their near
neighbors through international economic and
(possibly) political integration. The progressive
incorporation of many European countries in
the European Union (EU) in a deepening form
of economic, monetary and political integration
is probably the most obvious example. The EU
is also at the center of a system of huband-spoke regional economic partnership
arrangements (REPAs) with many developing
countries under the Cotonou Agreement which
superseded the Lom
e Convention in 2001. The
creation of the North American Free Trade
Area (NAFTA) comprising Canada, Mexico
and the United States in 1994 is also important,
particularly in the light of the 2001 Qu
ebec
Summit proposals for its extension continentwide as the Free Trade Area of the Americas
(FTAA). Discussions continue concerning the
expansion of the Asia-Pacic Economic
Cooperation (APEC) to create a regional
association of Pacic Rim countries. All of
these RTAs either already include or are
expected to include many small island states,
many of which are developing economies.
A pertinent issue arising from this trend
in regionalism is how it can be reconciled
with increasing globalization. Globalization is
eroding the economic barriers between countries while regionalism is leading to the creation

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WORLD DEVELOPMENT

of discrete and increasingly more powerful

blocs of countries that may constitute bastions
of regional protection against some of the
forces of globalization. This apparent conundrum has two parallel explanations. First, the
relative pace of economic, political and social
liberalization diers between distinct regional
groups of countries. Second, the Uruguay
Round amendments to GATT Article XXIV
on RTAs has led to the development of open
regionalism.
The default pace of liberalization among
countries opting-in to the globalization process
is determined by progress in rules-based international negotiations, such as at the WTO.
Since its creation in 1994, the WTO in particular has been the critical arbiter of the rules for
conducting global trade in goods and services
but not, as yet, foreign direct investment and
international competition issues. Liberalization
is also inuenced by the Washington Consensus
and so reects the prevailing economic ideology
of the leading industrialized countries and key
international institutions, such as the International Monetary Fund (IMF) and World Bank.
The political dimensions of this consensus have
changed signicantly in the light of the events
of September 11, 2001. In the strict legal sense,
regionalism is only permitted because it provides a fast-track form of liberalization of
mutual trade and investment ows within particular economic blocs. The revisions to GATT
Article XXIV are intended to limit external
protectionism by RTAs and to promote liberalization through bilateral free trade agreements between RTAs. The parallel trends in
globalization and regionalism are therefore
converging such that the latter is not likely to
be a long-lived phenomenon. Even so, regionalism may confer upon an RTA sucient
economic and political leverage for strategic
behavior to challenge the regulatory power of
key multilateral institutions.

centuries, the growth success of many small

states provides a demonstration eect for distinctive subnational regions of larger countries
to acquire greater local policy-making autonomy. Further, the economic, political and
social similarities between many subnational
regions and small states suggest that there is
potential for mutual policy lessons.
The wealth of policy experience of many
small states suggests that they have much to
oer subnational regions in terms of responding to the challenges of small size. Similarly,
subnational island regions in particular oer
useful insights for small island states concerning spatial integration and the potential role
of adjacent hinterlands rendered accessible by
the globalization process (see Armstrong &
Read, 2002a, 2002c).
3. THE DETERMINANTS OF GROWTH
IN SMALL STATES
There is an extensive literature on the impact
of size on the growth of small states, including
small island states, and the signicant challenges that they face (see for example: Armstrong, Jouan de Kervenoael, Li, & Read, 1996,
1998; Armstrong & Read, 1995, 2003a; Asho,
1989; Briguglio & Kaminarides, 1993; Dommen, 1980a; Dommen & Hein, 1985; Jalan,
1982; Read, 2002; Robinson, 1960; Selwyn,
1975; Shand, 1980a; Srinivasan, 1986). Nevertheless, small size does not appear to constitute
an insurmountable obstacle to the growth success of small states since a disproportionate
number are found in the World Banks UpperMiddle (Group 3) and High (Group 4) income
classication (Armstrong et al., 1998; Armstrong & Read, 2003b). A discussion of the
impact of globalization requires a brief review
of the key determinants of growth in small
states, and small island states in particular,
identied in the literature.

