Micro Economies: Big Challenges and Small Opportunities

Niue (a small island nation in the Pacific Ocean) has a population even less than the number of students studying in the Shri Ram College of Commerce, University of Delhi. According to the World Bank, all economies with a population of less than 0.5 million are considered to be “micro.” At present, there are 29 such countries which constitute around 15% of the total number of countries in the world. They are usually found together in groups and are prevalent in three regions: the Caribbean, the Pacific, and Africa. Despite their spread across the world, they have negligible say in the functioning of the world economy. And this article is an attempt to understand the economic systems of the ‘subaltern’ countries of the world.

These economies (also called micro-economies) are either landlocked countries or island nations, mostly present in the middle of nowhere. In either case, they are isolated from the ‘markets’. This increases the cost of transportation as the goods either have to travel long distances over oceans or through several countries. This increases the overall cost of production which makes the goods produced in these countries unattractive in international markets, and imports costly. As a result, exports in the commodity sector is low in these economies.

Micro-economies have limited labour supply in the market. A labourer is expected to perform several duties which leads to the overburdening of work. This reduces labour productivity and labourers are unable to specialise in one kind of work. Thus, the economy cannot receive the benefits of specialisation and division of labour. Contrary to enjoying economies of scale, micro-economies face ‘diseconomies of size’ due to low demand and high production costs.

Very evidently, micro-economies are unattractive for new market entrants. Hence, these markets are generally a monopoly or an oligopoly, which provide a limited range of products and services at high costs. High costs, in turn, lead to poverty and large income inequalities. This can be substantiated from the fact that countries like Lesotho, Guinea-Bissau, Gambia, Gabon, Suriname have more than 40% of their total population living below the internationally accepted poverty line of $1.90 per day. Limited production also leads to extremely low GNP per capita: Comoros, Gambia, Guinea-Bissau and Sao Tome and Principe have a GNP per capita of less than $500.

Production is not the only area where economies of scale benefit a country. It is seen that economies of scale greatly benefits an economy when it comes to providing social security and creating social and economic infrastructure, as well. A country with a huge population and a higher number of taxpayers has huge amounts of money to spend on infrastructure. The cost of social security, as well as social and economic infrastructure, is spread over a larger population. This reduces the cost incurred per person for providing these facilities. In the case of small economies, the population, as well as the number of taxpayers, is low. Hence, the governments of these countries have almost no money to spend on building and developing economic infrastructures such as highways and roadways, and social infrastructures like schools and hospitals. All this ensures foreign investment never comes into these countries, creating a chakravyuh (vicious cycle) of poverty.

With limited production capacities and little diversification, micro-economies are generally capable of specialising in the production of one good or service, in which they have an advantage over other economies. Due to the low population, the demand for their commodities is low and limited. This means that they are ready to export the commodity in which they have a competitive advantage over the rest of the world.

Many of these economies are also highly dependent on tourism. This is evident from the fact that tourism constitutes more than 50% in Fiji and more than 40% in Vanuatu and the Caribbean States as part of their total exports. In fact, imports and exports combined constitute more than 100% of the GDP of these countries. But this high degree of openness also makes it highly vulnerable to international events and shocks.

Their vulnerability can be seen as how these economies developed at staggering paces of more than 8% per annum before 2008. But, as soon as the 2008 financial crisis hit, the income from tourism sector plummeted rapidly. This had such an impact on the economies that these countries grew at -1% to 0% for the next two years. Vulnerability also makes income more volatile. It is seen that the standard deviation of the real per capita GDP growth is more than 9. This means that there can be an average of 9% change per annum in their per capita GDP, as compared to the world average of 3.2%.

These economies also function as parasites. Just like parasites feed upon the parent trees, these economies feed and depend upon a large economy which is beside them. The Caribbean States depend upon Mexico and the US, the African island nations in the Indian Ocean depend upon India, and those in the Pacific depend upon Australia and New Zealand. Most of their trade (over 90%) is carried out with these large economies and in most cases, they take up their currency as well. Therefore, how these large economies fare in the global market decides the fate of these micro-economies.

However, these ‘parent economies’ seldom take interest in investing in their children. Hence, micro-economies turn towards the International Monetary Fund, the International Development Association and various other regional and international development banks for grants and unilateral advances for developmental funding. These grants go a long way in helping micro-economies provide their citizens with basic necessities. Research suggests that these grants have helped reduce poverty levels by around 2-5% in different micro-economies.

One of the recent challenges that these countries face is global warming and increased danger of disasters. As most of these countries are islands or chains of islands, they are just metres above sea level. The rising sea level and the increased frequency of natural disasters has increased the risk of complete disappearance of these island nations. Adequate disaster management is necessary, which requires funds. Owing to lack of funds, these countries have to look towards the international community and the United Nations for their sustenance and to equip them with various techniques of disaster risk management. Debt bells ringing.

In spite of having so many problems, micro-economies have some advantages as well. As most of these small economies are a group of islands, they have access to huge amounts of the ocean as their territory. Thus, these economies have Exclusive Economic Zones (EEZ’s) in the oceans. These economies usually grant foreign multinational corporations permission for fishing and extract resources from the EEZs against a charge. This has become one of the main sources of income, apart from allowing military bases of other countries to be set up on their territory (China and India are watching closely).

Some of these economies also serve as tax havens for the rich billionaires and multinational corporations. They have very lax to no tax laws. The most prominent example would be of Cayman Islands (population - 23,000), which by the mid-1990’s, became the world’s fifth largest banking centre measured by deposits. There are more than 560 banks registered in this micro-nation, including major accounting, audit and law firms. The Caymans are the ideal tax haven as they provide “tax efficient asset protection”. There are no taxes, no exchange controls and no threat to the ‘confidentiality’ of deposits.

As Alberto Alesina said in his book Size of Nations:

“Whether country size matters for economic prosperity depends on a country’s degree of economic integration with the rest of the world.”

Similarly, these economies too, have to integrate with the world economy if they wish to develop and prosper. They cannot depend on a single economy or a single commodity for their development. Maldives and Fiji are two micro-economies which have seen tremendous growth in these recent years after opening up their economies to the world. They are not totally dependent on their regional powers or a single commodity for trade. However, they are still part of the exception than the norm. Other micro-economies too can look up to them, and try, develop, progress and finally contribute to the global economy. Recognising the existence of microeconomics, and understanding their nuanced problems, will go a long way in bringing a change.


Abhishek Sancheti

Young, Dumb and Curious. Currently pursuing B.A. (Hons) Economics from SRCC, Delhi University, he is fascinated by the subject matter of Economics. He wishes to be married to his first love, Economics by being an economist for the government.

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