‘Smallness’ is a relative term that might explain why there is no formal definition of “small island economies” (SIEs). However, the smallness of SIEs often relates to their population size, land mass or share in international trade.
The development stage of different SIEs has given rise to various other terms with particular nuances like ‘small economies’, ‘small and vulnerable economies’, ‘small island developing states’ and ‘structurally weak and vulnerable small economies’.
Some European SIEs, like Malta and Cyprus, are nations in their own right, while others, like the Channel Islands, have self-rule.
The majority of SIEs are part of bigger countries. The Balearic and Canary Islands are part of Spain. Greece has various islands. Sweden has a handful of inhabited islands, but the most important is Gotland in the Baltic Sea. The UK also has some SIEs like the Hebridean Islands, the Shetlands, and the Isle of Man.
SIEs share some common challenges and characteristics, although every island has particular challenges.
Most SIEs lack connectedness to global value chains, negatively impacting their ability to trade internationally. This weakness often discourages direct foreign investment, but some islands like Malta, Cyprus and the Channel Islands attract substantial foreign investment.
Poor maritime and air connectivity often exacerbates high physical communication costs, discouraging investment and trade and hindering economic growth.
However, the most debilitating disadvantages that affect almost all SIEs are the narrow range of resources; overuse of natural resources and their premature depletion; domestic markets that are too small to provide significant economies of scale; heavy reliance on imported goods, which often means high cost of living for the local community; and limited export potential with a narrow range of products.
SIEs that are also nations have the added challenge of finding the right calibre of people to lead their institutions which often results in inadequate institutional capacity, making them more prone to governance failure and heightened reputational risk. Small islands rarely attract the attention of the international media except when something they do goes seriously wrong.
Europe’s small island economies adopt different models for promoting sustainable growth. Tourism remains the main activity in those islands with idyllic locations.
The success of the Balearics and the Canary Islands in attracting a large number of tourists is now beginning to worry policymakers. They realise that their diminishing returns from increasing volumes may not be sufficient to balance the well-being of the islands’ communities and the economic benefit. The Greek Islands and the Italian island of Capri face similar challenges.
European SIEs will do well to adopt economic models that promote sustainable economic growth
The Channel Islands of Jersey and Guernsey have arguably adopted the best economic model based on financial services and tourism. They have done so while ensuring they select only the best investment that offers residents sustainable economic growth, high living standards and quality of life.
The Hebrides, another UK archipelago, have economies that depend mainly on fishing and agriculture. The discovery of North Sea oil in 1965 boosted the islands’ economies, and today, investment in renewable energy projects is gaining importance. Unlike some other SIEs, the Hebrides authorities face the challenge of a decreasing population. The UK government helps mitigate the problem of depopulation by giving significant grants for people to cultivate the land rather than migrate.
Gotland is Sweden’s largest island, with a population of just 61,000. It is an integral part of the mainland and does not have self-rule. Despite its limited population, Gotland has a relatively diversified economy based on tourism, agriculture, food processing, IT solutions, design and some heavy industry. The Swedish government is also increasing its military establishments on the island, and this strategy is bound to gain strength as current geopolitical realities cannot be ignored.
The EU and the UN encourage SIEs to base their economic models on sustainable activities in the context of the increasing challenges caused by climate change and the overdependence on fossil fuels.
The United Nations Development Programme is increasing investment in supporting small island developing states through their energy transitions, developing and impending climate adaptation strategies and leveraging nature-based solutions. As part of its commitment to encouraging investment in the blue economy, the EU also supports preserving marine and coastal biodiversity and accelerating the ocean economy sectors.
In the context of Europe’s democratic systems of government, Singapore and Hong Kong’s economic models will always be alien to the old continent’s way of promoting sustainable development.
European SIEs will do well to adopt economic models that promote sustainable economic growth and the well-being of the islands’ communities.