TWN Info Service on WTO and Trade Issues (Jun21/07)
14 June 2021
Third World Network

United Nations: SIDS face great challenges in the wake of COVID-19
Published in SUNS #9365 dated 14 June 2021

Geneva, 11 Jun (Kanaga Raja) – The challenges being faced by the Small Island Developing States (SIDS) due to the intensifying impacts of climate change and natural disasters have been magnified by the economic impacts of the COVID-19 pandemic, according to the UN Conference on Trade and Development (UNCTAD).

UNCTAD said that 2020 was a particularly challenging year, and that the SIDS are facing an uphill battle in their efforts to recover from the impact of the COVID-19 crisis.

In the wake of the pandemic, the SIDS experienced an estimated fall in GDP of 9% in 2020, compared with a 3.3% decline in other developing countries based on IMF projections data, it added.

Many SIDS have developed a service economy around the ocean resources, tourism and business services. The collapse of tourism combined with high levels of external debt are threatening livelihoods in many SIDS, including their capacity to achieve the 2030 Agenda for Sustainable Development, said UNCTAD.

These conclusions were highlighted by UNCTAD in its Development and Globalization: Facts and Figures 2021 report.

The report has been published ahead of the 15th quadrennial ministerial conference of UNCTAD to be held online from 3 to 7 October 2021.

The UNCTAD-15 conference is being hosted by Barbados, itself a Small Island Developing State.

“This report offers a unique perspective on SIDS by combining a wide variety of statistical information to examine these countries from the aspects of trade, the economy, the environment and society,” said Ms Isabelle Durant, Acting Secretary-General of UNCTAD.

“I hope the report will serve as a useful statistical and analytical tool for the SIDS themselves and for all those interested in understanding these islands,” she added.

According to the UNCTAD report, geographically speaking, the SIDS are usually considered to be very small countries.

Taken individually, this is indeed the case – even the largest SIDS, the Solomon Islands, measures only 27,990 sq km. For comparison, this is roughly equivalent to the land area of Albania or Armenia.

However, as a group, in terms of land area, SIDS together measure 117,901 sq km, which would rank in the 53rd percentile of countries, similar in size to North Korea or Nicaragua.

When land area plus the exclusive economic zone (EEZ) is taken into consideration, the country “SIDS” is the second largest country in the world (21 million sq km), just behind the Russian Federation. From this perspective, the SIDS account for 8.7 per cent of global combined EEZ and land area.

According to the UNCTAD report, most SIDS have small economies, leaving little room for diversification into manufacturing or agro-processing and the creation of economies of scale. Small and vulnerable economies face serious constraints in kick-starting secondary activities, such as manufacturing and agro-processing.

SIDS are also highly dependent on international trade, especially importing manufactured goods, fossil fuels and often food.

Many SIDS depend on the export of a limited number of agricultural commodities to only a few export destinations which renders them vulnerable to global price shocks and changes in demand for their products.

Furthermore, UNCTAD said SIDS are some of the most disaster-prone countries in the world, and are vulnerable to tropical cyclones, hurricanes, earthquakes, tsunamis, etc. Disasters can cause significant losses of human life and damage to the economic infrastructure in SIDS.

As a result of these vulnerabilities, GDP growth in SIDS is more volatile than that of other developing countries.

The largest downturn before 2020 was seen during the 2008-2009 global financial and economic crisis, when the average annual GDP growth rate declined from above 8 per cent in 2006 to -3.5 per cent in 2009, said UNCTAD.

SOME ECONOMIC TRENDS IN SIDS

According to the UNCTAD report, SIDS are highly integrated with the global economy and often depend on a limited set of commodities and economic sectors.

Therefore, they are vulnerable to changes in global business cycles, shifts in demand for their products and abrupt price fluctuations, it said.

As in many small economies, their annual GDP growth can be rather volatile. The largest collapse was seen during the 2008-2009 global financial and economic crisis, said UNCTAD.

The global crisis was felt most severely in the Caribbean SIDS, which experienced a 5 per cent drop in GDP from 2008 to 2009.

