RESTRICTEDWORLD TRADE
ORGANIZATIONWT/COMTD/W/50
12 November 1998
(98-4484)
Committee on Trade and Development Original:  English
JOINT PAPER BY BARBADOS, JAMAICA, LESOTHO, MAURITIUS,
SRI LANKA, AND TRINIDAD AND TOBAGO
Concerns and Problems of Small Economies
The following communication has been received from the Permanent Missions of Barbados,
Jamaica, Lesotho, Mauritius, Sri Lanka, and Trinidad and Tobago, with the request that it be
distributed to WTO Members.
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1. At the 2nd WTO Ministerial Conference, the Ministers were deeply concerned over the
marginalization of "certain small economies" and they recognized the urgent need to address this
issue.  The first sentence of paragraph 6 of the Geneva Ministerial Declaration refers.*  T h i s
joint-paper gives a perspective of the issues involved.
2. A number of studies have been carried out on small economies and in particular on small
island states, namely by the Commonwealth Secretariat, UNCTAD, the University of Malta, the
Free-trade Area of the Americas (FTAA) Working Group on Small Economies.  (A bibliography has
been placed in the room).  There is a general consensus in these studies that small economies are
particularly vulnerable.  There is equally convergence on a number of parameters that give rise to
concerns of marginalization of these small economies.
3. These studies underscore that per capita income is not an adequate measure of the level of
development in the case of small economies and as such can be even misleading as this criterion
overstates the structural dynamism of such economies but does not reflect the handicaps facing these
small countries.  Instead it has been forcefully adva nced that the vulnerability index should be used in
the case of small economies including island developing states, to assess their developmental levels
and needs.
Physical Features
4. The following parameters are at the root of the concerns in one way or another.  The degree
and extent to which each country remain vulnerable may differ at different times and under different
circumstances depending on the incidence of most of these parameters at the material time ofvulnerability.
                                                     
*Ministerial Declaration (WT/MIN(98)/DEC/1):  "We remain deeply concerned over the marginalization of
Least-Developed countries and certain small economies and recognise the urgent need to address this issue which has been
compounded by the chronic foreign debt problem facing many of them…"WT/COMTD/W/50
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(i) Demography (severe constraints in their capacity to produce quality manpower
resources in a timely manner commensurate with the developmental needs of these
small economies);
(ii) Land Mass (availability of economically exploitable land);(iii) Natural Resources endowment;
(iv) Vulnerability to natural disasters, climatic hazards and fragilization of ecosystems;
(v) Geographical location.
Market Considerations
5. (i) Small internal market size (higher risks of lopsided competition as the concept of
'national treatment' places TNCs on equal footing with small and indigenous
enterprises; existence of monopolies, duopolies and oligopolies and concentration of
economic and financial power in a small group);
(ii) Difficulties in - realizing economies of scale in production; attracting investment;
ensuring an effective and developed infrastructure; and in the efficient provision ofGovernment services;
(iii) Heavy reliance on few and specific overseas markets;
(iv) Strong dependence on international sea and air transport (dependence on liner
conferences which act like cartels; and freight costs are disproportionately high
because of smaller volumes of goods);
(v) Reliance on few commodities;
(vi) Constraints in pursuing economic diversification programmes;
(vii) Instability of export earnings (price fluctuation, exchange rate, output frequently
affected by climatic factors);
(viii) Small size of firms (competition between small enterprises and large transnational
companies which benefit from national treatment).
Other Features
6. (i) Dependence on trade taxes;
(ii) Dependence on foreign investment (limited capacity in mobilizing domestic savings;
and difficulties in attracting Foreign Direct Investments);
(iii) High reliance on foreign exchange earnings to pay for importation;(iv) Public sector expenditure as a percentage of Gross Domestic Expenditure is high;WT/COMTD/W/50
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(v) Price takers;
(vi) Higher per capita costs in establishing basic infrastructure;
(vii) Shortage of critical mass and difficulties in applying new technologies to modernize
economic structure.
Recognizing The Needs of Small Economies
7. The Marrakesh Agreement recognizes that there is  need for positive efforts designed to ensure
that developing countries, and especially the least developed among them "secure a share in the
growth in international trade commensurate with the needs of their economic development".  The
Uruguay Round Agreements have made a number of special provisions in favour of developing
member countries and have gone to the extent of addressing the specific needs of different groups of
Members categorized as LDCs, Net-Food Importing Developing Countries, "below
$1,000 per capita", Cotton/Wool Producing Exporting Countries and Developing Country Members
affected by the growth of illicit narcotic crops.  The WTO, as a dynamic organization has rightly
recognized the difference which such economies face in light of their evolution in the Multilateral
Trading System.
8. Likewise, in the case of small economies, their propensity to derive benefits under established
WTO initiatives has been very small because of their apparent incapacity to apply for same on the one
hand and the absence of any mechanism which can effectively address their concerns on the other.
Experience of the WTO regime has shown that the adjustments aiming at integrating small economies
which should have taken place have by and large not been achieved, thus further fragilizing these
countries.  As illustrated below the unique features that make up small economies are also largely thecause of their specific vulnerability.
9. First, small economies tend to be more adversely affected by environmental factors such
climatic hazards and natural disasters.  A second element which is often ignored in these economies is
the costliness of the preservation and timely rehabilitation of the ecosystem, infrastructure and the
economy at large, especially following the damage causes by recurrent natural disasters.