(c) Subnational regional autonomy

(a) Openness and comparative advantage
The partial devolution of political and economic sovereignty to the subnational regions of
larger developed nation states is often confused
with broader regionalism. Paradoxically, the
increasing autonomy of smaller jurisdictions is
a parallel trend to the erosion of the sovereign
power of nation states by globalization. In the
context of this discussion, this development is
important for two reasons. In a reversal of the
big is beautiful philosophy of the last two

International trade is critical to growth in

small states because it alleviates constraints
associated with a small domestic market through
specialization to improve domestic eciency and
international competitiveness. Further, trade
provides the primary means of nancing essential imports. These gains from specialization,
however, must be oset against the greater risks
of undiversied output and exports. The multi-

GLOBALIZATION AND REGIONALISM

plier eects of trade on growth are

particularly strong because small states have a
necessarily high degree of openness (Asho,
1989)trade to GDP/GNP ratios often far
exceed 100%. Their exports must therefore be
rmly based upon inherent comparative advantage to be internationally competitive. Successful
small states can be expected to specialize in
goods and services embodying human, and
possibly nancial, capital not reliant upon
increasing returns to scale or low-cost labor,
such as natural resources and higher value-added
niche manufacturing and service activities.
(b) Sectoral specialization and growth
The need for small states to pursue their
underlying comparative advantage suggests
that their growth success is likely to be founded
upon particular patterns of sectoral activity (see
UNCTAD, 1997). Empirical analyses of the
relationship between growth and sectoral specialization nd that economic performance is
strongly associated with the presence of a rich
natural resource base and a strong service sector, notably nancial services and tourism,
while manufacturing only has a limited inuence (Armstrong et al., 1996, 1998; Armstrong
& Read, 1995, 2000, 2001).
(c) Islandness and growth
Much of the research literature assumes implicitly that the topography of islandness has
critical economic growth eects (see, for
example, Briguglio, 1995; Dolman, 1985;
Dommen, 1980b; Selwyn, 1980; Shand, 1980b).
Remoteness and isolation clearly have adverse
eects on economic growth in islands via higher
costs of transport and communications
although a similar argument can also be
applied to land-locked states. A critical issue is
the extent to which islandness as opposed to
small size per se aects growth. This requires
direct comparison to be made between the
growth of small island states and small states in
general. Empirical analyses of the impact of
islandness on growth in small states nd only
weak adverse eects for both Western Europe
(Armstrong & Read, 1995) and an extensive
global data set (Armstrong et al., 1996, 1998;
Armstrong & Read, 2000, 2002b). These ndings suggest that the growth impact of islandness on small states is not as strong as some
studies presume. In taxonomic terms, there is
no reason to regard small island and archipe-

369

lagic states as being separate and distinct to

non-island small states but rather they are a
discrete subset of small states in general.
(d) Vulnerability and growth
Small states are have a greater exposure to
exogenous shocks than larger states because of
their vulnerability to external economic, political/strategic and environmental shocks (Briguglio, 1995; Easterly & Kraay, 2000; Holmes,
1976). This vulnerability is an important factor
in the growth of small states and suggests that
they experience disproportionately greater
instability and volatility in their growth trajectory. In addition, the growth of many small
developing states is further constrained by their
lack of resources to assuage the impact of vulnerability (UNCTAD, 1988). There are several
reasons why the impact of vulnerability will be
uneven: small states pursue diering economic
policies and growth strategies; the spatial and
sectoral specialization of small states varies;
those in strategic locations are more vulnerable
to external political and economic pressures;
small island and archipelagic states are particularly vulnerable to meteorological and environmental phenomena such as typhoons and
rising sea levels; and nally, growth success
itself increases economic vulnerability because
of greater dependence upon trade and external
interaction. The latter suggests that economic
vulnerability is therefore by no means necessarily inversely related to levels of per capita
income. The empirical analysis of vulnerability
suers from similar methodological problems to
the Kearney/Foreign Policy globalization index
(see Read, 2000) although several indices of
have been developed for small island states
(notably Briguglio, 1995; Commonwealth Secretariat, 1998summarized in Easter, 1999;
United Nations, 2000). Robust ndings remain
lacking although a study of a limited sample of
small island states nds a signicantly positive
eect on growth, primarily because openness to
trade is used as a proxy for economic vulnerability (Armstrong & Read, 2002b).
(e) Locational determinants of growth
The growth of any country is likely to be
inuenced by the economic prosperity and
dynamism of the broader global region in which
it is located by means of strong regional linkages
such as market access. Little attention, however,
has been paid to the impact of location on the

