. The Problems of Small States in Africa

. The Problems of Small States in Africa

The Problems of Small States in Africa Small states have long been viewed by international organizations as a special category with specific handicaps requiring special assistance The UN has an Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries, and Small Island Developing States This shows that the UN regards small developing states that are landlocked or islands as being on par with the least developed countries (LDCs)

LDCs = low income states with a 3 year average income per capita of less than $905 Typically have human resource weakness (low indicators of health, food security, education levels etc). Also economically vulnerable (e.g. instability of agricultural production, instability of exports, handicap of economic smallness, susceptible to natural disasters etc.) Generally stated that small states have intrinsic disadvantages The provision of public services usually yield increasing returns to scale - reduction in the cost per unit resulting from increased production and operational efficiencies

In other words, big states supposedly more efficient because provision of services at a larger scale is achieved at a lower cost small states may suffer from scale diseconomies Returns on private investment may also have increasing returns to scale, which may be difficult to realize in small states, whilst small size may also limit an economys scope for diversification Many small states are islands or landlocked, and often face problems of remoteness Or they may only produce a few items and have to import the rest Being relatively open economies (they have to be, in

order to import needed goods) they are then more exposed to trade shocks /increase in prices etc AFRICA 14 countries are classified as small states THE INHERENT DISADVANTAGES OF SMALL AFRICAN STATES Five supposed disadvantages of small African states: 1. High infrastructural costs 2. High public service and institutional costs 3. High costs of tertiary education and limited opportunities for high-skilled employment 4. High exposure to natural hazards

5. High volatility of GDP 1. High Infrastructural Costs One study (Winters and Martins 2004) examined the extent to which business costs for exports were higher than in mediansize countries (population 10 million) for four categories of small states: i. micro (under 12,000 inhabitants) ii. very small (under 200,000) Seychelles, Sao Tome & Principe iii. threshold (under 1.6 million) Swaziland, Cape Verde, Comoros, Djibouti, Eq. Guinea, Gambia, Gabon, GuineaBissau, Mauritius iv. small (under 4 million) Botswana, Lesotho, Namibia Cost disadvantagesreflecting higher charges for transport, utilities, and skillswere modest for countries with up to 4

million population But the disadvantages worsened rapidly as size diminished - very high for the very small and micro categories Business costs were between 3040% higher than in mediansized states. Such countries would find it difficult to compete in manufacturing - even with very low wages Their viability lies in finding economic niches tourism is the main strategy 2. High Public Service and Institutional Costs The share of government consumption in GDP is higher in small states because the fixed costs of many government servicessuch as defence,

bank supervision and higher educationare high Government administrative capacity tends to be limited in states with very small populations. In response, small states have devised innovative ways to overcome scale diseconomies. For example, the West African states have created a telecom authority and an economic community (ECOWAS) to promote regional integration Francophone states have created monetary unions in West Africa and Central Africa respectively, and use a common currency (the CFA franc). A number of small states are

enthusiastic members: Benin, Burkina Faso, Cte d'Ivoire, Guinea Bissau, Mali, Niger, Senegal and Togo form the West African Economic and Monetary Union (WAEMU); Cameroon, Central African Republic, Congo, Gabon, Equatorial Guinea and Chad form the Central Africa Economic and Monetary Community (CEMAC) This reduces costs whilst hopefully improving monetary policy, professionalism etc 3. High Costs of Tertiary Education, Limited Job Opportunities Universities and technical training institutions need a minimum size to attract suitable staff and students Those that create skills often suffer a brain drain

The problem is worst in countries where poor policies have reduced economic growth and job opportunities World Bank report revealed that nationals who attended university and have left their country the most are from - Cape Verde (68 %) - Gambia (63 %) - Mauritius (56 %) - Seychelles (56 %) of the more than 1 million individuals of Cape Verdean ancestry, fewer than half actually live on the islands 61% of physicians born in Sao Tome and Principe have emigrated the country BUT Remittances are a critical lifeline for families and entire communities across Africa

some 30 million African workers outside their countries send home approximately $40 billion a year in remittances. Top remittances per capita (US$) to Africa: 1. 2. 3. 4. 5. 6. Cape Verde Seychelles Swaziland Botswana

Senegal Nigeria 262 129 86 75 75 62 Remittances are large, come in foreign currency and go directly to households means that these transfers have a

significant impact on poverty reduction, funding for housing and education, basic essential needs and even business investment 4. High exposure to natural hazards In Africa, disaster damage as a proportion of GDP averaged 58% in small states - against 8% for large states Compounded by: Limited natural resource base, high competition between land use, intensity of land-use, spatial concentration of productive assets

