the impact of globalization on small states presented by: dr. peter larose

The Impactof

Globalizationon

Small States

Presented by: Dr. Peter Larose

The Impact of Globalization on Small Island States


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The Presentation


Definitions of globalization,Pros and cons of globalization,Aspects of globalization,How integrated are the developing countries?Growth in economic wealth and inequality,What is the definition of a small state?Why much attention to small states?What are the special strategies used by small states?Does globalization increase poverty or inequality?How can developed countries make a contribution?How can international institutions help?What are the inherent characteristics of small states?What are the challenges face by small states?What are the future investment & risk for small states?Does globalization have any impact on the economic policy?The future of small states in a global arena.


Different writer would interpret the word“Globalization” using different terminology.

The creation of a "Global Village", where members of the same industry from around the world interact on a large scale.

The integration of economic and capital markets throughout the world.

Bringing the world closer through better world-wide Communication,, transport and trade links..


“A global economy is one whose strategic core activities, including innovation, finance & corporate management, function on a planetary scale on real time”. By Martin Carnoy – Head Economist for President Clinton

Globalization is a strategy of political elites &corporations to overcome the profit crisis faced by big corporations in the mid-1970s, and this strategyinvolves an ideology of the 'free market’ which attacks the rights and livelihood of working people around the world and subordinates everything to corporate profit. (by Greenfield & Levens)


The new debate over globalization has brought people out onto the streets,” said Anthony Giddens, Director of the London School of Economics and Political Science .

“It is no longer a debate about whether it exists. It’s more about the consequences of it being here.”

“Globalization is not an ‘out there’ phenomenon, as if some external forces are at work. September 11 showed that it’s an ‘in here’ phenomenon,”


IMF believes that globalization has long been a force for good – helping to deliver better standards of living for billions of people around the world.

Quote by IMF “ our job is to help our members reap the benefits of globalization, not to oppose it”.

“But we recognize the risks and costs that comewith it and we try to help countries deal with them”.


ProsProductivity grows more quickly when countries producegoods and services in which they have a comparative advantage. Living standards can go up faster.

Global competition and cheap imports keep a lid on prices, so inflation is less likely to derail economic growth,

An open economy spurs innovation with fresh ideas from abroad.

Export jobs often pay more than other jobs, and

Unfettered capital flows give the U.S. access to foreign investment and keep interest rates low.


ConsMillions of people have lost jobs due to imports or production shifts abroad. Most find new jobs--that pay less.

Millions of others fear losing their jobs, especially at thosecompanies operating under competitive pressure.

Workers face pay-cut demands from employers, which often threaten to export jobs.

Service and white-collar jobs are increasingly vulnerable to operations moving offshore.

U.S. employees can lose their comparative advantage when companies build advanced factories in low-wage countries, making them as productive as those at home.


Capital Movement

Direct foreign investment has become the most importantcategory of flows to the developing countries. Both portfolio investment and bank credit rose but they have been more volatile, falling sharply in the wake of the financial crises of the late 1990s.

Movement of People

Workers move from one country to another partly to findbetter employment opportunities. The flow of migrants toadvanced economies is likely to provide a means through which global wages converge.


Spread of Knowledge & Technology

Information exchange is an integral, often overlooked, aspect of globalization. For instance, direct foreign investment brings not only an expansion of the physical capital stock, but also technical innovation.

Knowledge about production methods, management techniques, export markets and economic policies is available at very low cost, and it represents a highly valuable resource for the developing countries.


Movement in Trade & Commerce

Developing countries as a whole have increased their share of world trade during the last decade.

The newly industrialized economies (NIEs) of Asia have done well, while Africa as a whole has fared poorly.

The strongest rise by far has been in the export of manufactured goods. The share of primary commodities in world exports—such as food and raw materials—that are often produced by the poorest countries, has declined.


Globalization means that world trade and financial markets are becoming more integrated. But just how far have developing countries been involved in this integration? Their experience in catching up with the advanced economies has been mixed.

Some countries, especially in Asia, per capita incomes have been moving quickly toward levels in the industrial countries since 1970

A larger number of developing countries have made only slow progress or have lost ground. In particular, per capita incomes in Africa have declined relative to the industrial countries and in some countries have declined in absolute terms.


Globalization is not just a recent phenomenon. Some analysts have argued that the world economy was just as globalize 100 years ago as it is today. But today commerce and financial services are far more developed and deeply integrated than they were at that time. The most striking aspect of this has been the integration of financial markets made possible by modern electronic communication.

The 20th century saw unparalleled economic growth, with global per capita GDP increasing almost five-fold.