370

WORLD DEVELOPMENT

growth of small states although their participation in regional convergence clubs is likely to
be particularly important. Nevertheless, regional
interaction may be very dicult for relatively
remote and isolated small island and archipelagic states as opposed to those small states on
the littoral of larger land masses. The empirical
analysis of the impact of location on the growth
of small states nds that the broader World
Bank regions have a signicantly positive eect
on their per capita income (Armstrong et al.,
1996, 1998; Armstrong & Read, 2001). Broader
regional markets and forces therefore continue
to have a very powerful inuence on the growth
of small states in spite of the globalization process but may have uneven eects because of
dierences in their relative accessibility.
(f) Political sovereignty and growth
Small size imposes critical constraints on
growth yet many small states retain a limited
degree of jurisdictional policy autonomy determined by their political sovereignty. In spite of
the success of many small states in overcoming
these constraints, the growth contribution of
policy sovereignty and the issue of the quality
and eectiveness of endogenous policy formulation and implementation have yet to be fully
investigated. Political sovereignty, however, has
been found to have a signicantly negative
relationship with growth in small states (Armstrong & Read, 2000; Bertram & Karagedikli,
2002) although it is unclear whether this is the
direct outcome of poor policy formulation.
(g) Economic sovereignty and growth
Economic sovereignty refers to the extent of
autonomy over economic policy formulation
and implementation as opposed to ultimate
territorial ownership. This suggests that the
growth focus should be on economic sovereignty, specically domestic autonomy over
revenue-raising (notably taxation), expenditure,
the regulatory environment and the determination of monetary, scal, trade and exchange rate
policies. Nevertheless, de jure economic sovereignty does not necessarily imply de facto policy
autonomy given the economic constraints on
small states imposed by their size. Again, this is
a relatively neglected area of the growth analysis
of small states. Any such discussion also needs
to consider the scope for opportunistic behavior
by small states driven by national-self interest
international political economy, through inter-

national free-riding and rent-seeking facilitated

by their relative insignicance (see Armstrong &
Read, 2002a; Kakazu, 1994).
(h) Human capital and growth
The accumulation and utilization of human
capitaleducation, training and learning-by
doing, is identied as being a key factor in
growth (see Edwards, 1993, 1998). For small
states, the role of human capital is of even
greater importance because it is a critical
determinant of their underlying comparative
advantage. Given that they cannot hope to
compete with low-cost labor-intensive exports
from more populous developing countries,
small states must focus instead on enhancing
labor quality through human capital formation
to increase productivity and raise domestic
value added. There is, as yet, no empirical
analysis of the specic contribution of human
capital to the growth of small states, primarily
because of a lack of data although its impact
is likely to be signicantly positive.
(i) Social cohesion and growth
Small states are argued to have greater social
cohesion and policy exibility in responding to
opportunities, niches and change and this, in
turn, enhances their growth. This is because
smaller societies have shorter distances and
deeper links between economic agents, so
increasing their social cohesion. This view is
founded upon the critical contribution of social
capital to growth as a result of social and institutional community interaction leading to
greater exibility and consensus in decisionmaking (see Putnam, Leonardi, & Nanetti,
1993). Small states, however, are not immune
from ethnic divisions and/or rent-seeking
behavior based upon family ties or clientelism;
these are likely to have a greater adverse impact
on growth and social cohesion in a small society.
The role of social capital in the growth of small
states still awaits robust empirical verication
but, as noted in Section 2(a), small states generally perform very well in the UNDPs HDI.
4. IMPLICATIONS OF GLOBALIZATION
AND REGIONALISM FOR GROWTH IN
SMALL ISLAND STATES
The changes in the international economy
being wrought by globalization clearly consti-