GDP per capita has not grown notably in SIDS since 2005. The 2009 global economic crisis reversed the trend for growth in the Caribbean islands, and GDP per capita has not reached pre-crisis levels since then, said UNCTAD.

Only in the Atlantic and Indian Ocean SIDS has GDP per capita grown steadily over time, being 52 per cent higher in 2019 than in 2005.

UNCTAD also said that GDP per capita varies greatly across SIDS. In nominal terms, GDP per capita is much higher in the Caribbean SIDS than in the other two regions.

In 2019, it was at US$11,561 (in current prices), three times more than in the Pacific SIDS (US$3,433) and 1.6 times more than in the Atlantic and Indian Ocean SIDS (US$7,143).

There is also a large gap between the highest and the lowest GDP among SIDS. GDP in Trinidad and Tobago in 2019 (US$23.8 billion, current prices) was over 500 times higher than that of Tuvalu (US$0.045 billion).

In 2019, three in four SIDS had a GDP below the SIDS’ average of US$3.7 billion. In 12 SIDS that are mostly located in the Pacific, GDP was below US$1 billion.

Half of the top-ten SIDS, in terms of GDP, are Caribbean. In 2019, the Caribbean accounted for 63 per cent of SIDS’ GDP, the Atlantic and Indian Ocean for 24 per cent and the Pacific for 13 per cent.

According to UNCTAD, opportunities afforded by agriculture in the SIDS are constrained by the climate and the availability of arable land in the smallest islands, but agriculture, forestry and fishing are still important sources of employment and livelihoods for many SIDS.

The share of agriculture, hunting, forestry and fishing as a percentage of GDP differs greatly among SIDS. In the Comoros, these activities generated 34.5 per cent of GDP in 2019, while in the Bahamas the share was only 0.7 per cent.

Agriculture, hunting, forestry and fishing are significant sources of employment for some SIDS, said UNCTAD.

In 2019, their share of total employment was around 50 per cent for Vanuatu and the Comoros, and over 30 per cent for Timor-Leste, Solomon Islands and Fiji.

In the Caribbean SIDS, agriculture, hunting, forestry and fishing contributed less to employment, only about 2-3 per cent for Bahamas, Barbados, and Trinidad and Tobago.

In the Pacific SIDS, the share of this sector in GDP has declined slightly from 17 per cent in 2005 to 16 per cent in 2019.

In the Atlantic and Indian Ocean SIDS, the share dropped from over 9 per cent in 2005 to below 6 per cent in 2019, while it has stayed rather stable in the Caribbean SIDS, at just below three per cent.

UNCTAD said that the manufacturing sector produces less than 9% of GDP, on average, in SIDS, which is lower than in least developed countries (LDCs, at 12.9%) and landlocked developing countries (LLDCs, at 12.6%).

It said in half of SIDS, manufacturing constitutes less than five per cent of GDP. In 2019, Nauru had the largest manufacturing share, at 19 per cent of its economic output.

Manufacturing exceeded 10 per cent of GDP in 2019 in three other SIDS: Trinidad and Tobago (19 per cent), Fiji (13 per cent) and Mauritius (13 per cent).

In 2019, the value of manufacturing output was highest in Trinidad and Tobago (US$4.3 billion), Mauritius (US$1.6 billion) and Jamaica (US$1.2 billion).

The UNCTAD report highlighted the important role played by services in the SIDS. It said that on average, service sector made up 71 per cent of SIDS’ GDP in 2019, compared to 66 per cent in 2005.

The share of services was highest in Palau and Saint Lucia at 86 per cent, with Seychelles, Bahamas, Barbados and Maldives also exceeding 80 per cent.

The share of services in GDP exceeded 50 per cent across SIDS. Since 2005, the service sector has grown by more than 10 percentage points in Trinidad and Tobago and in Samoa.

In contrast to the trend of industrial production, the share of services in GDP has increased in SIDS during the last decade, said UNCTAD.

Atlantic and Indian Ocean SIDS saw a steady increase of the services share in their economies. Some growth was also recorded in Caribbean SIDS, while the share slightly decreased in Pacific SIDS.