High external transport costs, time delays and high costs in accessing external goods, delays and reduced quality in information flows, geopolitically weakened Small exposed interiors, large coastal zones Weak disaster mitigation capability Limited hazard forecasting ability, complacency, little insurance cover Small economies, dependence on external finance, small internal market, dependence on natural resources, highly specialised production Cape Verde suffered a hurricane that struck the island of Brava in 1982, a severe volcanic eruption on Fogo in 1995, a deadly flooding in Sao Nicolau in 2009, and a dengue fever epidemic in

2009 5. Small States Have Higher GDP Volatility Small states are typically dependent on a few economic activities, and a boom or bust in these sectors can propel GDP up or down much more than in large countries. Such countries are generally relatively open economies, highly sensitive to changes in the global economy Volatility (measured as the standard deviation of the growth rate of per capita GDP) globally: 3.9 in small states 1.4 in low-income countries

1.5 in middle-income countries (World Bank) However, Africa, the region that is poorest and most dependent on commodity exports, is an exception While volatility of GDP growth is high in Africa, it was lower between 1981 and 2002 in small states (5.85) than in large states (6.63) WHY? In Africa, some larger states are relatively undiversified commodity producers.

Many small states are more diversified, since even a modest amount of tourism or industry creates substantial diversification out of commodity production Share of agriculture in GDP in small African states = 17 % vs. 32 % in large African states Share of services in GDP was 50% in small African states vs. 43% in large African states NOTE: volatility is declining This reflects, among other things, the diversification of economies into services, reducing traditional dependence on commodity exports Characteristics of African Small States 1. African small states are very a heterogeneous group SIZE: Contrary to groups of small states in the Caribbean, the Pacific or Europe,

African small states show a wide range of population and land area from 460 km in Seychelles to 823,290 km in Namibia LOCATION: Some African small states are islands (e.g. Cape Verde, Comoros and So Tom e Prncipe), while others are landlocked (Botswana, Lesotho, Swaziland) ECONOMY: Some of them have valuable natural resources (Botswana, Gabon and Equatorial Guinea), while most others do not GOVERNANCE: Institutions are generally strong in many African small states such as Botswana and Mauritius, but a few have experienced recurring civil war (Comoros and Guinea-Bissau) WEALTH: Variation in GDP per capita is substantial, ranging from $1,881 in So Tom & Prncipe to $21,600 in Seychelles 2. All sub-Saharan IBRD (i.e. quasi-commercial) borrowers, with the exception of SA, are small states

reflects that small states are on average substantially richer than the average SSA country Median GDP per capita of African small states $2,217- more than 4x median of larger SSA states African small states are, however, much poorer than the average small state globally: the GDP per capita of all African small states, with the exception of Seychelles, falls below the small states average. Name Population Area (km)

Density (per km) Per capita GDP ($) Comoros 2,170 752,438 346.7 1,202 Djibouti 23,000

516,055 22.4 2,555 Mauritius 2,040 1,284,264 629.5 12,838 Seychelles

455 87,476 192.2 21,600 28,051 633,441 22.6 18,143 267,667

1,514,993 5.6 14,419 1,001 212,679 600,370 1,990,876 Lesotho

30,355 2,130,819 70.2 1,468 Namibia 825,418 2,108,665 2.6 6,900

Swaziland 17,363 1,123,913 64.7 4,500 Cape Verde 4,033 429,474

107.3 3,700 Gambia 11,300 1,782,893 157.7 1,900 Guinea-Bissau 36,120

1,533,964 42.5 1,100 Equatorial Guinea Gabon So Tom & Prncipe Botswana 212.4 1,881 3.3 15,489

African small states are more open than their African subSaharan counterparts In general, small states tend to be more open, the argument being that trade enables small states to alleviate constraints associated with their small domestic market Most small African countries have increasingly integrated into the world economy during the last twenty-five years BUT whilst small African states are more open than other SSA countries, a lot remains in terms of making them easy to do business in Global average ease of doing business But this varies massively.