GLOBALIZATION AND REGIONALISM

tute a signicant challenge to the future growth

of small island states. Many of the characteristics of globalization, however, do not appear
to have direct implications for small island
states. The continued erosion of the sovereign
power of nation states and the liberalization of
trade policies are not new issues for small island
states given their size. Nevertheless, in the light
of the discussion in Section 3, the impact of
globalization on small island states may be
more subtle and perhaps somewhat unexpected. The key growth factors identied earlier
are considered in turn.
(a) Globalization, openness and comparative
advantage in small island states
Most small island states have a long-standing
high degree of openness to trade resulting
directly from their small size and this suggests
that they have little to fear from further liberalization. A closer examination of the trade
relations of many small island states however,
reveals that they have not always been necessarily reliant upon a truly level international
playing eld but instead have often enjoyed
advantageous bilateral concessions from larger
partners. This is perhaps most evident with
respect to the EUs complex web of nonreciprocal trade concessions with respect to small
island states in Western Europe (see Table 4,
Armstrong & Read, 1995) and many SIDS via
the Lom
e Convention. The greater degree of
eectiveness of the WTO in enforcing the rules
governing the conduct of international trade,
however, means that the scope for such asymmetric arrangements in future is limited. The
elimination of these irregular bilateral trade
arrangements by WTO members can therefore
be expected to erode critical margins of preferential access to some markets. For small
island states, this development may imperil the
competitiveness of some niche exports in key
markets. Globalization thus presents a major
challenge to the continued international competitiveness of the exports of some small island
states.
(b) Globalization and sectoral specialization in
small island states
The high degree of openness to trade of most
small island states and the contestable impact
of trade on domestic prices therefore mean that
their patterns of sectoral specialization closely
mirror their underlying comparative advan-

371

tage. This tends to lie in economic activities

based upon natural resources and human capital. Again, it might appear therefore that small
island states have little to fear from globalization on this front. This conclusion may apply
generally for trade in goods, subject to the
caveat outlined in Section 4(a), but may not be
the case for nancial and business services, a
critical area of activity in many small island
states. The discussion in Section 2(a) emphasizes the role of a multilateral regulatory
framework to ensure that countries adhere to
the agreed rules and there is a very strong case
for the appropriate regulation of international
nancial ows and tax havens. The economic
well-being of many successful small island
states is threatened by concerted pressure from
the leading industrialized countries, under the
auspices of the EU and OECD, to impose a set
of unilateral rules (Hampton & Christensen,
2002). Besides targeting illegal nancial activities, these rules are being used by some
industrialized countries to address their own
domestic issues of harmful international
tax competition and corporate governance,
regardless of the probity of domestic regulatory
frameworks in small island states. This supplementary action ts awkwardly with the
ideological commitment to liberalization and
competition with respect to trade in goods
under the WTO and may yet have severe
adverse implications for the future growth
and prosperity of many small island states,
including those with robust regulatory frameworks.
Perhaps the most interesting form of regional interaction available to some small island
states relates to the potential for developing
crossborder clusters or industrial districts with
their adjacent hinterlands (Armstrong & Read,
2003c). The feasibility of creating such linkages, whether upstream and/or downstream,
is critically dependent upon several factors
including proximity as well the trade and
industrial policies of larger neighboring states.
Singapore has succeeded in developing crossborder industrial linkages with Malaysia and
Indonesia but, for many more isolated and
remote small island states, this form of regional interaction is likely to be beyond their
reach. Nevertheless, longer distance clustering
already exists, notably between Mauritius and
South Asia in textiles, and may be further
facilitated by falling transport costs and technological improvements (Armstrong & Read,
2003c).