Different types of services, including retail trade, hotels and restaurants, have become an important source of employment, said the UNCTAD report.

On average, two in three persons work in services in the island economies, half of men and three in four women, with these jobs being often related to tourism.

For comparison, globally, 50 per cent of all employed persons work in services – 45 per cent for men and 58 per cent for women.

In 2019, the share of services in total employment was highest in Bahamas (84 per cent), Barbados (78 per cent) and Trinidad and Tobago (70 per cent). Only Vanuatu and the Comoros remained below 40 per cent.

The UNCTAD report also said that the current account balance relative to GDP is often higher in SIDS than in developing economies.

Since 2016, SIDS have run large current account deficits. The collapse of tourism due to the COVID-19 pandemic is expected to widen these deficits in 2020, it said, adding that tourism typically accounts for most of the exports of SIDS.

In 2019, the current account deficit of SIDS was 2.9 per cent of GDP, thus considerably higher than that of the developing economies in total, which ran a surplus of 0.8 per cent of GDP.

For wider comparison, it remained smaller than those registered for LDCs (-3.6 per cent) and LLDCs (-3.7 per cent) in proportion to GDP.

For many SIDS, current account deficits are significantly offset by the inflow of remittances. But SIDS also need to resort to external borrowing and rely on foreign direct investment (FDI) and other financial flows to cope with their deficit, said UNCTAD.

“Export revenues, especially from tourism, are important for managing debt. As the COVID-19 pandemic and the related economic downturn significantly reduce earnings from tourism, SIDS’ debt service burden is likely to increase,” it added.

The UNCTAD report also said that SIDS are among the most indebted developing countries in the world. Overall, SIDS’ external indebtedness is considerably higher than that of other developing countries.

In 2019, SIDS’ external debt accounted for 62 per cent of their GDP, compared with 29 per cent for all developing countries and economies in transition.

This gap has widened substantially over the last decades. Between 2000 and 2019, the external debt-to-GDP ratio rose by 24 percentage points in SIDS while dropping 6 percentage points in all developing countries.

Most of the increase occurred in the aftermath of the 2008 global financial crisis, and has accelerated since 2013, the year of the “taper tantrum”, which was then followed by a series of external shocks which in turn kept debt positions under strain, said UNCTAD.

It said large-scale borrowing from foreign creditors, both public or private, has opened new options for financing investment, recovering from natural disasters, and development in SIDS.

However, this has come with greater exposure to the vagaries of international financial markets, including sudden changes in major exchange and interest rates, thereby raising concerns over sovereign risk, UNCTAD added.

The rise in SIDS’ external debt since 2000 has been mostly driven by long-term private debt along with short-term debt, while long-term public debt, on which policy focus has traditionally concentrated, has remained rather steady.

Long-term private debt represented 15.9 per cent of SIDS’ GDP in 2019, in stark contrast to 1.2 per cent in 2000. Over the same period, short-term debt increased from 6.6 per cent of SIDS’ GDP to 14 per cent.

By virtue of their economic situations, typified by low diversification and the ever-present risks of natural disasters, SIDS are naturally exposed to public debt distress, which rises when a government struggles over time to honour some or all of its debt obligations, said the UNCTAD report.

Owing to their smallness and their dependency on the global economy, SIDS are extremely vulnerable to external shocks, it added.

“The terms of trade for merchandise trade and services and their need for steady supplies of imported goods are beyond the domestic control of SIDS.”

During the COVID-19 crisis, a significant drop in SIDS’ current account balance can be expected, from -2.7 per cent of GDP in 2019 to -12.1 per cent in 2020 and further to -12.3 per cent in 2021, said the report.

Small domestic financial markets make SIDS dependent on external borrowing to finance investments and recovery from natural disasters, it added.

SOME TRADE TRENDS IN SIDS

According to the UNCTAD report, SIDS are highly vulnerable to economic shocks and are dependent on trade.

They are also challenged by remoteness from trading partners and dependence on a few markets for imports and exports.

