Overview

More than a quarter of World Bank members are countries with a population under 1.5 million. These countries vary greatly in their level of development and the size of their economies. They are also spread out geographically, with most of them clustered in the Caribbean, the Pacific, and in Africa. Despite their diversity, these countries share a common set of development challenges:

Challenge: Size

Vulnerability to economic shocks and income volatility. Because of the small size of their economies, growth strategies in small states rely on foreign markets. A high degree of openness however means that they are heavily exposed to external shocks in global markets. Moreover, their narrow resource base and small domestic markets prevent small economies from diversifying into a wide range of activities, making them more vulnerable to terms of trade shocks. When one dominant activity declines, it has an impact throughout the economy, exposing the population to income volatility which can create additional hardships as the poorest are less able to weather shocks to their incomes. Government revenues are also volatile because they rely more heavily on taxing imports as a source of revenue. As tariffs are reduced, so is the government’s income.

Limited capacity.  Because of their size, small states are traditionally characterized by weak capacity in both the public and the private sector. They also tend to have larger public sectors than other countries. In some states, a widely scattered population adds to the challenge.  Small states also lack sufficient institutional capacity to participate fully in international fora, which can profoundly affect their economies.

Difficulty accessing external capital. Access to global capital markets is important for small states, and is one way to compensate for adverse shocks and income volatility. But private markets tend to see small states as more risky than larger countries, so spreads are higher and market access is more difficult.

Challenge: Geography

Limited competitiveness. Three out of four of developing small states are islands or widely dispersed multi-island states; others are land-locked, and some are located far from major markets.  Their remoteness and isolation make it difficult and costly for these states to access world markets to compensate for small domestic markets — a situation that increases the cost of intermediated inputs and imports and prevents efficiency and innovation. Domestic competition is also limited, which hampers successful development.

Susceptibility to natural disasters and climate change. Most small states are vulnerable to climate change related impacts and natural disasters such as hurricanes, cyclones, droughts, and volcanic eruptions that typically affect an entire population and economy. The impact on the government’s finances can be overwhelming, limiting a country’s ability to build cushions for development programs and future needs. 

The World Bank tailors its assistance to the unique challenges of small states, drawing on an array of financial products, and knowledge and learning services. Tailored country and regional programs help small states assess social and structural sources of vulnerability, address underlying policy and institutional weaknesses, and respond to and manage shocks. In addition, the World Bank works closely with small states to generate and share in-depth analysis on specific local challenges.

Twenty small states (countries with populations of 1.5 million or less) are currently eligible for funding from the International Development Association (IDA), the Bank’s fund for the poorest. Thirteen of these countries have access to IDA under the small islands economies exception.1 These countries have access to IDA funding in recognition of their vulnerability to economic shocks and natural disasters despite having GNI per-capita levels on average four times the IDA operational cutoff (and in some cases as high as six times the operational cutoff).

Over time, in recognition of their particular challenges, the World Bank has enhanced its financial support to small states:

  • First, as part of its Performance Based Allocation (PBA) system, IDA provides a minimum base allocation to each country. For small states, this minimum base allocation constitutes the majority of IDA’s financial support. The minimum base allocation was increased from SDR1.1 million per year in IDA14 to SDR4 million per year in IDA17. 
  • The terms of IDA funding for countries under the small island economies exception were changed from blend to regular IDA credit terms, which resulted in longer maturities and grace periods, as well as a lower interest rate.
  • Beyond core IDA funding, small states are eligible for funding under the regional IDA program. Provisions have also been made to allow for leveraging significantly more financing from the regional program compared to larger IDA clients, with national co-financing capped at 20% of annual allocation for small states.  In IDA16, several regional projects ranging from aviation investment to broadband connectivity are being funded in the Pacific and the Caribbean; further raising IDA’s financing contribution in these small states in addition to country allocations.

The World Bank is supportive of initiatives to help small states mitigate the impact of external shocks.  While much of the financial assistance provided to small island states is targeted at addressing longer-term development needs, other innovative financing windows in the Bank provide complementary resources to respond rapidly and effectively to sudden, unexpected needs, such as the Crisis Response Window (CRW) and the recently established Immediate Response Mechanism (IRM). 

These instruments are only the latest in a range of sovereign risk management products provided by the Bank to small states. Examples include weather derivatives against drought risks, call options to help cap the price of maize imports, regional risk pooling schemes (the Caribbean Catastrophic Risk Insurance Facility, the Pacific Catastrophe Risk Insurance Pilot Program); and other innovative approaches to leverage concessional funds for adaptation to climate change and mitigation of the impact of natural disasters (the Program for Climate Resilience, Agriculture Risk Insurance).