But this growth was not steady—the strongest expansion came during the second half of the century, a period of rapid trade expansion accompanied by trade—and typically somewhat later, financial—liberalization.


In the inter-war era, the world turned its back on internationalism—or globalization as we now call it—and countries retreated into closed economies, protectionism and pervasive capital controls. This was a major factor in the devastation of this period, when per capita income growth fell to less than 1 percent during 1913-1950.

The story of the 20th century was of remarkable average income growth, but it is also quite obvious that the progress was not evenly dispersed. The gaps between rich and poor countries, and rich and poor people within countries, have grown. The richest quarter of the world’s population saw its per capita GDP increase nearly six-fold during the century, while the poorest quarter experienced less than a three-fold increase.


There is no clear-cut definition of what constitutes a smallState. The definitions vary considerably between quantitative, and qualitative.

Quantitative : land area, population size, gross national product (GDP), per capita income , and Commonwealth – those countries with 2.5 million people.

Qualitative: intrinsic physical/geographical characteristics degree of insularity, and vulnerability,


Africa Asia Caribbean Central America Southeast and Central Europe European Union Indian ocean Mediterranean Middle East, and South Pacific


Globalization has placed mounting pressures on the ability of small states to manage their trade, economic and political relationships.

After the end of cold war new relationships emerged, with new strategies, & new national political identities.

International trade liberalization is constantly reducing the need for large domestic markets, which has an impact on the level of trade for the small states.

Small states are normally constrained by their economiesof scale in terms of production.


The Small States recognize that in order to survivethe vagaries of the wider world, they need to usesmart strategies both at the political and economiclevel.

These strategies range from:

(a) multi-lateral alliances,(b) small states alliances (SIDs),(c) regional alliances,(d) remain neutral in international disputes, and(e) seek for security protection from major countries


Multi-lateral AlliancesThe small states would enter into commercial and strategicalliances with the multi-lateral agencies so as to protecttheir resources.

Such alliances would be tied to large international financialInstitutions (e.g. World Bank, IMF, European InvestmentBank, Development Bank of the region, & other megafinancial institutions).

Alliances with these institutions is related to economic &moral support, in whatever way assistance can be provided.


Small-Small States AlliancesThis alliance would be reflected through the collaborationof: political, economic, social, and technological needs.

A constant flow of exchange of information by small statesfrom one to another as the need arises.

Joint venture projects is a common occurrence, wherebythe small states thrive on their human capital to drive thesuccess of their projects.

The emergence of the Small Island Developing States (SIDs)network leading to the call of “Small Islands Voice”.

AIMS – is the network regrouping the following regions:Atlantic, Indian Ocean, Mediterranean, South China Seas.


Regional AlliancesWith regional alliances comes, political, economic & socialstability.

What small states need is “stability” in order to contributeto its economic development & well-being.

Small states cannot afford to enter into unnecessaryconfrontations between themselves, as it is too costly &damaging on all fronts.

It is now a common occurrence that regional alliances arequite prevalent, even amongst the industrial nations as well.

Example: Japan-US Joint Declaration on Security Alliancefor the 21st Century (signed in Tokyo – 17th April 1996).


Remain Neutral in International DisputesOne of the political strategies of the small states is the resolve to remain NEUTRAL in matters of international disputes between the superpowers.

In the case of Seychelles, our motto is “Friends to All, Enemies to None”.

Small states prefer to observe the United Nations rules& laws that there should be no confrontation betweenmember states, and any disputes should be resolvedin as far as possible through the diplomatic channels.

Most small states belong to the Commonwealth club.


Seek Security Protection from Major CountriesThe small states also recognize that the best approach todefend its territories and resources, is to seek affordableprotection from other powerful nations.

This strategy works both ways – in favour of the smallernations, and the larger countries as they are seen to enforcegood collaboration & stability within the region.

From an economic standpoint, it is much cheaper to drawon the resources of a bigger nation, subject that there ismutual respects, and no political interferences.


This is a very pertinent question to ask at this point!

During the 20th century, global average per capita incomerose strongly, but with considerable variation among countries.

It is clear that the income gap between rich and poor countries has been widening for many decades. The most recent World Economic Outlook studies 42 countries (representing almost 90 percent of world population).

It reaches the conclusion that output per capita has risen appreciably but that the distribution of income among countries has become more unequal than at the beginning of the century.


But incomes do not tell the whole story; broader measures of welfare that take account of social conditions show that poorer countries have made considerable progress. (e.g. some low-income countries, e.g. Sri Lanka, have quite impressive social indicators).