Therefore, SIDS have also been identified as one of the groups that will be disproportionately affected by the COVID-19 pandemic and its economic impacts, said UNCTAD.

It noted that SIDS import more goods than they export, and are often highly reliant on services exports, e.g., related to transport, tourism and business services.

SIDS have some common characteristics regarding trade in goods. Most SIDS are net importers of goods and many have proportionally high exports in primary commodities, but country variation is high.

SIDS share common challenges, but also differ significantly regarding the factors in their favour, such as the commodities they can export, said UNCTAD.

SIDS’ merchandise imports over GDP ranged around a global median of 33 per cent, except for Nauru (74 per cent) and Seychelles (67 per cent) that had relatively high imports of goods in comparison with GDP.

On the contrary, the exports of goods as a share of GDP are low for many SIDS, sometimes considerably below the global median of 21 per cent.

Exceptions were Trinidad and Tobago, Solomon Islands, Seychelles, Nauru and Marshall Islands who all exported goods valuing more than 25 per cent of GDP, said UNCTAD, noting that SIDS export, on average, more services than goods.

Merchandise trade involving SIDS is, on a global scale, small. On average, between 2017 and 2019, only about 0.3 per cent of globally traded goods were exported to SIDS and only 0.1 per cent were imported from them.

The UNCTAD report also said that SIDS represented 17.5 per cent of global ship registrations as of 1 January 2020, only slightly behind the combined share of developed economies (21.6 per cent).

SIDS have been gaining prominence in this maritime business since 1980, surpassing transition economies and LDCs, it added.

The Marshall Islands and the Bahamas are global leaders in maritime registrations, representing 3rd and 8th place among economies ranked by dead-weight tonnage, accounting for 12.7 and 3.8 per cent of the registered tonnage globally, while Bermuda ranked 28th, representing 0.35 percent.

SIDS accounted for 21.3 per cent of the US dollar value of registered global tonnage in 2019 and 21.0 per cent in 2020, said UNCTAD.

In 2020, the Marshall Islands occupied 2nd place in the ranking of leading flags of registration by value and the Bahamas fourth place, with shares of 11 per cent and 8 per cent, respectively.

Oil tankers and bulk carriers represented the highest proportion of the value of the fleet registered in the Marshall Islands, whereas for the Bahamas, it was ferries and passenger ships and offshore vessels.

On the other hand, UNCTAD said, SIDS’ participation in global shipbuilding, ship ownership and ship recycling industries is negligible compared to other country groupings.

Out of the world’s 50 least connected economies, 29 are SIDS. Some SIDS are among those with the longest ship turnaround times and lowest service frequencies, said UNCTAD.

SIDS’ marginalization from global transport networks is also associated with higher transport costs compared to other economic groupings, making their trade uncompetitive and costly, it added.

“This situation stems mainly from diseconomies of scale and low levels of competition. Corporate strategies of concentrating cargo in bigger ships and using fewer ports makes it challenging for SIDS’ ports to attract services due to their low cargo volumes, which is linked to low trade volumes, narrow export base and lack of a wider hinterland, their geographic position, as well as port equipment and infrastructure gaps.”

As a result, few service providers operate in SIDS and traders face limited shipping choices and higher freight costs, said UNCTAD.

On average, SIDS pay twice as much for the international transport of their imports as developed countries. They are also confronted with far lower shipping connectivity than other countries.

This situation leads to a vicious cycle, where low trade volumes lead to high trade costs, and high trade costs makes trading uncompetitive, said UNCTAD.

“This in turn leads to diseconomies of scale and infrequent transport services, further increasing trade costs.”

The disruption caused by the pandemic created an additional challenge, exposing the heavy dependence of most SIDS on maritime transport for their livelihood and access to the global market, said the report.

SIDS are highly dependent on travel exports for their international trade and employment. Consequently, they are very exposed to the economic consequences of the COVID-19 pandemic, it added.

It is estimated that it could take up to four years for international tourism to recover to levels observed in 2019.

In 2019, SIDS exported US$26 billion worth of services, of which US$20 billion were travel services. Services exports accounted for 25 per cent of GDP of the group.