Resilience building, including disaster preparedness and mitigation investments, is critical to help protect small states against exogenous vulnerabilities. Given the high propensity for natural disasters, a development policy operation with a Catastrophic Risk Deferred Drawdown Option (Cat DDO) can be critical to rapidly respond to a natural disaster and restore economic activity. The Cat DDO instrument, which is available to IBRD-eligible countries, can provide immediate liquidity in emergency situations caused by natural disasters and catastrophes. In addition to being a source of bridge financing while other resources are being mobilized, this instrument can support countries’ efforts to enhance resilience and capacity to manage natural hazard risk.

Technical and advisory services represent an important component of the Bank’s work with small states to produce tailored solutions and generate lasting impact. The World Bank works in partnership with small states as a global connector of practitioner knowledge, a broker of development solutions, and a facilitator of capacity development. The Small States Forum (SSF)—the annual gathering of Finance Ministers and Central Bank Governors from small states in conjunction with the World Bank/IMF Annual Meetings—provides a platform for small states to discuss common challenges, learn from each other, interact with development partners, and forge new partnerships. Since the first meeting in 2000, the SSF has covered a wide variety of topics central to small states development challenges, including, trade; remittance flows; climate change; food and energy security; the impact of the global recession; and sustainability of small states’ development and growth. A number of successful projects and initiatives have emerged as a result of the SSF discussions.

Technical and advisory services to small states are often "embedded" into World Bank operations and cover a broad range of issues, including expanding and improving service delivery for health and education; enhancing the effectiveness and efficiency of public spending; debt and macro-financial vulnerability; PFM reform and strengthening statistical capacity; improving investment climate and private sector development; building resilience and developing options for scaling-up renewable energy and energy efficiency measures.

Technical and advisory services are also provided as stand-alone service and ad-hoc initiatives. These activities are often financed through trust funds and in partnership with other institutions or bilateral donors. For instance, the Global Facility for Disaster Reduction and Recovery (GFDRR) helps strengthen global post-disaster recovery assistance coordination and build capacity for preparedness, planning and response; the Pilot Program for Climate Resilience (PPCR) supports countries’ efforts to integrate climate risk and resilience into core development planning and implementation.


1 Cape Verde, Dominica, Grenada, Kiribati, Maldives, Marshal Islands, Micronesia, Samoa, Sao Tome and Principe, St. Lucia, St. Vincent and Grenadines, Tonga, Tuvalu, and Vanuatu.  Marshall Islands, Micronesia and Tuvalu benefitted from the exception during IDA16.

The World Bank has become more agile and flexible in responding to small states’ evolving needs and has contributed to the considerable success achieved by small states in several areas:

In Bhutan, under the Private Sector Development Project, which established the Thimphu TechPark, a total of 1,034 secondary and tertiary graduates have been trained. Approximately 804 Bhutanese graduates between the ages of 19 and 24 years, with equal representation between young men and women across Bhutan’s 20 districts, are now working in the IT/ITES sector. The cost to the government per job created under the project has been estimated to be in the range of $1,000, which is highly satisfactory per regional and global standards. Access to all-season feeder roads has been constructed and improved in 100% of the target project areas under the Second Rural Access Project (RAP-2). Travel time to the nearest motorable road has been reduced by 50%.

In Cabo Verde, under the Road Sector Support Project the asset value of the national road network has been increased by around 15% to more than ECV 600 billion. Sustainability is likely to be assured via regular maintenance funded via a newly established Road Maintenance Fund, which is financed by a road maintenance (fuel) levy that went into effect in 2009.

In Djibouti, an ongoing Djibouti Urban Poverty Reduction Project which combined infrastructure investment with social activities and institutional support, improved access to basic infrastructure and community services via the construction of four major roads; creation of 15,000 person-days of short term employment opportunities; increased capacity building of selected institutions through the establishment of a financial and stock management system; and the funding of the City master plan. The Primary Education Support Project supported the country’s second Education Action Plan. The number of beneficiaries in the sites selected more than doubled between 2010 and 2013, to 2,950 students. The ratio of girls to boys increased from 0.55 to 0.88 Training was given to 120 school directors on the use of a pilot tool for monitoring the quality of school management. There was support for the production of textbooks, with the Ministry of Education printing a total of 50,000 basic education textbooks between 2010 and 2012, increasing the percentage of students who have access to textbooks to 96 percent.

In Gabon, the Natural Resource Management Development Policy Loan (NRM-DPL) contributed to the modernization of Gabon’s forest sector. Amongst other the following two quantifiable outcomes can be attributed to the NRM-DPL operation: (i) a sharp rise in the percentage of areas in compliance with sustainable management prescriptions which have moved from 30 percent to 77 percent over the period of the NRM-DPL; (ii) a sharp increase in the recovery rate of the forest revenues which should move from 40 percent in 2005 to 87 percent for the area fees at the end of NRM-DPL.

