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The Honolulu Advertiser
Posted on: Thursday, August 13, 2009

Smallest nations face biggest challenges


By John C. Bersia

Too many of the world's small countries, those with populations of less than 1.5 million, are sinking fast — in more ways than one. The latest warnings come from the Pacific region. At a recent conference in Australia, it was reported that some members of the Pacific Islands Forum — a 16-state group dedicated to shaping collective responses to regional issues — were struggling with hefty budget deficits, along with level or declining growth, well before the recession. Now, their plight has worsened.

Last week, several members of the same group also rang the climate-change alarm. Advancing seas are eating away at their shores, damaging or killing crops, contaminating freshwater and forcing people to abandon their villages.

Those developments, which are not limited to the Pacific, point to a serious, urgent crisis. I believe we all know how the rich world should respond to the climate-change challenge, starting with the reduction of harmful emissions on a reasonably strict schedule. The affected states themselves also have a key role to play by taking steps to mitigate disaster. As for the economic challenge, the Pacific Islands Forum offered some helpful ideas. It recommended that small states in the region bolster the private sector's influence, improve inefficiencies in state-controlled enterprises, and reduce the expense businesses shoulder for regulatory and legal purposes. But there is something even more fundamental to consider: Do small states really have the means to operate successfully in the global economy? How are they coping with the international financial crisis? For insights, I turned to Tim Cullen, executive director of the Small Countries Financial Management Centre, a newly minted, Oxford University-affiliated program on the Isle of Man.

Cullen explains that small countries have fewer alternatives if things go wrong in the areas in which they specialize.

Also, small countries tend not to have very diversified economies. Thus, they may be quite dependent on, for example, fisheries or the financial sector. Another disadvantage is their remoteness. In addition, because of the sheer small size of their populations, they do not have a great depth of human capacity to run their economies.

Fortunately, Cullen says, there are large countries that have reason to be attentive to the plight of their tiny brethren. For instance, he points to Canada for its particular focus on the Caribbean. Similarly, Australia and New Zealand have an interest in the Pacific nations.

Beyond the moral imperative, Cullen points out a practical incentive for caring: Some small countries have become transit points for the illegal movement of money. If they have weak regulatory systems, they are naturally going to become targets for criminal and terrorist organizations.

Finally, he echoed the climate-change dilemma, especially for tiny islands. In light of those challenges, Cullen says he is impressed at how relatively well many small countries do.

Cullen knows from experience what he is talking about; his own home, the Isle of Man — a self-governing British Crown dependency located in the Irish Sea — with a population of 80,000, is part of the small-states club. He admits the island has had the good fortune of solid political and legal institutions. Even so, three decades ago, the Isle of Man faced a predicament. Most of its land was agricultural, yet that sector contributed minimally to the island's economy. Further, many tourists discovered they could fly to Spain or other warm spots for about the same cost as an Isle of Man visit. Those circumstances prompted the island to diversify into financial services, film-making and ship registration. The result: A robust, 21st-century economy.

Now, Cullen says, the Isle of Man seeks to be part of the solution for other small countries' troubles. Along with Oxford University's Said Business School, the World Bank and other partners, it gives officials who work in small-country finance ministries, central banks and financial regulatory bodies an opportunity for cost-free, intensive training with some of the best professors and practitioners in the world.

To small countries, such efforts can be a life-saver, enhancing their officials' skills and confidence to plan, negotiate and shape strategies in a rapidly changing, uncertain world.