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WORLD DEVELOPMENT

(c) Globalization and the vulnerability of small

island states
The greatest impact of increasing integration
and international interdependence resulting
from globalization is likely to be the greater
economic vulnerability of small island states.
While globalization oers the prospect of a
more dynamic environment in which they
might be expected to prosper, small island
states will also be exposed to a greater risk of
exogenous shocks because of the increased
likelihood of economic and nancial instability
and contagion. This is likely to increase the
volatility of economic growth in small island
states, particularly those that are most closely
integrated with the international economy. For
SIDS, the consequences will be especially severe
given their dearth of resources to combat the
adverse eects of such shocks (see Auret &
Mora Baez, 2000). The impact on political/
strategic and environmental vulnerability is less
clear. If globalization increases international
political instability and rewards strategic
behavior by powerful states, small island states
along with developing countries are likely to be
particularly susceptible given that their growth
is highly dependent upon a stable international
environment. Natural resource depletion and
environmental degradation are also argued to
be accelerating owing to the adoption of
unsustainable economic practices facilitated by
inadequate regulation and enforcement. The
unanticipated environmental eects of globalization may include rising sea levels and greater
meteorological instability, to which small island
states are particularly vulnerable.
(d) Globalization, technology and the location
of small island states
The impact of globalization in the context of
location has two important dimensions; the
role of regional growth poles, including RTAs,
and the impact of advanced communications
technology. Empirical studies nd that membership of a regional convergence club,
through proximity to a prosperous region and
the extent of regional economic linkages, is a
signicant determinant of growth in small
island states (see Armstrong et al., 1998; Armstrong & Read, 2001). RTAs are by their very
nature location-specic and their formation
may in itself create a regional convergence
club. Should small island states therefore
participate in RTAs so as to lock-in their

regional economic linkages in the light of

globalization. Economic theory generally
assumes that small countries are the greatest
beneciaries of RTAs, predicated on their preintegration policies being highly protectionist.
Given the highly open trade policies of many
small island states, the economic benets of
integration via RTA membership have probably been greatly exaggerated (see Armstrong
& Read, 2002c; Rothschild, 1944, 1963; Read,
2004). Free trade areas (FTAs), like NAFTA
and APEC, require relatively shallow cooperation between states and permit some degree of
policy autonomy while deeper integration, as in
the EU, transfers the control of many policy
variables to a supranational center. Few small
island states are currently full members of deep
RTAs but increasing globalization may force
them to seek economic and political refuge
at the cost of the loss of critical domestic
economic policy autonomy.
Signicant advances in communications
technology, notably information technology
(IT) and e-commerce are rendering distance, and therefore location, less important.
Improvements in the eciency of economic
activity and the reshaping of the dimensions in
which it is conducted have profound implications for all countries but particularly for small
island states, many of which are remote and/
or peripheral. This is likely to be particularly
important with regard to crossborder regional
interaction with larger neighboring states (see
Section 4(b)). Taking advantage of these new
growth opportunities will require both a critical
minimum threshold of domestic technological
infrastructure and the requisite human capital
capacity. For small island states, augmenting
the stock of domestic human capital is likely to
be less problematic than creating the necessary
technological infrastructure given high sunk
costs and increasing returns to scale resulting in
high unit usage costs (Read & Soopramanien,
2003). In the absence of regional cooperation,
these costs are likely to form a critical entry
barrier impeding the ability of SIDS to establish
an appropriate infrastructure, so continuing to
constrain domestic economic interaction with
global markets.
(e) Globalization and the political/economic
sovereignty of small island states
Political and economic sovereignty are treated in tandem because the distinction between
them is increasingly blurred such that the

GLOBALIZATION AND REGIONALISM

impact of globalization is likely to be similar.

