Helping Small Island Developing States graduate to success

 What’s the issue?

Before 2030, between five and twelve Small Island Developing States (SIDS)1 might graduate from eligibility to official development assistance (ODA): once they have exceeded the high-income threshold (currently set at USD 13 845), they are no longer deemed to need the same levels of concessional funding as countries with lower income. While it should be viewed as a success and an achievement to celebrate, graduation is often feared by governments: because of their low competitiveness, low domestic resource mobilisation, and insufficient investments in resilient infrastructure, they still have significant finance needs that they have difficulty filling. In the case of the Eastern Caribbean States, many of them at the doorstep of graduation or having already graduated, evidence shows that neither they nor their financial partners among the Development Assistance Committee (DAC) members have assessed challenges and needs well enough to effectively anticipate the consequences of graduation (Piemonte, Kim and Cattaneo, 2024[1]).

SIDS closest to graduation – Palau, Nauru, St. Lucia and Montserrat – remain significantly dependent on ODA, accounting for 38% of their external financial flows on average (2024[2]).2 In other developing countries, by contrast, that proportion is nineteen times lower: as they grow, other means of financing take over, including non-concessional flows, private investment and domestic revenues. In SIDS, however, private flows seem unable to take off; as for tax revenues, at the time of graduation they represent on average 1.6 times the total amount of external inflows vs. ten times in other developing countries (Table 1).

Despite income levels that surpass those of most other developing countries, SIDS may be considered the most vulnerable. Based on the results of the new UN multidimensional vulnerability index (MVI) (United Nations, 2024[3]), they have the highest average and median scores of any “most in need” country grouping, followed in descending order by least developed countries (LDCs), fragile contexts and land-locked developing countries (LLDCs) (OECD, 2024[4]) (Figure 1).

Because of their vulnerability, SIDS remain exposed to sudden income fluctuations, even after they reach high-income country (HIC) status, which puts them at risk of going on and off the DAC list of ODA recipients3. For example, after losing 7.5% of its GDP in 2020 and 13.7% in 2021 as a result of the COVID-19 crisis, Palau was the first country to be reinstated onto the list.

Forced to take on greater levels of debt to respond to natural disasters and economic shocks, SIDS are more indebted than their peers.4 Moreover, their small economic size hinders their ability to renegotiate existing debt, or secure new debt at competitive terms, (Piemonte, 2021[5]).

 

Figure 1. SIDS are both richer and more vulnerable than other developing countries

Note: Includes ODA-eligible developing countries. Lines indicate medians for each axis.

Source: Author’s design based on UN MVI (2024) and WDI (2024).

 Why is this important?

The survival of SIDS’ societies is at stake. Although SIDS contribute the least to carbon emissions, they are on the frontlines of the climate crisis and extremely vulnerable to external shocks. However, their often-precarious financial situation makes it difficult for them to respond to such shocks alone. Adverse weather events can wipe out some of their economies overnight: in 2017, Dominica lost 227% of its GDP because of Hurricane Maria; the COVID-19 pandemic translated into an 8.1% decrease in the GDP of SIDS on average in 20205, against a 3.6% drop in other developing countries.

SIDS graduating for worse could have effects beyond their borders, given their strategic geographic locations around the globe. Supporting SIDS as independent democracies is crucial to consolidate peace around the world.

SIDS graduation is a test for the international community’s capacity to respond to climate change challenges. SIDS have an important role in the management of oceans and biodiversity worldwide: although they make up only 3% of the Earth’s land area, they harbour 20% of all plant, bird & reptile species on the planet, twelve of the eighteen centres of marine endemism, seven of the ten coral reef hotspots, etc. (UN-OHRLLS, 2017[6]). Furthermore, protecting ecosystems with large potential emissions of greenhouse gases upon conversion, such as coastal ecosystems, is estimated to be one of the most cost-effective means of climate mitigation. (CBD, 2020[7])

Helping SIDS graduate to success would come at a low price. Official development finance to SIDS that could graduate before 2030 represents between USD 851 million and USD 4.6 billion in commitments (average per year over 2021-22) – that is, only between 0.2% and 1.2% of the DAC community’s total ODF commitments per year. Guided by new tools, such as MVIs, which allow for a more granular identification of SIDS’ vulnerabilities and related financing needs, donors should be able to reallocate, and/or dedicate additional resources to secure the successful graduations of these countries.