One recent paper found that if countries are compared using the UN’s Human Development Indicators (HDI), which take education and life expectancy into account, then the picture that emerges is quite different from that suggested by the income data alone.


Advanced economies can make a vital contribution to the low-income countries’ efforts to integrate into the global economy:

By encouraging flows of private capital to the lower-income countries, particularly foreign direct investment, with its twin benefits of steady financial flows and technology transfer.

By promoting trade. One proposal is to provide unrestricted market access for all exports from the poorest countries.

This should help them move beyond specialization on primary commodities to producing processed goods for export.


By supplementing more rapid debt relief with an increased level of new financial support. Official development assistance (ODA) has fallen to 0.24 percent of GDP (1998) in advanced countries (compared with a UN target of 0.7 percent).

This is vitally important to create a world of peace andprosperity.

Otherwise, there will always exist a wide gap betweenthe developed and developing countries wealth generation and level of income per capita.

Poverty will continue to remain a national issue for theless fortunate people.


The IMF supports reform in the poorest countries through its new Poverty Reduction and Growth Facility.

It is contributing to debt relief through the initiative for the heavily indebted poor countries.

The World Bank with its affiliates should also join the other multi-lateral institutions to participate into projects or joint-venture programmes that will helpalleviate the poverty.

Soft financing facilities should be made available andmanaged by representative agencies to foster furtherdevelopment in areas of economic potentials.


Small states are subject to the same inherent characteristics

Their dependence on a very narrow range of exports,Their excessive dependence on imported energy & importedraw materials,Their insularity and remoteness, leading to high transportcosts,Their fragile eco-system, a condition often exacerbated byproneness to natural disasters,Their high degree of economic openness rendering themvery susceptible to economic conditions in the rest of theworld, andTheir small size, which limits their ability to reap the benefitsof economies of scale & constraints their productionpossibilities.(see, Briguglio – Operationalising the Economic Vulnerability Index)


The Small States face a number of challenges dueto their integrated in the global market.

The obstacles can be considered as:a. Constraint due to their small size,b. Lack of business competitiveness,c. Subject to external shocks,d. Economy tied to large industrial countries,e. Fiscal difficulties,f. Non-existent of monetary policy,g. Heavily expose to exchange rate risk,h. Expose to interest rate movement,i. Inflation difficult to control,j. Lack of hedging facilities,k. Expose to money laundering activities,l. Constraints of new & advanced technology, andm. Brain-drain syndrome.


Constraint Due to Small SizeSmall states face many difficulties in engaging into anysignificant level of production, which can help them froman economic viewpoint.

Its labour force is one of the main obstacles because theyare always in short supply.

The land space available for economic development isequally in short supply. They are having to reclaim landfrom the sea in order to accommodate their desired/targetdevelopment.

Furthermore, their geographical location does not makeit easier for the transportation of raw materials or finishedproducts.


Lack of Business Competitiveness

Due to lack of natural resources & raw materials, the smallStates have to import most of its energy & raw materials.

The imported commodities do not come cheap when thetransport costs are added to the basic costs.

They have difficulties to mechanize their national productionmethods due to the heavy investment costs.

As a result of the previous argument, small states cannotEnjoy economies of scale as other industrial countries.

The local production costs, which incorporate a high costof labour remains uncompetitive.


Subject to External Shocks

Due to the high degree of integration in the internationalmarket, they are very vulnerable to external shocks fromtheir trading partners.

The external shocks can range from: economic stagnation, civil unrest, strikes, natural disasters, act of terrorism, change of Government, new trade policy (e.g. protectionist measures), shift in the commercial agreements with major clients or suppliers of raw materials.


Economy Tied to Major Industrial CountriesIt is not a coincident that most small states depend on thelarge industrial nations for their outlet of production.

Likewise, many island states depend on tourism & fisheriesas the major economic sectors for their national income, andin turn revenue generation rest on the link with industrialcountries.

Although, some small states would trade fairly well amongstthemselves, they are limited to the volume of trade that theycan realize in order to match or sustain their development.

Some states were previously occupied as colonies, andpsychologically cannot let go this relationship in as far astrade & investments are concerned.


Fiscal DifficultiesSurprisingly, while a number of small island states areexperiencing economic growth and a high level of foreigndirect investments, others are still suffering.

The tendency is for the Government in many small statesto pay attention to social spending at the perils of economic returns.

This means that there is always an excess of expenditureover revenue – and the result is constant budget deficits.

The experience with budget deficits for the small islandStates is not easy to correct without a long-term planbacked by sound investment plans.