The eects of globalization on sovereignty are
complex but two important trends can be distinguished; the emergence of new conceptual
levels of jurisdiction and increasing constraints
on national policy autonomy. National
boundaries no longer necessarily dene the
extent of policy sovereignty such that there
are multiple levels of jurisdictional hierarchy,
echoing the EUs concept of subsidiarity where
decisions are made at an appropriate level.
Globalization is eroding the sovereignty of the
nation state, irrespective of size, so that the
autonomous domestic policy portfolio of
countries is being increasingly constrained. This
challenge is not particularly new for small
island states generally since their policy
autonomy has long been subject to stringent
external constraints and some inferences can
therefore be drawn with regard to the decreasing autonomy of larger states. A key factor in
the growth success of many small states has
been their very eective use of a restricted
domestic policy portfolio together with freeriding and rent-seeking behavior in the international economy (see Armstrong & Read,
2002a). This eectiveness includes nonintervention in policy variables that, in small economies, are best determined exogenously,
notably major macroeconomic indicators such
as monetary policy, ination and the exchange
rate. This suggests explicit recognition of the
limits of eective policy autonomy and judicious use of the available policy portfolio by
technocratic decision-makers, founded upon
high-quality human and social capital. This
shifts the analytical focus onto an explicit
consideration of the critical areas of policy
quality and good governance, both of which
are identied as key determinants of growth in
endogenous models. For small states at least,
there are clear linkages and positive interaction
eects between human and social capital accumulation and the eective exercise of their
policy sovereignty.
The experience of small island states in
decision-making given rigorous policy constraints may oer some important policy
insights for larger states aected by globalization. Further, the accumulated policy
experience of small island states also oers
possible lessons and insights to the increasing
number of devolved subnational regions in
many larger states with limited policy autonomy. In turn, many of these subnational
regions have much to oer small island states

373

in return, particularly in promoting the

establishment of regional economic linkages
and crossborder interaction.
(f) Globalization and human capital in small
island states
Globalization is placing greater stress on
underlying comparative advantage in determining national competitiveness and human
capital is a critical growth component in many
countries, including small island states. This is
because its accumulation in conjunction with
open trade policies raises productivity and so
enhances domestic economic growth. The high
level of openness in small island states suggests
that the role of human capital in their growth
will be particularly important. The absorptive
capacity of domestic human capital and its
interaction eects with trade is a source of
growth because it enhances the assimilation of
embodied technology in imports. These eects
are particularly important in small island states
because of their lack of indigenous R&D (see
Briguglio, 1995). The growth of IT and ecommerce both as sectors and as means of
business communication, however, pose a new
challenge for small island states. Investment
in education and training to augment the
domestic stock of human capital is likely to be
insucient to take full advantage of the
opportunities engendered by these developments except through investment in complementary technological infrastructure (see
Section 4(d)).
An important feature of many small island
states in recent decades has been their relatively
high levels of migratory labor ows. Many
SIDS are net sources of migrant labor to larger
and more prosperous neighboring states in
return for signicant inows of worker remittancesMIRAB (migration, remittances, aid
and bureaucracy) economies (Bertram, 1986).
In contrast, many successful small island states
use in-migration to resolve local skill shortages
given domestic labor supply constraints, notably in Western Europe, (Armstrong & Read,
1995, 1998). Several EU autonomous island
territories enjoy derogations from the free labor
mobility statute enabling them to control inows of labor. Globalization may therefore
have a mixed impact on human capital accumulation in small island states with migration
ows being determined by relative per capita
incomes. The critical issue for SIDS revolves
around the continued out-migration of the

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WORLD DEVELOPMENT

most highly skilled laborthe brain drain, in

spite of domestic investment in human capital
formation as part of a national growth strategy.
This may mean that they are locked-in to a
MIRAB structure, dependent upon remittance
inows, and unable to stimulate domestic economic growth through structural diversication.
(g) Globalization and social cohesion in small
island states
Social capital formation is believed to be a
signicant factor in growth by enhancing
social cohesion and so fostering eective policy-making and strategic exibility. Strong
complementarities between human and social
capital also mean that they can be mutually
reinforcing. Globalization also intensies the
external pressure on social capital, which is
perceived to be a critical source of competitive
advantage in small island states. It is unclear,
however, whether societies can maintain their
social capital when subject to increasing
external stress of this kind or whether it may
lead to possibly catastrophic social fragmentation. The growing number of autonomous
subnational regions in larger states may be
able to stimulate similarly advantageous social
cohesion through their new-found policy
autonomy and identity and so may erode
some of the advantages derived by small
island states from their greater social cohesion.
Nevertheless, social capital will continue to be
a key source of strength and potential growth
for small island states in the future and should
therefore be cherished.

