COMPETITIVENESS STRATEGIES FOR
SMALL ISLAND STATES
Lino Briguglio
University of Malta
June 2013
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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.
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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..
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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
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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.
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.
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.
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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
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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.
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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.
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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
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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.
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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.
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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/
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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.
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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.
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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.
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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
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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
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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.
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Thank you for your attention
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