Monetary Policy Non-Existent

Due to the precedence of chronic budget deficits, the fiscalpolicy would override the monetary policy.

As such, the fiscal policy leads the decisions for the CentralBank to select monetary policy tools to accommodate thefiscal position.

In a number of small island state, there is a lack of separationof clear cut responsibilities between the Ministry of Finance& the Central Bank.

Practically, the Ministry of Finance would interfere or dictatethe mode of operations to the Central Bank administration.


Heavily Expose to Exchange Rate Risk

The volume of trade with the rest of the world is insignificantfor the small states to be able to influence the movement inthe exchange rate.

Even, if there has to be an improvement in their trade balancethey will still be unable to make any meaningful contributionto the overall rate.

As such, they remain expose to large fluctuations in the ratesof other major currencies.

Furthermore, the small states currencies are not convertibleand there is practically no demand for these currencies onthe international markets.


Expose to Interest Rate Risk

The international interest rates are determined beyond theborders of the small states, which they have no control.

Whatever rates are applicable on the international marketsare eventually filtered throughout the world. (e.g. if the USdecides to alter its rate on the long-term bonds & treasury bills, therate finally is felt through the world banking system).

Small states are exposed to policy issues that are beinginstituted by the world’s leaders, unless, their Central Banksemploy a managed interest rate system. If this is the case,there is equally a price to pay on the national scale.


Inflation Difficult to Control

Raw materials as well as finished goods have to be importedfrom the rest of the world in order to survive economically.

The import costs itself would include an element of inflationdepending from the countries, where the imports come from.

The combination of “import-inflation” combined with thelocal costs of production (usually high for labour intensive)production contributes to a higher level of inflation.

On the other hand, when a country is unable to controlfiscal deficits through discipline, this country is likely toface a fair amount inflation within its public finance.

The higher the rate of inflation, the more difficult to control.


Lack of Hedging FacilitiesOne of the common characteristics experience by the smallis that their respective financial systems are not as developed

They have great difficulties to modernize their financialservices system because of their economic structure (mostly

relying on one or two sectors), so they are compelled to maintaina system, where there is little room for sophisticated services.

Therefore, hedging facilities are not available because banksprefer to offer only traditional banking services.

Hence, it is difficult for the country to hedge its financial risksexposure with the international traders.


Expose to Money Laundering Activities

It is now fashionable that a number of small island statesare promoting offshore banking services as another sectorto supplement their sources of national income.

To those small jurisdictions, the advantage is that if they areable to offer competitive services, this sector is likely toflourish.

The downside to such a business is that there is also thedanger that a number of unscrupulous businesses maycease on the opportunity of a weak regulatory system tolaunder illicit funds.

Not only does such activity create a bad image for thejurisdiction, but also contribute to other illegal activities.


Constraints on New & Advanced Technology

New technology should not be a constraint for the smallstates, instead, it should be of great assistance.

However, development in new/advanced technology takesplace in the industrial world first (as expected), and it takestime for the small countries to be able to import thesetechnologies, subject to affordability.

Some of the technologies require trained specialists tohandle them in a manner that turn them into productive use.

Most of the time, if the local specialists not available, theyhave already emigrated in other countries with bettereconomic prospects.


Brain-Drain SyndromeIt is a common phenomenon for the small states to experience a “brain-drain” syndrome every now and then.

This is due that the intellectual elite feels constrained either through the lack of development or economic reasons. Those qualified citizens would leave their home country toemigrate overseas.

There is a huge national costs for the small states to incuras a result of their inability to retain their professionals.

On the other hand, the industrial countries benefit from theinflux of the skilled & professionals at no cost.


Act of TerrorismTerrorism is every where, and the small states have not beenspared from such criminal act. (e.g. the Island of Bali, Indonesia).

This is one of the threats of the modern 21st Century that wehave, no choice, but to live with.

Such act can be more pronounced when it takes place inour home country.

Not only that it disrupts the every day living, but also places a burden on our social and economic activities. In addition,such criminal act can also destabilize the entire region.

The cost of preventing or monitoring terrorist activitieswithin our borders can represent a huge national cost, whichthe small states cannot afford.


Weather RiskOne of the most important challenges facing the worldincluding the small island states is the rapid changes in theweather conditions.

Recent development, Katrina, Wilna, and other hurricanetyped devastation is a constant reminder that we are livingin a very turbulent world.

Again, the Tsunami that hit the Indian Ocean includingSeychelles (very remote), indicate to us the degree of ourintegration.