5. SUMMARY AND CONCLUSIONS:

GLOBALIZATION AND THE GROWTH
OF SMALL ISLAND STATES
Globalization constitutes a signicant challenge to the long-term prosperity of many
countries, notably developing countries. For
small island states, and SIDS in particular, this
challenge is particularly acute because of their
limited room for manoeuvre given the policy
constraints of small size. The preceding discussion of the growth of small island states
highlights several critical issues requiring further analysis in the context of the challenges
of globalization and regionalism.

(a) Globalization, regionalism and the growth

of small island states
Globalization is having a distinct eect on
small island states, primarily because their
small size imposes critical constraints on the
feasible range of their domestic economic
activities and their policy portfolio. Unlike
many of their larger counterparts however,
most small island states have long been exposed
to the competitive rigors of the international
economy because of their openness to trade.
The progressive liberalization of global trade in
goods and services will create new opportunities for all countries through improved access
to export markets and falling import costs. An
important caveat for small island states, however, is that the special relations that they have
enjoyed with their major trade partners may no
longer be sustainable under WTO disciplines.
Further, SIDS are least likely to be able to
respond to such new opportunities and the
most likely to be aected by the loss of bilateral trade preferences. Globalization is also
increasing international economic interdependency, giving rise to a greater risk of contagion
from economic and nancial shocks. The
openness of small island states, together with
their strategic and environmental vulnerability,
suggests that they will experience even greater
volatility in their growth and this will be particularly problematic for SIDS.
Constraints on the sectoral structure of the
economies of small island states mean that they
tend to specialize in natural resources and
human capital-intensive services, notably oshore nance. Globalization is placing greater
stress on underlying comparative advantage
such that these sectors will continue to be
critically important. Blanket action by leading
industrialized countries against harmful tax
competition in nancial services, a key growth
sector, threatens small island states with sound
nancial supervision as well as those with more
dubious regulation.
In parallel to globalization is the apparently
paradoxical growth of regionalism, with countries seeking to join regional economic blocs.
This fast-track regional liberalization strategy, pre-empting global liberalization, might
be expected to be short-lived except that there
are signicant long-term political gains to be
derived from membership of powerful RTAs.
Regional economic convergence has been a
signicant factor in the growth success of small
island states through close trade links but the

GLOBALIZATION AND REGIONALISM

direct benets to them of deep economic integration are more debatable. Nevertheless, small
island states may be left with little choice but
to join RTAs given the increasing domination
of the international economic environment by
powerful regional blocs.
(b) Globalization and small island states: critical
issues (a research agenda)
The discussion of the determinants of growth
in small island states highlights several critical
issues requiring further research in the context
of the impact of globalization. This has important policy implications given the need to
anticipate new challenges and to formulate an
eective policy response.
(i) The role of human capital in small island
states
Human capital is a key determinant in
endogenous growth models, regardless of the
size of a country, but a critical factor for small
island states, primarily because it is a fundamental source of their comparative advantage
given the relative scarcity of labor. To date,
many small island states have built their economic growth upon investment in the accumulation of human capital through education,
training and skills acquisition and the promotion of export-oriented, skill-intensive sectors
such as oshore nance, insurance and data
processing. If this international competitiveness
is to be maintained and enhanced in the face of
globalization, a fuller understanding is needed
of the specic contribution of human capital to
growth in small island states. Any discussion of
human capital accumulation in small island
states must also address its growth interaction
eects with labor migration. This has two
facets. For many SIDS, notably the Pacic
MIRAB economies, increased investment in
domestic human capital may simply result in
greater outows of educated labor (the brain
drain), compensated for by increased inows of
worker remittances. This suggests that many
SIDS may be locked-in to the MIRAB
structure as exporters of human capital with
low domestic economic activity and a continued dependence on remittance inows. Many
successful small states however, have made very
eective use of selective in-migration policies to
overcome their labor supply constraints, with
respect to the domestic scarcity of both specialist skills and relatively unskilled labor.
These have made use of restrictions on the