The Grenada Hurricane Ivan Emergency Recovery Project (2004-2009) was designed to deal with the widespread destruction caused by Hurricane Ivan, a Category 3 storm, which struck the Caribbean island in September 2004.  The US$10 million project in loans and credits supports the rehabilitation and reconstruction of schools and recovery activities in the health sector. By June 2009, all five of the island’s health facilities were restored to pre-hurricane conditions and 18 schools of 19 target schools were rehabilitated or reconstructed.

The Kiribati Adaptation Program is supporting the country to adapt to the effects of climate change, improving water security and improving coastal resilience. Comprised of low-lying coral islands with population and infrastructure concentrated along the coast, the people of Kiribati are perhaps among the most vulnerable towards effects of climate change such as sea level rise and coastal erosion. The program has helped plant 37,000 mangrove seedlings and construct a seawall to better protect Kiribati’s citizens.

The multi-country Education Development projects implemented in Grenada (2003-2011), St. Kitts and Nevis (2002-2009), St. Lucia (2002-2009) and St. Vincent and the Grenadines (2004-2011) sought to increase equitable access to secondary education and improve the quality of teaching and learning through the construction of new schools in under-served areas, as well as through the expansion, upgrade and rehabilitation of existing facilities.  The construction of two new schools and the expansion of four others have benefited more than 2,300 children; the transition rate from primary to secondary school increased from 54% in 2000 to 97% in 2007; and the net enrollment rate in secondary schools rose from 64% in 2000 to 81% in 2007.

The HIV/AIDS Prevention and Control projects implemented in Grenada (2002-2009), St. Kitts and Nevis (2003-2009), St. Lucia (2004-2010) and St. Vincent and the Grenadines (2004-2010) for a total US$23.5 million aimed at assisting the Government of these countries to control the spread of HIV/AIDS and mitigate its socio-economic impact.  The projects were able to reach at-risk groups and the general population with prevention information. Significant progress was also made in expanding counseling and testing services, as well as in the provision of antiretroviral therapy. In the area of prevention of mother-to-child-transmission, St. Kitts and Nevis managed to consistently increase the number of pregnant women reached; St. Lucia achieved zero transmission of HIV from mother-to-child; and St. Vincent and the Grenadines offered these services during pregnancy to all women.

The OECS-Catastrophe Insurance Project (2007-present) has allowed countries to join the Caribbean Catastrophe Risk Insurance Facility. The Facility serves as a joint reserve mechanism where participating governments can obtain coverage (insurance) that gives them the ability to access a quick financial payout in the event of a catastrophic natural disaster.  Overall, this insurance has been a success, providing the much needed liquidity promptly following a catastrophic weather-related event and has helped reduce the vulnerability of OECS to natural hazards and the impacts of climate change.

The Telecommunications and ICT (Information and Communication Technologies) Development Project (2005-2009), implemented in Dominica, Grenada, St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines for a total of US$2.7 million, sought to improve access and quality of these services at a more affordable cost.  As a result, fixed-to-mobile rates were reduced by 40%. Additionally, monthly rates for domestic and international leased lines decreased over 56% and 78%, respectively; mobile retail rates fell by 67%; and Internet rates at the speed of 1 Mbps from 2009 to 2011 dropped by 28%.  The project also increased the use of information and communication technologies among rural underserved communities, persons with special needs, and contributed to improve communications, collaboration, e-learning and research for students.

In disaster reconstruction and rehabilitation, the Samoa and Tonga Post-Tsunami Reconstruction Projects have helped communities rebuild their lives after the powerful tsunami in 2009. In Samoa, the project supported communities to relocate to safer grounds to ensure their safety in the future. Upgrading of 30 kilometers of road has helped approximately 5,000 people improve the livelihoods of tsunami-affected communities.

To strengthen rural population, the Bank is undertaking the Solomon Islands Rural Development Project which has helped over 93,000 people have access to services and infrastructure such as water supply, health centers and schools. The Samoa Agriculture Competitiveness Enhancement Project has helped 2,000 farmers improve produce quality and have better access to markets.

The Solomon Islands Rapid Employment Project provided short-term employment and training amid the economic crisis for urban youth and the women in the capital of Honiara. To date, 250,000 labor days have been created by the project with about 15,000 people benefitting from training and work activities. Approximately 57 percent of total beneficiaries are women and 50 percent youth. The REP is expected to exceed its labor day targets by the end of the project in 2015.


LENDING

Small States: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments