financing, as a share of total financing, decreased in response to the relatively higher income level of small states. The study highlights that, throughout the period, external debt accumulated much faster in small states than in low income countries and it classified one third of small states as severely indebted on the basis of the net present value of debt to export earnings and GNI. It also found the sharpest increase in external indebtedness between 1990 and 2003 was in small states in the Caribbean.

Favaro et al<sup>19</sup> determined that, since 2000, public debt levels in small states, particularly external public debt, have declined sharply: they fell to an average of 60 percent of GDP prior to the onset of the global crisis in 2008. Several factors to account for this outcome are identified. These include debt relief in the context of the HIPC and MDRI initiatives from which five small states have benefitted, Comoros, The Gambia, Guinea-Bissau, Guyana, and Sao Tome and Principe; debt restructuring and debt forgiveness in a number of other small states including Antigua and Barbuda, Grenada, Kiribati, the Marshall Islands, Seychelles and the Solomon Islands; higher commodity prices in Botswana (diamonds), Equatorial Guinea and Gabon (oil); strong economic growth in small states like Cape Verde and Mauritius and fiscal consolidation in others such as Belize and Dominica. However, the study accurately foresaw the impact of the global economic crisis that erupted in the third quarter of 2008. Many small states saw their economies contract sharply in the wake of this crisis and were forced to borrow externally to finance current account deficits and economic recovery packages. This study concurred with Dodhia and found small states in the Caribbean to be the most indebted with public debt levels averaging 80 percent of GDP often as a result of expansionary fiscal policies, as was the case for example in Antigua and Barbuda, Grenada, and St. Kitts and Nevis. Conversely, Briguglio, Persaud and Stern<sup>20</sup> argue small states saw a rapid increase in external debt in 2000-2005 due to a number of factors including a decline in resource transfers and in capital investment, persistent public sector deficits, averaging over 6 percent of GDP in small states in the Caribbean, natural disasters, weak macroeconomic management, limited success in deepening the tax base and global economic downturns.

Small states confront some specific institutional and human capacity constraints that add to the challenge of developing sound debt management capacity and are found to be an important factor in why so many small states continue to perform poorly. Ministerial portfolios in small states are typically multifaceted, placing a concomitant burden on personnel and often stretching the institutional capacity of the public sector to its limit. This is reflected in the administrative characteristics of small states with staff limited in number, assigned to multiple tasks and

> 19 Favaro,E,  Dömeland, D, O’Boyle,W.  and Stucka T., _Small States, the Financial Crisis, and the Aftermath._ Chapter of _“Sovereign Debt and the Financial Crisis: Will This Time Be Different?”_ Edited by Braga, C. and Vincelette G., Washington DC: The World Bank 2010

> 20 Briguglio, L.; Persaud, B.; and Stern, R. _Towards an Outward-Oriented Development Strategy for Small States: Issues, Opportunities and Resilience-Building._ Singapore: 2006 Bank-Fund Annual Meetings

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