375

allocation of work permits, the mobility of nonnationals, the ownership of property and residency to control the domestic supply of labor.
The stark contrast in the direction of labor
ows between SIDS and more successful small
states suggests the existence of some growth
threshold above which the direction of
migration is reversed. The nature and level of
such a threshold remains to be established.
(ii) Technology and human capital in small
island states
Rapid developments in the IT sector are
creating a widening productivity gap between
the leading industrialized and developing
economies, the digital divide, because of the
latters lack of a critical mass of infrastructure
to support e-commerce and capture potential
growth spillovers. The expansion of IT provides an important opportunity for isolated
small island states to overcome spatial barriers
to their international economic interaction.
Failure to take full advantage of these advances, however, may mean that some small island
states will continue to be insulated against both
the benecial and adverse eects of globalization such that they remain isolated on the
periphery of international economic activity.
The key to this opportunity lies in the need to
establish a critical threshold of physical IT
infrastructure coupled with attaining a requisite
level of absorptive capacity in their human
capital. This can be expected to have two
complementary eects; modifying their underlying comparative advantage through the upgrading of the domestic stock of human capital
stock and the generation of positive growth
interaction eects between IT technology,
human capital and trade. The key technological
and skill thresholds along with the potential
magnitude of the growth eects need to be
established and to derive appropriate policy
implications. For many SIDS, lack of resources
may suggest that regional cooperation in infrastructural provision and skills acquisition
may be the rst step in bridging this digital
divide.
(iii) Crossborder economic interaction and
potential regional growth eects in small island
states
The broader regional location of small island
states is a critical determinant of growth, particularly with respect to the prosperity of
larger neighboring states and regional convergence eects through crossborder economic

376

WORLD DEVELOPMENT

interaction. The ability of small island states to

take full advantage of the potential for growthinducing crossborder linkages with larger
neighboring states is partly a function of their
proximity. In the light of the discussion in the
preceding section, however, the impact of distance will be reduced by the local stock of
communications technology infrastructure
coupled with the absorptive capacity of
domestic human capital. The key issue is the
extent to which more remote small island states
can reproduce the types of crossborder linkages
already successfully established by Singapore
(proximate) and Mauritius (remote). This suggests that there is scope for policy insights to be
derived from cross-border interaction between
subnational regions, notably with respect to the
promotion of industrial clusters. The growth
success of many remote small island states,
however, has been achieved in spite of their
lack of such clusters and this may also oer
some useful policy lessons for more isolated
subnational regions of larger states.
(iv) Human capital, social cohesion and optimal
policy formulation in small island states
Optimal policy formulation based upon the
constrained policy portfolio available is argued
to be an important endogenous determinant of
growth in small island states. In many respects,
the quality of policy-making, including good
governance, are dependent upon positive
interaction between human and social capital.
The discussion of human capital highlights its
critical contribution to comparative advantage
and international competitiveness in small
island states. The issue of social capital is
addressed in the literature but research is still at
a nascent stage with few if any empirical studies
directly relating to small island states. It is
clear, however, that good governance and
eective policy-making in small island states

are likely to be highly dependent upon social as

well as human capital. This discussion provides
a new dimension to the analysis of policy sovereignty since it suggests a causal relationship
between the eective use of policy autonomy in
small island states and their stocks of human
and social capital. An informed, highly skilled
and socially cohesive society has greater potential to be exible in its policy responsiveness
and more eective in identifying and implementing appropriate policy packages promoting sustained growth. The high degree of
international economic interaction of small
island states, necessitated by their openness,
suggests that human and social capital are
critically important in their growth policy formulation. For the SIDS lacking in these assets
and skills, there are lessons to be learned
regarding the transfer of best-practice in
economic policy-making.
(v) Economic vulnerability and growth in small
island states
In spite of extensive discussion in the literature, a robust empirical understanding of economic vulnerability and its eects on small
island states remains lacking. Further work is
required on rening the analytical methodology
coupled with the generation of improved data,
particularly for the smallest island states. The
current partial understanding of economic
vulnerability makes it dicult to identify
satisfactorily all of the causes of volatility in growth and to derive appropriate policy
responses although risk insurance and compensation schemes, similar to the EUs Stabex
system, have been proposed. The recent
creation of the UN Oce of the High Representative for Least Developed Countries, LandLocked Countries and Small Island Developing
States (OHRLLS) is perhaps a recognition of
some of these potential problems.

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