COMPETITIVENESS STRATEGIES FOR SMALL ISLAND STATES Lino Briguglio University of Malta June 2013 1 1. INTRODUCTION During the past two decades, competitiveness received considerable attention in academic and policy circles reflecting in part the insufficiencies of short-term approaches and the consequent need for improved economic governance. The literature on competitiveness has grown considerably in recent years and Governments of developed as well as of developing countries have placed competitiveness at the centre of their development agenda. 2 This paper is based on the notion that competitiveness has a significant role to play in the economic development of small island states, particularly in the current wave of globalisation. In a globalised free trade context, competitiveness is the means for firms as well as for countries to survive and thrive. The alternative to competitiveness, namely protection from international competition, has time and again proved to be futile, as it results in inefficiencies and poor returns.. 3 The paper is organised as follows. Section 1: Competitiveness as a major issue for small island states in the era of globalisation Section 2: The major elements a competitiveness strategy for small island states Section 3: Concluding considerations 4 Section 1. COMPETITIVENESS AND SMALL ISLAND STATES Competitiveness is especially important for small island states because of their very high dependence on international trade. Their small domestic markets necessitates that a large share of output of goods and services be sold to nonresidents (i.e. exported). In addition, the limited availability of natural resources in most small states, necessities that a relatively high proportion of the country’s expenditure is serviced by imports. 5 . Small island states are characterised by a number of special features, which include the following: ► High dependence on economic conditions in the rest of the world. ► Inability to influence international prices. ► Limited ability to exploit economies of scale. ► Limitations on domestic competition. ► Limitations on diversification possibilities. ► Insularity and high transport costs. ► High cost of public administration due to indivisibility of overhead costs. 6 These factors not only limit the development options of small island states, but also exacerbate the proneness of such states to external shocks. Some small island states have done remarkably well, prompting some analysts to argue that smallness may actually be an advantage, but a deeper analysis would indicate that the economic success of some small island states resulted in spite of and not because of their size. The promotion of competitiveness is thus crucial for small economies to be able to cope with these 7 challenges. The globalisation process has led not only to improvements in technology and in the means of communication, but also to deliberate economic policies aimed to achieve higher rates of growth through the liberalisation of markets. Globalisation however comes at a cost, associated mostly with greater risk and uncertainty in economic performance, as international economic developments over the past five years have shown. 8 These considerations leave no option for countries but to continuously strive to improve their competitiveness if they are to succeed economically, in particular in meeting the effects of adverse cyclical developments in the international economy. These realities are especially challenging for small states in order to overcome their special constraints associated with small size and insularity. 9 Section 1. COMPETITIVENESS STRATEGY FOR SMALL ISLAND STATES A number of strategic options are available to small island states with regard to competitiveness. One suggestion could be to shelter the economy from the shocks of international markets and pursue an inward-looking policy. Numerous experiences in various countries have shown that this course of action only serves to promote inefficiencies that would defeat the original 10 purposes for which it was instituted. An alternative route would be to pursue growth led by an expansionary policy based on simulating domestic expenditure, particularly government expenditure. A disadvantage associated with this option is that government expenditure is likely to increase aggregate demand without necessarily expanding the economy’s supply capabilities, leading to inflationary pressures and/or an increase in imports. This policy would be appropriate if the economy is in a situation of severely depressed demand relative to its supply capabilities. 11 It is therefore argued that isolationist and inwardlooking policies cannot be relied upon to sustain the economic growth of a small state. A possible viable option for small states is to attempt to step up their international competitiveness so that they can perform successfully in the export market. 12 Competitiveness is a multi-faceted phenomenon, which spans economic, social, political and international dimensions and involves all the players in the economy. It is for this reason, that competitiveness indicators such as those produced by the World Economic Forum Global Competitiveness Report1 and the IMD Competitiveness Report2 include a large number of components. 1. http://www.weforum.org/issues/global-competitiveness 2. http://genevalunch.com/2013/05/30/imd-competitiveness-report-usfirst-swiss-second/ 13 It is however often the case that these dimensions result in conflicting priorities, especially in the short run where, for example, the attainment of social objectives may conflict with economic efficiency considerations. The achievement of competitiveness across all these dimensions in a sustainable manner will depend upon appropriate economic and social policies. 14 A competitive strategy should attempt to foster good economic governance, in particular by focusing on the following elements: 1. Macroeconomic stability; 2. A Predictable legislative framework, accompanied by efficient public administration; 3. Adequate infrastructural services, particularly transport and telecommunications; 4. Promotion of investment in human capital accompanied by the encouragement of innovation, research and development; 5. Balancing wage levels, productivity and taxation; 6. Improving the ease of doing business; 7. Maintaining social cohesion, and ensuring that the promotion of competitiveness does not lead to exploitation of workers or to environmental degradation. 15 These elements of a strategy for the promotion of competitiveness cover virtually all aspects of economic and social policy and require inputs from all social partners. They also highlight the fact that economic objectives should not be blindly pursued while incurring excessive social and environmental costs, as these not only work against social cohesion and public health, but would also ultimately undermine competitiveness in the long run. 16 The constraints arising from small size and insularity, outlined in section 2 of this paper, render the tasks of small island jurisdictions somewhat difficult, mainly due to the problem of expenditure indivisibilities (leading to high per capita costs of government and other overhead costs), limited ability to reap economies of scale, and relatively high transport costs. The good economic-governance policies which are laid out as the elements of a competitiveness strategy however still apply, and apply a fortiori , given that small island states tend to depend heavily on exports and imports, due to the very small size of the market 17 and lack of natural resources. CONCLUSION This paper argues that competitiveness is a prerequisite for the economic success of small island states, more so than is the case of larger territories, given the high degree of dependence of small island states on international trade. An important point that emerged from this paper is that competitiveness has social and environmental dimensions and therefore the support of the social partners (employee unions, employers, the government and civil society) in promoting 18 competitiveness is an important requisite. It has also been argued that competitiveness is to a large extent an enterprise issue, and it is the individual company at the micro level that needs to be competitive, in order to enhance national competitiveness. However the public sector has a major role to play, not least of which by taking a lead in place competitive on top of the policy agenda, and taking the lead in removing bottlenecks when these occur. 19 Thank you for your attention 20