The Big Future for Small States: A Statistical Analysis
By: Robert Koenig
Tags: Economics, Money, Blockchain, Technology, Bitcoin

This article was updated 29th January 2019

The World Bank defines small states as countries or nations characterized by a small population (less than 1.5 million people), with limited human capital, and a confined or isolated land area. Small states are challenged to prosper at optimal efficiency and effectiveness. With limited economic developmental options, and the tsunami-like effects a volatile market can create, small states need not assume added risk in applying their monetary systems and policies.

Let us examine the numbers and analyze the situation of these countries.

Gross Domestic Product (GDP)

Growth is a political as much as an economic choice. For small countries, growth is coming from international trade and tourism. Innovation of these sectors must be an inherent part of economic activity, and gross domestic product (GDP) growth will be improved when constantly evolving innovation is occurring, guided by the design of markets and with the involvement of all participants in them.

The economy of small countries can be improved by understanding of how instability and crises can be handled internally within their markets, rather than looking at the influence from outside. An excellent example was the creation of the internet that empowered most countries as the internet is the perfect vehicle for tourism and trade.

Currently most of new money circulating in an economy is created by commercial banks, every time they make a new loan. These loans can help an economy, but in many cases, they can also cause problems (little flexibility and higher interest rates), and one priority therefore in small countries (and only there) must be a strong participation of the government. Compared with banks, only the government will have growth and the welfare of its citizens in mind. Banks are profit oriented. The way in which money is created will affect the distribution of wealth within their society. Consequently, the method of money creation should be understood to be a political issue and not be exclusively in the hands of banks. Again, this is only applicable to small countries.

On average, the GDP of small countries increased from US$6.3 billion (2017) to US$7 billion whereby a 16% of those countries has a GDP of under $1 billion (this was 2017 over 30%). Just to compare: the GDP of Hollywood, the home of the US film industry, contributed $49 billion to the GDP of the United States in 2018.

Small countries have a small population and with it low income and expenditure. The difficulties start when negative things happen — which is also highlighted by the World Bank as one of the huge problems for small countries. For example, before the damages of Hurricane Maria in 2017, the GDP of Dominica was $600 million, their economy was growing by around 3%, and inflation was 1.5%.

Their population was 71,000. Growth of their economy since 2006 was attributed to gains in tourism, construction, offshore and other services, and some subsectors of the banana industry. The International Monetary Fund (IMF) recently praised the government of Dominica for its successful macroeconomic reforms.

In 2017, the country was hit by a devastating hurricane. The Post-Disaster Needs Assessment concluded that Hurricane Maria resulted in total damages of US$931 million and losses of US$382 million, which amounts to 226 percent of the 2016 GDP. The identified recovery needs for reconstruction and resilience interventions amount to US$1.37 billion. Dominica will not be able to generate that amount of money, and waiting for external support will take a long time. Although the government has been doing outstanding work over many years, such a problem can wipe those efforts out within minutes. A new solution needs to be created.

Debt

Adding together the outstanding loans, credits, and grants of multiple international institutions together and comparing them with the country’s GDP highlights that a country with a low GDP can have a high value of outstanding financial support. This is an important statistic as it emphasizes our theory that small countries must be empowered to become less dependent on other countries/institutions.

Growth in small countries is slow as it is usually linked to buildup of infrastructure, but decline can be very fast. This is a reason why these countries can protect themselves through implementing their own currency as a cryptocurrency.

Credit Rating

Only some of the small countries have been assigned a credit rating score. The big three agencies that assign this score are Fitch, Moody’s, and Standard & Poor’s. Their function is to assess how likely a borrower can repay its debts and help those trading debt contracts in the secondary market. Losing the rating or being downgraded can have a fatal effect on a country’s ability to borrow money on the markets.

To compare, a country like Brazil has a credit rating of BB- and Mexico BBB+.

For the rating agencies, a bond is considered investment grade if its credit rating is BBB- or higher. Bonds rated BB+ and below are considered to be speculative grade, sometimes also referred to as “junk” bonds. Of those small countries that have been rated, most of them would fall in the category “investment grade.”

Comparing the ratings with open loans/credits and grants to the World Bank and IMF, all those countries with a good credit rating (above BBB-) have no outstanding loans, grants, or credits with these institutions.

Corruption

Our analysis is based on the data published by Transparency International that has been publishing the Corruption Perceptions Index (CPI) since 1995, annually ranking countries “by their perceived levels of corruption, as determined by expert assessments and opinion surveys.” The CPI generally defines corruption as “the misuse of public power for private benefit.” The CPI currently ranks 176 countries “on a scale from 100 (very clean) to 0 (highly corrupt).”

Of the small countries, 31 have been classified in this corruption index.

To compare, Brazil has a CPI of 35 and Mexico 28. The average of the small countries is 47 (it improved from 2018). That is better than most other countries, which indicates that corruption is not really a huge issue in small countries. This can be explained by this fact: in small countries, people know one another, and large-scale corruption would be made immediately visible.