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Supporting Investment and Private Sector Development in Times of Crisis

Strategies for Small States

image of Supporting Investment and Private Sector Development in Times of Crisis

Small states are vulnerable to the effects of the global financial crisis because of their high dependence on foreign direct investment, the importance for them of export earnings, and high levels of remittances and aid flows. The crisis thus also in turn affects investment and private sector development. This Economic Paper examines the effects of the crisis on three countries: Mauritius, St Lucia and Vanuatu. Only Vanuatu is relatively resilient so far, with the effects on investment in Mauritius and St Lucia being dramatic, though affecting different sectors in each country. The policy responses followed also differ markedly. The authors demonstrate once again the vulnerability of small states to shocks, and emphasise that they are often at the receiving end of global policies, particularly so in the context of the global financial crisis. They argue that more could be done to clarify and address the greater vulnerability of many small states.

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Introduction

Global financial crises appear to affect small and open developing countries more than other developing countries, yet little attention has been paid to the special circumstances of small states in international discussions of the recent crisis, including at meetings of the G-20 and the UN. Policy responses in the small states themselves also vary widely. This paper will discuss the effects of the recent global financial crisis on small states through the transmission belts identified in te Velde et al. (2009), such as private financial flows, trade, remittances and aid; these are the key channels through which financial crises affect investment and private sector development. The paper will also analyse policy responses at national and global level which have attempted to address the crisis.

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