Overview

  • While many small states’ undeveloped natural beauty and remoteness offer unmistakable assets, these same characteristics can constrain small states progress towards the Sustainable Development Goals.  Small states are characterized by a small population, limited human capital, and a confined land area. They face labor market and capacity constraints: the limited number of workers and production capacity is often inadequate for local production or export at scale, and few in-country education facilities means a dearth of adequate specialization.

    Constrained economic prospects mean relatively few employment opportunities, so skilled labor often migrates to seek an economic livelihood. While this brain drain leaves the country more exposed to labor market shortfalls, it opens the door to remittances and capital inflows. Despite challenges managing remittance income, these flows provide much needed resources.

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    Private-sector-led growth can be difficult for small states to achieve. The narrow population base means a low demand for goods and services, which limits domestic production and international investment targeted at the local market. Manufactures are primarily for export, but that, too, is constrained by the small workforce. Production costs are generally high because of the lack of economies of scale. The investment climate often needs improvement to ensure appropriate regulations, a level playing field, and good infrastructure.

    A diversified economic base can also be difficult to achieve. Geography and demography limit small states’ productive base. The few economic sectors may include fisheries, tourism, commodity exports, or financial services, and opportunities for economic diversification are limited. The narrow range of exports can make such states vulnerable to terms-of-trade shocks and extreme weather events.

    Generally, few sources of revenue are available. Less space for land-based economic activity and a constrained pool of human resources limit economic activity and sources of income. Thus the tax base for most small states is small and inadequate to meet the cost of public administration and services. A constrained fiscal envelope makes it hard to manage financial, economic and other forms of volatility.  Many small states face endemic debt challenges.

    Remoteness adds an economic cost. Many small states are geographically far removed from international trade partners. The Pacific island states are the most remote, situated on average 12,000 kilometers away from the nearest markets. The landlocked African states are similarly cut off from direct access to the sea. The lack of connectivity imposes a tax on trade. External inputs into domestic production are proportionately costlier, while transport expenses make exports less competitive.

    Poor IT connectivity affects the service sector. Mauritius and small states in the Caribbean have leveraged their skilled workforce and good IT connectivity to position themselves as service providers. Such a solution is not yet available to small states in the Pacific, given poor Internet broadband and inadequate submarine fiber optic cables, though there are recent efforts to ameliorate the problem.

    Providing public services to small scattered populations can be costly. Many small states - notably the Pacific island states - are island archipelagoes with populations dispersed over enormous geographic distances. The prohibitive costs of service delivery across vast swathes of ocean often affect health care, education, social security, and infrastructure services.

    Small island states are highly exposed to climate change and natural disasters. This group accounts for two-thirds of the countries that suffer the highest relative losses due to natural disasters (1-9 percent of their GDP each year).[1] The Pacific and Caribbean are frequently hit by storms, earthquakes, volcanic activity, floods, droughts, and landslides.

    Recurrent financial, climate, and disaster shocks reduce the fiscal space. With a narrow economic base, small states may have difficulty to spread economic risk across productive sectors.  They face more exposure to market shocks that affect income, employment, and expenditure.

    Small states therefore rely on international finance to supplement their fiscal envelopes. However, unless they have commodity exports or a service sector geared to the external market, many small states are not sufficiently creditworthy to raise funds in international capital markets. The local financial sector is similarly less developed, given diseconomies of scale.[2] Several small states are forced to rely on concessional finance; others have significant debt as they draw on their natural resources to graduate from low-income status and lose their access to concessional financing.

    The small states also face challenges in the area of human development. Although many have made progress on infant mortality, there is still an unfinished agenda of low child immunization rates, the reemergence of vector-borne diseases such as dengue, and the challenge of non-communicable disease (high blood pressure, diabetes, cancer, etc.). In general, small states have achieved gender parity at the lower levels of education, and more girls than boys pursue higher levels of education. However, women’s employment prospects and earnings are significantly worse than men’s.

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    Despite the systematic constraints identified above, there are small state success stories which can offer some lessons more broadly. For example, Bahrain, Brunei, Estonia, Malta, and Qatar have achieved high incomes, making the most of their specific combinations of fossil fuels, strategic location on the crossroads of trade, a highly educated workforce, strong legal systems, and well-developed financial sectors. However, most small states lack these advantages.

    Small states do not easily fit the standard development model where low-income and IDA-eligible countries become medium-income and IBRD states, and then transition to self-sufficiency and graduation. Instead, many small states find themselves caught in a gap between eligibility for concessional financing and self-sufficient capacity to take on sustainable financing at market interest rates. To meet small states’ unique constraints, international development institutions need to develop innovative solutions tailored to address their interrelated development and financing issues.

    Last Updated: Oct 05, 2016

  • The World Bank employs multiple instruments to channel IDA and IBRD resources in supporting sustainable development in small states. Development policy financing has been widely used to support policy reforms to enable small states to better adapt to climate change, strengthen disaster preparedness, and provide resources for infrastructure investments. Investment project financing can be processed as a new resilience project, a long-term national or regional resilience program (i.e., a series of projects), or additional financing to an existing project to scale up a pilot or make a sectoral operation climate-resilient. Technical assistance is widely applied for sector diagnostics, specialized advice, or training. In addition, the World Bank makes use of sector work and reimbursable advisory services and plays a convening role vis-à-vis the development community.

