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Lovely but expensive

October 29, 2010

Like supermodels, small islands can be lovely but expensive. They’re usually a long way away, so shipping costs are high. Their smallness and fragmentation mean they achieve virtually no  economies of scale, raising production costs. If the ocean surrounding French Polynesia were converted into land area, it would be the world’s 10th-largest country, so you can imagine how costly it is to transport things internally. Kiribati is the size of the Caribbean. Tuvalu is smaller — it only takes up about a million square kilometres of ocean (but it looks nice). Vulnerability to natural disasters is another challenge. Hurricanes do wreak havoc with one’s bottom line.

High prices can make it almost impossible to produce anything competitively. When it costs over $2000 to export a container from Vanuatu or the Marshall Islands compared with about $400 in New Zealand, it’s no surprise that most Pacific island states are strangers to the trade surplus. Agricultural exports in the region have a dismal modern record, and Fiji and Papua New Guinea are among the few economies to export much — mostly sugar and fish. Costs can be so high that many private sector activities are totally unviable: there aren’t a lot of electronics plants in the Pacific.

Often, international donor agencies with a Washington Consensus mindset make the mistake of blaming these high cost structures on the dead hand of government. But it’s probably partly the other way round. Because the private sector is hampered by prohibitive costs from the start, it is so small that the state has to take up the slack. Admittedly government spending in the likes of Tuvalu would give Gideon Osborne a heart attack; it’s currently nine-tenths of GDP and used to be more than 120%.

But commercial businesses simply wouldn’t provide some of  the services currently offered by government. Keeping patients on dialysis machines abroad accounts for a large part of Tuvalu’s health budget. There’s no way the government will be privatising its healthcare, and the hospital hasn’t got the know-how or facilities for a machine of its own. The collateralised debt obligation somewhat passed Tuvalu by, if you know what I mean, so the national bank is the sole provider of finance. With a population of 10,000, private education isn’t viable. Even private shops in many remote islands often simply run out of goods when the boat fails to arrive, meaning that the government has to ship in food itself.

So shrinking the state, which would be the stock Washington Consensus response, would simply lead to a shortfall in many areas. Like it or not the state has a bigger long-term role than in many larger, more developed economies. Just as Naomi Campbell will remain fond of diamonds, small islands will stay in love with the state for some time yet.

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