Infrastructure is better, on average, in African small states than in other SSA countries As a consequence of higher GDP and larger capital expenditure, infrastructure (measured as the paved roads as a share of total roads and the number of telephone lines as a share of population) is substantially better in African small states compared to SSA overall. Nonetheless, several African small states continue to suffer from a weak infrastructure, in particular Djibouti, Gabon and Guinea-Bissau Infrastructure and geography have been identified as the main determinants of trade costs A small population size implies lower ethnic fractionalization African borders were drawn to a large extent ignoring ethnic

boundaries, which arguably resulted in higher ethnic fractionalization in SSA But states that happen to have smaller populations are likely to include a smaller number of ethnic groups - suggesting a strong correlation between small size and ethnic fractionalization Since high ethnic fractionalization has been linked to a higher probability of conflict and weaker institutions, smallness actually turns out to be an advantage in the African context Countries with high degree of ethnical fractionalization tend to have weaker governance Ethnic fractionalization also tends to weaken institutions ethnic fractionalization may lead to uncoordinated rentseeking activities where each ethnic group does not take into consideration the effect of ones groups actions on

the rents of the other group Moreover, ethnic fractionalization may weaken the centralization of control and useful checks and balances, facilitating rent-seeking activities, weakening accountability and opening the door for corruption. In line with this theory, governance is generally stronger in African small states, partly as a result of lower fractionalization The institutional quality of the average small African states is higher than the sub-Saharan African average, across all the standard indicators The indicators show that small African states are less corrupt, have more effective and accountable government, a better regulatory environment and better rule of law overall

This difference between small and larger African states is particularly large in the case of rule of law: ten out of 14 small states fare better than the average sub-Saharan African state Small African states are also show a remarkable degree of political stability Only Djibouti is less stable then the average for sub-Saharan Africa. Not only are governments in African small states less likely to be overthrown or challenged in armed conflicts, but political rights in these countries are actually stronger on average than in sub-Saharan Africa Political stability is reflected in a lower incidence of armed conflict and state failure among the African small states Armed conflict is substantially rarer in African small states compared to the average for sub-Saharan Africa The probability of state failure (which includes coups, but also civil wars,

genocides etc) is much less in a small state, compared to the average subSaharan state State Performance The literature suggests that there are three key determinants of small state performance: geographical location, natural resources, and policies and institutions Geographical Location Determines distance to export and tourist markets, transport costs, and ease of integration with neighbours Small states are mainly islands or landlocked, and both categories undoubtedly suffer from disadvantages in this respect But not always: the small landlocked states (Botswana,

Lesotho, and Swaziland) are well linked to the big market and good infrastructure of South Africa Natural Resources Natural resources - the most important are minerals and agricultural resources for tropical crops Many small states are commodity exporters: Gabon and Equatorial Guinea have oil and gas Mauritius has excellent conditions for growing sugar Guinea-Bissau exports cashews All islands have fish in the surrounding seas

Donor policies in the past encouraged commodity exports - substantial aid and trade preferences focused on developing and protecting commodity exports (e.g. by EU) Yet recent research demonstrates that the most important natural resource of small states is often tourism potentialweather, scenery, and beaches Tourism is now one of the most important service industries, and has become one of the most important invisible export sectors in many small states in Africa (and the world) Tourism fetches foreign exchange, generates income and employment not only directly, but also through multiplier effects in the economy through creating demand for other sectors which are indirectly related to this

sector Action to simulate tourism development is sometimes a part of the diversification strategy of small states, e.g. Cape Verde and Sao Tome & Principe Tourism may make a positive contribution to the economic diversification and development of small states, particularly in small states with few possibilities to diversify and develop But international tourism is a highly competitive industry and tourists have a lot of options the returns from developing the tourism industry in a small African state will depend on its ability to meet foreign competition EXAMPLES: Gambia vs. Cape Verde

Policies and Institutions The large number of small-state successes suggests that good policies and institutions can overcome disadvantages arising from geographical location or factor endowments. Very small states have exceptionally high disadvantages in transport, infrastructure, and governance costs Small states such as Mauritius and Seychelles have no great mineral or agricultural endowments, but their policies and institutions have attracted enough foreign investment, financial services, and tourism to make them (relatively) rich However, other small states that have suffered from poor policies and governance have been

among the weakest performers In Africa, small states with good policies and institutions (notably Botswana and Mauritius) have prospered, while those with weak governance and policies (Comoros, GuineaBissau) have remained poor Governance is central Conclusion Most of Africas states do not serve the interests of their citizens, neighbours or international community Despite the advantage for growth that large states with resource bases and domestic markets should theoretically enjoy, Africas three most populous countries Nigeria, Ethiopia and the DRC are per capita income very poor

Yet per capita income in countries with lower than 2 million inhabitants has shown steady growth over the last 15 years Big African states have generally not succeeded in establishing political and administrative systems capable of coping with the challenge posed by their size In contrast, a number of small African states have relatively reconciled their internal political, ethnic, and religious differences and to establish political systems capable of accommodating the demands and interests of their various constituencies Africa in some respects represents a paradox in the literature on small states

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