    Using these and other specially tailored instruments, IDA has been a primary financing platform to support small states. Specific IDA provisions relevant to small states include the following:

    • The Small Islands Economies Exception provides island states that have a population of less than 1.5 million with continued access to concessional IDA finance, even if their per capita income exceeds the ceiling for IDA eligibility.
    • The IDA Performance-Based Allocation for each country entails a minimum financing envelope. This base allocation has increased since IDA13 to SDR 4 million per year in IDA17 and may increase further in IDA18.[1]
    • Regional IDA support to small states can be accessed to supplement country-specific IDA allocations. The World Bank enables countries that receive SDR 13 million or less in IDA funds each year – mainly small states – to leverage more financing than regular countries under the Regional IDA Program.
    • The IDA Crisis Response Window (CRW), in place since IDA 15, has provided critical additional resources for exceptional emergency situations, arising for instance from natural disasters or economic shocks.

    Complementing IBRD and IDA resources, the World Bank acts as financial trustee for over 20 financial intermediary funds – large multilateral financial mechanisms that support global initiatives – that are available to small states eligible for IBRD and IDA support. The World Bank also acts as trustee to donor-financed resources.

    The World Bank Treasury provides financial products and services to small states: asset management services, support regarding the design and implementation of risk and debt management solutions.

    IFC, the private sector arm of the WBG, has several interventions targeted at small states to facilitate increased private sector-led development.

    MIGA, the political risk insurance arm of the WBG, supports specific small states by helping bring foreign direct investment into productive sectors.

    The World Bank Group is the single largest provider of climate and disaster-resilience-related investment finance. It has supported both disaster preparedness and post-disaster recovery and is a significant player in resilient infrastructure finance. World Bank support for resilience extends to over 25 small states through regional programs: Caribbean Resilience Initiative and Program; Pacific Resilience Program and ongoing national programs; and West Africa Coastal Areas Program and Southwest Indian Ocean Risk Assessment and Financing Initiative. The Bank also has launched a global program, the Small Island States Resilience Initiative.

    The World Bank supports innovative mechanisms to insure against the cost of natural disasters, releasing funds that would otherwise be used for post-disaster expenditure to finance long-term development instead. Regional catastrophe insurance pools allow small states to secure ex-ante cost-effective financing for a rapid response to an event, and access international insurance on competitive terms. Bank-supported regional catastrophe insurance pools such as the Caribbean Catastrophe Risk Insurance Fund or the Pacific Catastrophe Risk Assessment and Financing Facility can facilitate access to reinsurance markets on competitive terms by pooling country-specific risks into a single, better structured portfolio. Contingent finance facilities, like the Deferred Drawdown Option for Catastrophic Risk (CAT-DDO) program which supports countries with limited bridge financing in the event of a specified low-probability, high-impact disaster, can help some small states implement disaster risk financing strategies.

    The Bank has invested in the blue economy, centered on the planet’s oceans. It hosts the Global Program on Fisheries (PROFISH), a multi-donor trust fund (MDTF) to support fisheries and aquaculture, providing significant support for small island nations in particular. The Pacific Islands Regional Oceanscape Program and the Caribbean Oceans and Aquaculture Sustainability Facility are similar Bank-supported initiatives to harness the economic potential of oceans sustainably.

    The WBG is one of the largest financiers of clean energy activities in small states, with a total commitment of US$87 million in current and future lending operations and knowledge work. WBG clean energy support is funded by IBRD, IDA, Climate Investment Funds, the Global Environment Facility, Energy Sector Management Assistance Program, SIDS DOCK Support Program, and the Asia Sustainable and Alternative Energy Program MDTFs.

    Investments in transport and ICT address the core structural constraints small states face, reducing economic isolation, lessening barriers to trade, promoting tourism, and improving mobility.

    Small states also tap Bank-administered financial intermediary funds for climate adaptation and disaster-related assistance. The World Bank administers the Global Facility for Disaster Reduction and Recovery (GFDRR), a global partnership that helps developing countries reduce their exposure to natural hazards and adapt to climate change.

     

    Last Updated: Sep 21, 2017

  • 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:

    IDA provided four credits totaling US$ 9.6 million to Dominica, Grenada, Saint Lucia and Saint Vincent, which were implemented via the regional agency of the Organization of Eastern Caribbean States (OECS) for the Electronic Regional Integration Project. These grants helped finance a regional electronic ID system, regional online tax filing system, and a regional eProcurement system for pharmaceuticals.

    Papua New Guinea: Giving Urban Youth a Second Chance - Unemployment of young people in urban areas is one of the biggest development challenges faced by Papua New Guinea. The Urban Youth Project is helping youth in the capital of Port Moresby by providing training and employment opportunities to give them a leg up in life.

    Last Updated: Sep 21, 2017

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LENDING

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

*Amounts include IBRD and IDA commitments


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Additional Resources

Contact:

The World Bank - Small States Program
1818 H St., N.W. Washington, DC 20433
Small_States_Secretariat@worldbankgroup.org