Additionally, they represented 60 per cent of SIDS’ total exports of both goods and services. For comparison, in other developing economies, services cover some 18 per cent of all exports.

The contribution of SIDS to global services trade is predictably low, accounting for only 0.4 per cent in 2019, slightly below the 0.6 per cent recorded in 1980 – one of the first years with comparable services trade statistics.

In 2019, SIDS captured 1.4 per cent of the international travel market, with their share of travel exports worth US$20 billion, said UNCTAD.

Caribbean SIDS attracted most receipts from foreign travellers: 61 per cent of SIDS’ total. Another 31 per cent were exported by Atlantic and Indian Ocean SIDS and the remaining 8 per cent by the Pacific SIDS.

In 1980, travel had accounted for 63 per cent of SIDS’ services exports. By 2010, the share had increased to 70 per cent and in 2019 to 78 per cent.

In contrast, in developing economies as a group, the share of travel in services exports decreased from 34 per cent in 1980 to 31 per cent in 1995 and has since remained constant.

Given the severe decline in international travel exports in 2020 – estimated at 70 per cent for remote island states – SIDS’ services exports and related economic activity could suffer severely from the consequences of the COVID- 19 pandemic, said the UNCTAD report.

In some countries, such as Maldives and Saint Lucia, tourism supplied jobs for almost two thirds of the employed. The loss of international travel receipts in 2020 may shake many SIDS’ economies, it added.

For SIDS, tourism is a particularly important sector. Between 2017 and 2019, it accounted for, on average, 11.7 per cent of SIDS’ GDP, compared to 1.9 per cent in LLDCs.

In absolute terms, tourism inbound expenditure represents a crucial source of income for many SIDS in all regions.

Tourism generates over US$5,000 of income per capita a year in economies like Palau, Maldives and Seychelles in the Indian Ocean, as well as in most Caribbean SIDS. In Curacao and Turks and Caicos, for instance, this value exceeds US$20,000 per capita, according to latest available data.

In SIDS, tourism industries are an important employer. Among SIDS with data, tourism industries’ share of total employment was highest in Barbados and Seychelles in 2019. In these two economies, every fifth woman worked in tourism directly.

The pandemic is likely to have had a disproportionate impact on women, since the bulk of the mostly low-skilled workers in the SIDS’ tourism industry are female, said UNCTAD.

For instance, women account for almost 70 per cent of employment in food and beverage sectors in Kiribati and Tonga, while they are more rarely employed in travel agencies, tour operators and reservation services, representing higher-skilled segments of the tourism sector.

Tourism has turned out to be one of the sectors hardest hit by the COVID-19 pandemic, with unprecedented impact from an economic and social point of view, said UNCTAD.

It said all economies experienced travel restrictions of some sort during the second quarter of 2020, including total closures of borders.

UNCTAD said based on available data as of January 2021, the World Tourism Organization (UNWTO) estimates that international tourist arrivals fell by 74 per cent in 2020 with respect to 2019, from almost 1.5 billion to around 381 million, falling back to levels not experienced in over 30 years.

According to UNCTAD, preliminary data available show that the vast majority of SIDS experienced a fall of over 60 per cent in international tourist arrivals in 2020 compared with 2019, with some other island States, such as Guam, Samoa and Singapore, showing declines of over 80 per cent.

“One of the main characteristics of SIDS is the fact that the vast majority of their tourism expenditure comes from international tourism, while their domestic tourism markets are smaller and less developed.”

UNCTAD said that the conjunction of all these factors – (a) the high dependence on tourism, (b) under-developed domestic tourism markets, (c) the high concentration on source markets, (d) the requirement of long-haul air travel, and (e) the deep impact of the COVID-19 pandemic on the main source markets – places the inhabitants of SIDS, many of them relying on tourism as the main source of their income, into an extremely vulnerable situation and exerts pressure on governments to react.

The UNCTAD report also highlighted a number of other trends in the SIDS pertaining to the environment and social development.

(The full UNCTAD report including SIDS country profiles can be accessed at: https://dgff2021.unctad.org/)