Economic trends

SIDS’ economies are vulnerable to changes in global markets

SIDSsmall island developing States (SIDS) were recognized as a distinct group of developing countries at the Earth Summit in Rio de Janeiro in June 1992.
More information on UNCTAD official page. 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. As in many small economies, their annual GDPGross domestic product (GDP) growth can be rather volatile (see figure 1). The largest collapse was seen during the 2008-2009 global financial and economic crisis. The global crisis was felt most severely in the Caribbean SIDS, which experienced a 5 per cent drop in GDP from 2008 to 2009.

Figure 1. GDP growth in SIDS regions

(Annual growth rate, based on data in constant 2015 prices)

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The 2014 slump in the Pacific SIDS (-5 per cent) was mainly due to a 25 per cent drop in Timor-Leste’s GDP. According to -—
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—-, at the time, petroleum was an essential part of their economy, representing 99 per cent of export earnings, 80 per cent of GDP and 93 per cent of total government revenues. In 2014, global oil prices dropped unexpectedly by more than 45 per cent, from US$108.4 per barrel in June 2014, to US$60.7 in December 2014. This is a clear-cut illustration of the dependency on a limited number of products in many SIDS and the resulting vulnerability of their economies. Luckily, the shock was followed by a 20 per cent bounce back in Timor-Leste the following year.

GDP per capita has not grown notably in SIDS since 2005 (see figure 2). 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. 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.

Figure 2. GDP per capita in the SIDS regions

(US$, constant 2015 prices)

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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-10 SIDS, in terms of GDP, are Caribbean (see figure 3 ). 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.

Figure 3. Distribution of GDP in SIDS, 2019

(Millions of US$, current prices)

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Persistent reliance on agriculture, hunting, forestry and fishing

The share of agriculture, hunting, forestry and fishing -—
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—- 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.

Opportunities afforded by agriculture are constrained by climate and the availability of arable land, especially for the smallest islands. In the Comoros and Mauritius, for instance, the share arable land accounts for 35 and 36 per cent respectively, whereas in the Solomon Islands and Palau it is only one per cent. In the Bahamas arable land accounts for only 0.6 per cent -—
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Regardless of the small share of arable land, the share of agriculture, forestry and fishing in GDP is relatively high in the Solomon Islands (25.4 per cent), explained by the large contribution of fishing and forestry rather than of agriculture. While only 0.7 per cent of their land is arable, 90.2 per cent, the highest proportion among SIDS, is covered by forest. Palau and Seychelles follow with 89.7 and 73.3 per cent share of forest land, respectively -—
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Agriculture, hunting, forestry and fishing are significant sources of employment for some SIDS. 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, for instance. -—
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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 (see figure 4).

Figure 4. Share of agriculture, hunting, forestry and fishing in GDP

(Percentage of GDP)

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Share of industrial production in GDP declining

In 2019, the value added generated by industrial productionIndustrial production, or industry includes in ISIC Rev. 3 mining and quarrying (ISIC C), manufacturing (ISIC D), electricity, gas and water supply (ISIC E) and construction (ISIC F) -—
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—-. (ISICInternational standard industrial classification of all economic activities Rev. 3 C-F) exceeded 35 per cent of GDP in Trinidad and Tobago and Nauru, while it represented less than 10 per cent of the economic output in the Federated States of Micronesia and the Comoros.

Over the last decade, the importance of industrial production has decreased in all SIDS regions (see figure 5) except in Pacific SIDS. However, this decline has flattened during the last couple of years and the share of industry has levelled in island economies. The regional trends mask large country differences, especially in Pacific SIDS. In 2019, industrial GDP (in constant prices) was almost 10 times higher in Timor-Leste than in 2005.

Figure 5. Share of industrial production in GDP

(Percentage of GDP)

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There are large differences in the share of industrial production in employment across SIDS. In 2019, its share ranged from 6 per cent for Vanuatu to 29 per cent for Tonga. Over 20 per cent employment shares were also recorded in Trinidad and Tobago, Mauritius, Samoa and Cabo Verde. In addition to Vanuatu, industry’s share of employment was very low, below 10 per cent, in Solomon Islands and Timor-Leste. -—
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In half of SIDS, manufacturingManufacturing can broadly be understood as "the physical or chemical transformation of materials, substances, or components into new products" -—
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—-, consisting of section D in ISIC Rev. 3 -—
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—-. constitutes less than five per cent of GDP. In 2019, Nauru had the largest manufacturing share: 19 per cent of its economic output. According to the most recent census in Nauru -—
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—-, the share of manufacturing in total employment was 13 per cent in 2011. Manufacturing on the island includes coconut products and some handicrafts, in addition to phosphate production. 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 role of manufacturing in structural transformationStructural transformation can be broadly defined as the reallocation of economic activity across three broad sectors, agriculture, manufacturing and services, which accompanies the process of economic growth. -—
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—- It usually refers to the transfer or shift of production factors — especially labour, capital and land — away from activities and sectors with low productivity to those with higher productivity, which are typically different in location, organization and technology -—
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—- is discussed in Sustainable industrialisation.