There is very little that we can do on our own to minimizethis risk, unless, the international community joins us ina concerted effort in dealing with the “unexpected”.


The international community strongly recognizes that thesmall states survival in the mega world of commercedepends on a co-habitation culture.

They also recognizes that the small states should have a voice – to express their concern in a manner that theirnational interests are protected.

In the same context, the small states must be protectedfrom external influences, which can put their economic prospects at risk.

This is especially the case, whereby the smaller neighbourIs experiencing wealth and prosperity.

Mutual respects should prevail.


Set Up of Regional Stock ExchangesThere are some experts, who advocate that there is a needfor the setting up of regional stock exchanges in orderto allow greater participation of the smaller block countriesto share the investment flows.

The regional stock exchanges would not only contributetowards the spread of economic prospects, but alsocontribute towards closer economic collaboration thatthe smaller countries can share the benefits of the region.

Greater economic collaboration will also create a fair shareof greater social support and stability in the region.


Pooling of Capital & InsuranceIn order to minimize the costs of doing business, it isforeseen that some countries can re-group through small-small states commercial agreement to pool theirinvestment capital to fund regional projects.

Obviously, the Commonwealth as an institution can assistwith the concept development and provide expertise inthis direction to make it a success – provided there is apolitical will.

Likewise, the Small Islands Developing States (SIDs) canalso explore the possibility of engaging dialogues withthe international insurance markets in offering a concessionary rate for the small sovereigns.


In the short-term, volatile short-term capital flows can threaten macroeconomic stability.

Thus in a world of integrated financial markets, countries will find it increasingly risky to follow policies that do not promote financial stability.

This discipline also applies to the private sector, which will find it more difficult to implement wage increases and price markups that would make the country concerned become uncompetitive.


There is another kind of risk. Investors—particularly short-term investors—take too sanguine a view of a country’s prospects and capital inflows may continue even when economic policies have become too relaxed.

This exposes the country to the risk that when perceptions change, there may be a sudden brutal withdrawal of capital from the country.

If it is assumed that countries aim to achieve sustainable growth, low inflation and social progress, then the evidence of the past 50 years is that globalization contributes to these objectives in the long term.


In short, globalization does not reduce national sovereignty on our economic policy.

It does create a strong incentive for governments to pursue sound economic policies.

It should create incentives for the private sector to undertake careful analysis of risk.

However, short-term investment flows may be excessively volatile.

It is up to the Government o the concerned country toensure that there is a safe and sound financial system,which can monitor its development at all times.


Efforts to increase the stability of international capital flows are central to the ongoing work on strengthening the international financial architecture.

It is essential that every Government participate activelyand lend their support, wherever they can.

Admittedly, some experts are concerned that globalization leads to the abolition of rules or constraints on business activities.

To the contrary—one of the key goals of the work on the international financial architecture is to develop standards and codes that are based on internationally accepted principles that can be implemented in many different national settings.


The future/survival of the small states within theglobal arena will depend on the following factors:

Implementation of modern corporate governance,

Observance of the rule of law,

Institute sound macro-economic policies,

Undertake market reforms, and Offer economic incentives.


Implement Modern Corporate GovernanceSmall states should endeavour to install good governanceit is administrative system, so as to ensure the continuedpolitical stability.

Good governance will demand a clean and transparentmanagement system that will not minimize corruption, butalso try to eliminate it all together.

Observance of the Rule of LawThe laws of the country should always take precedenceover political interference within the judiciary system.

Transparency & accountability in the commercial practicesshould be reinforced so as to build confidence of theInternational community.


Institute Sound Macro-economic Policies

The Government of the day must institute modern fiscal& monetary policies in order to modernize the economythrough:

(a) Low inflation,(b) Stable exchange rate,(c) Full employment,(d) Balance of Payments equilibrium,(e) Fiscal balance (if not a surplus),(f) Managed Interest rates,(g) Other sound macro-economic measures, and(h) Adopt policy measures to make the country resilient towards external shocks.


Undertake Market Reforms

oPromote fair trade practices,

oRevised the labour laws – if out-dated,

oEncourage greater productivity through performance related measures,

oFoster competitiveness in all economic sectors, and

oPromote bright ideas.


Offer Economic Incentives

Offer greater economic incentives to exports sector,

Ensure sustainable development through Government ledparticipation in the financing of projects,

Encourage Public-Private Partnership initiatives,

Promote inward capital investments,

Enter into economic dialogue and participation at theregional, intra-regional, and international level, and

Invest into research & development costs.


I wish you all, good luck

in your studies.

the impact of globalization on small states presented by: dr. peter larose

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