10. Furthermore, only a selected number of products, often and largely monocultures, can be
grown in these countries on account of the topological, soil and climatic conditions.  Because of the
fragility of the ecosystem in these countries, the burden of attending to the needs for sustainable
development becomes even heavier in terms of cost because of increasing requirements.  Often the
technological requirements for these purposes are beyond the reach of these countries.
11. Most of the small economies are heavily dependent on imports of foodstuffs and other basic
necessities not only because of their size but also because of climatic conditions.  The resulting highimport bill creates heavy strains on balance-of-payments.  It is important that the issue of food
security for small economies be addressed; the more so that FAO reports have established the
majority of these countries will never be able to attain self-sufficiency in food production.  Many of
them are not only beset by inherent weaknesses but have also to live in the constant fear of food
shortage.
12. On the economic front small economies suffer a priori  from the smallness of their domestic
markets.  Hence their high dependence on imports and exports.  As already indicated above, most
small economies have to import the bulk of their foodstuff.  In the domestic market itself, the exiguityWT/COMTD/W/50
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of the market is such that market mechanisms are not always sufficient to induce operations as
normally practiced in a liberalized and globalized system.
13. Further the remoteness of small economies from main market centres and the high freight
costs act as major constraints to the development of their trade and as a deterrent to their
competiveness.  A high percentage of the import bill is absorbed in freight costs and attendantinsurance premium.  Small economies pay disproportionately high transportation costs because of the
relatively small volume of cargo, small cargo units and the need for bulk breaking.  On average, they
pay some 10 per cent of the value of merchandise exports as freight costs compared to a world
average of 4.5 per cent and 8.3 per cent for developing countries.
14. The trade patterns of small economies have largely been influenced by their historical and
political links before and after independence.  It must be recalled that in the post-independence period,
the international community found that the free flow of trade between these trading partners could not
be ensured in the absence of certain support measures and trade preferences.  It was realized that in
view of the huge disparities that existed and that continue to exist, trade preferences had become a
sin qua non  in the trade mechanisms of all partners including the preferences giving countries.  The
benefits have all along been mutual and interactive in their economies.
15. There preferential trading arrangements have partly compensated for the lack of comparative
advantages of these economies and hence played an important role in ensuring the continued access of
products from the small economies to metropolitan markets.  Further these preferences have been
instrumental in attracting FDI reliant on such preferences to sustain the viability of investment
projects.  The recent dearth of FDI towards such economies has been partly motivated by the
uncertainty surrounding continued preferential access.
16. In view of the experience of small economies in the post-GATT era to date and the
recognition  of worsening disparities, it will be difficult to contemplate for many years to come that
these small economies could successfully integrate in to the Multilateral Trading System in the event
that existing preferences are abruptly removed.  As indicated above, the instability, unpredictability
and uncertainty of investment regimes devoid of preferences have already contributed to thedisruption of FDI flows.
17. As borne out by successive editions of the Wo rld Investment Report, private capital markets
do not tend to favour small economies because of their size limitations and vulnerability.  With their
relatively weak economic base, these economies are regarded as being less attractive for FDI from
Transitional Corporations.  This situation is very often compounded by the absence of a well
articulated Stock Exchange Market.
18. Furthermore, these small economies continue to have limited access to capital from
multilateral financial institutions whose funds are now increasingly made available under highly
stringent conditions and guarantees which reduce consequently their effectiveness in meeting
development objectives of the beneficiary countries.  Funds available at current commercial rates
prove to be prohibitive, hence inaccessible.  This situation is rendered more difficult by declining
ODA assistance which used to be an important source of development capital.
19. On account of the above constraint, including an unrealistic per capita income criterion for
assessing their level of development and the consequential impact on access to financial markets,
small economies are handicapped by their near incapacity in tapping both the private and the
multilateral sources, whose concessional terms and offers become, thus, normal.  And yet, only
increasing levels of FDI on a sustained basis can prop up small economies to higher stages ofdevelopment.  Given the linkage between trade, fi nance and development, the implication for trade
should become a high and urgent priority.WT/COMTD/W/50
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20. On account of our inherent disadvantages, the technological disadvantage in small economies
is made more acute.  The input/output matrix of these economies is highly biased by the rising costs
of inputs.  In consequence, the value added is very low.  Furthermore, the manufacturing process, for
obvious reasons and especially on account of the relative technological disadvantages are not only
complex but also more costly.
21. Even in related to taking advantage of "the new world" with the reliance on wealth creation
through information technology and telecommunications revolution, many small economies are not
only on the periphery of this revolution but also are often practically off the main cable
communication links and hence rely on relatively higher cost satellite links for basic telephone.
22. The Understanding on Rules and Procedures governing the Settlement of Disputes (DSU) is
currently under review in the light of the experiences gained over the past few years.  Many problems
have been identified with the operations of the DSU.  One of the issues raised is the capacity or lackthereof for smaller economies to make use of the m echanism in view of high costs involved, lack of
adequate administrative structure, and relative inab ility to implement panel findings or to enforce
sanctions.  The DSU has also brought into the WTO an over-legalistic approach to situations that may
often warrant considerations that go beyond pure trade.
23. The WTO, a dynamic organization, has always lived up to the exigencies and realities of the
Multilateral Trading System at every stage of its ev olution.  It is clear that the small economies have
difficulties in integrating the multilateral trading sy stem due to their inherent vulnerability and given
the rapid trend of liberalization and globalization.  It therefore seems opportune that these very
concerns be addressed by the WTO provisions in the context of the implementation of the
Geneva Ministerial Declaration.
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