Construction in SIDS has been growing recently. The share of construction in GDP is highest in Caribbean SIDS, at 7 per cent. For instance, in the Saint Kitts and Nevis its share in GDP exceeded 20 per cent between 2016 and 2019. During the same four years, the construction sector in Antigua and Barbuda was also quite dynamic, reaching 16 per cent of GDP in 2019. In 2018-2019, construction activity also jumped up to over 11 per cent in Dominica. In Atlantic and Indian Ocean SIDS, construction value added exceeded 10 per cent of GDP in Cabo Verde, and among Pacific SIDS, in Tuvalu and Timor-Leste.

Construction plays an important role in SIDS via investment related to tourismTourism refers to the activity of visitors -—
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—-. International tourism expenditure is often approximated by the sum of travel services and transport of passengers, reported under balance of payments statistics (see Trade in services). Transport of passengers not considered, tourism represents a subset of travel, as some travelers, such as border-workers, travel for regular work, as they are holding employment contracts outside their usual residential environment. Activities of border-workers and similar travelers do not belong under tourism. -—
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—-, improvements of public infrastructure and road networks, as well as climate resilience building. Grenada, for instance, is undertaking a project to transform its capital, Saint George’s, into the first climate resilient city in the Caribbean. This includes construction projects, among other efforts, to improve infrastructure for water intake, drill new wells and build rainwater harvesting systems, improve water storage and distribution capacity, modernize sewage treatment systems and introduce new technology for remote monitoring and renewable energy use. -—
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The important role of services

On average, service sectorService sector includes according to ISIC Rev. 3 G-P: wholesale, retail trade, restaurants and hotels (ISIC G-H), transport, storage and communications (ISIC I) and other activities (ISIC J-P) -—
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—-. (ISIC Rev. 3 G-P) 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 (see figure 6). 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. On average, two in three persons work in services in the island economies, half of men and three in four women. These jobs are 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, services’ share of 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. -—
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Figure 6. Share of services in GDP

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Many SIDS run large current account deficits – some the world’s highest surpluses

The current account balanceCurrent account balance displays the flows of goods, services, primary income, and secondary income between residents and nonresidents of an economy. The current account balance measures, in general, the difference between current receipts and expenditures for internationally traded goods, services and income payments. At the same time, from a national perspective, the current account balance represents the gap between domestic saving and investment.-—
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—- relative to GDP is often higher in SIDS than in developing economies. Since 2016, SIDS have run large current accountCurrent account, within the balance of payments, displays the transactions between residents and non-residents of a reporting economy, involving economic values, namely the cross-national exchange of goods and services as well as cross-national transfers of primary and secondary income -—
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—-. deficits (see figure 7). The collapse of tourism due to the COVID-19Infectious disease caused by the strain of coronavirus SARS-CoV-2 discovered in December 2019. Coronaviruses are a large family of viruses which may cause illness in animals or humans. In humans, several coronaviruses are known to cause respiratory infections ranging from the common cold to more severe diseases such as Middle East Respiratory Syndrome (MERS) and Severe Acute Respiratory Syndrome (SARS). The most recently discovered coronavirus causes a coronavirus disease called COVID-19. pandemic is expected to widen these deficits in 2020. Tourism typically accounts for most of SIDS’ exports (see Tourism).

Figure 7. Current account balance in SIDS, LDCsLeast developed countries (LDCs) are low-income countries confronting severe structural impediments to sustainable development. They are highly vulnerable to economic and environmental shocks and have low levels of human assets -—
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—-., LLDCsLandlocked least developed countries (LLDC) and all developing economies

(Percentage of GDP)

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Note: Data not available for Nauru.

In 2019, SIDS’ current account deficit 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. As discussed in Trade vulnerabilities, many SIDS run a surplus in services and a deficit in goods trade.

The current account deficit has been largest in the Atlantic and Indian Ocean SIDS (-10.7 per cent in 2019), more than twice as large as in the Pacific SIDS (-4.6 per cent in 2019). While the Caribbean SIDS have also run deficits, in 2019 they recorded a surplus of 0.5 per cent.

In 2019, Kiribati had the world’s highest current account surplus, equal to almost half of its GDP. Tuvalu also had a high surplus of 27 per cent, followed by the Federated States of Micronesia, with an 18.5 per cent surplus in relation to GDP. Conversely, high deficits relative to GDP were observed in Dominica (-28 %) and the Maldives (-26 %), the third and fourth largest deficits in relation to GDP in the World.

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 FDIForeign Direct Investment (FDI) is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate) -—
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—-. and other financial flows to cope with their deficit. 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 serviceDebt service refers to payments made to satisfy a debt obligation, including principal, interest and any late payment fees -—
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—-. burden is likely to increase (see Financial risks).