Making Development Co-operation Work for Small Island Developing States

Executive summary

Small island developing states have vulnerabilities, but opportunities for sustainable development lie ahead

Focusing on the 35 small island developing states (SIDS) that are currently eligible for official development assistance (ODA), this report provides evidence of SIDS’ vulnerability stemming from their small populations and small landmasses, spatial dispersion and remoteness from major markets, and high exposure to external shocks, including severe climate-related events and natural disasters. While three fifths of SIDS are upper middle-income countries, they are among the most vulnerable developing countries. Compared to larger upper middle-income countries, SIDS in this same income group are 73% more vulnerable. The persistence of these vulnerabilities and of fragile growth patterns suggests that new development paradigms and solutions are needed to chart the course to sustainable development in SIDS.

Development opportunities to move closer to self-sufficiency lie ahead, at least for some SIDS: in technological innovations that could lift connectivity barriers to global markets; in the exploitation of renewable energies – sun, wind and ocean waves, all abundant in SIDS – which could break dependence on fossil fuels and create fiscal space to address critical development needs; in the development of the “blue economy” which, by connecting old and new sectors linked to the abundant marine resources of SIDS, could fuel economic growth and help address food insecurity, high unemployment and poverty.

For SIDS to seize these opportunities and embark on sustainable development pathways the international community needs to make development co-operation work better for them. Drawing upon new and original statistical sources, this report contributes evidence to the international efforts to tailor development co-operation and concessional finance to the specific circumstances of SIDS.

Financing for development landscape

SIDS face significant challenges in mobilising domestic resources and in accessing capital markets. They tend to have small and erratic domestic revenues, which combined with high costs for providing public services and the fiscal impacts of natural disasters, often result in limited fiscal space for development investments. The debt situation of the five SIDS that benefitted from the Heavily Indebted Poor Countries Initiative has drastically improved in the past 15 years, but for the remaining SIDS debt over gross national income (GNI) ratios have increased. Overall 20 SIDS are at “moderate” risk, “high” risk or “in debt distress” according to the International Monetary Fund. Foreign direct investments and other private finance flows are highly volatile and on average contribute little to SIDS’ external financing: only 12% in 2012-15. This reflects the lack of creditworthiness to raise funds in capital markets for many SIDS (especially in the Pacific) and the recent deterioration in international capital-market ratings and debt sustainability issues for other SIDS (e.g. in the Caribbean). Owing to large diasporas, remittances represent the largest flow of external finance for SIDS: 52% in 2012-15.

Concessional finance (i.e. grants and concessional loans from bilateral and multilateral providers) remains a vital source of financing for development in many SIDS, accounting for the largest flow of external finance for three out of five SIDS in 2012-15 and for over 10% of GNI in 13 individual SIDS, reaching 90% in Tuvalu. Concessional finance to SIDS, which reached USD 7.08 billion in 2016, has been influenced by one-off increases to individual SIDS: to Haiti following the earthquake in 2010, and to Cuba in 2015-16 for debt relief. However, in between these two peaks, volumes decreased. SIDS receive 3% of global ODA. While, due to their small populations, in per capita terms SIDS receive 3.8 times more than other developing countries, the cost of delivering assistance in a SIDS context is estimated to be 4.7 times higher than in other developing countries.

SIDS receive the bulk of concessional finance by bilateral providers (79%), mainly influenced by proximity and geopolitical ties. Financing from multilateral providers was more modest (21%) but increasing and expected to further rise driven by the four-fold increase in resources allocated to SIDS decided during the IDA 18 Replenishment. Non-DAC sovereign providers have become important partners for SIDS, and China is estimated to be the largest provider to some. Private philanthropy has also increased (USD 54 million annually on average in 2013-15) as well as private finance mobilised through official interventions (USD 234 million per year on average).

Although more sources have become available, many SIDS struggle to access these, owing to low absorption capacity and the complex array of accreditation and application processes to access the global funds. Access to finance is further constrained by a complex web of eligibilities and that includes ad hoc exceptions, resulting at times in inconsistent treatment across SIDS. Consequently, SIDS rely on average on just a single provider for 46% of their concessional finance. Overall, concessional finance is strongly concentrated on a few providers and few recipients, scattered across small projects, and could be better used to address some of the major vulnerabilities and issues that hinder further development in SIDS, such as climate vulnerabilities, lack of fiscal space, energy and infrastructure.

Innovations and good practices for better co-operation with SIDS

Owing to their specific circumstances and development challenges, breaking dependence on international official assistance will not be easy for some SIDS; for others, it will remain a critical resource to meet specific development needs. In both cases, as they embark on a path of sustainable development, SIDS will need to mobilise more financing from a broader array of both public and private sources. Concessional funds will need to play a significant role in leveraging and catalysing those flows.

Promising innovative approaches and good practices have been rolled out by development partners in recent years to catalyse new flows and tackle some of the fundamental impediments that keep SIDS from experiencing larger development gains. Several of these approaches could be replicated, further developed or scaled up. They include: innovative countercyclical instruments (e.g. contingent borrowing and “hurricane” clauses), green and blue bonds and other blending arrangements to bring climate finance to scale; debt relief mechanisms, such as debt for nature swaps; fiscal reforms to expand tax coverage (especially to include high revenue-generating segments of the economy); and policies to reduce “leakages” from key sectors and expand the taxable production base. These innovations are presented in the report under three main clusters, building on which a set of recommendations is presented.