By Alexander Apostolides on January 07, 2010

Small states and Trade: Lessons from the Great Depression

The interwar growth performance of Malta and Cyprus adds substance to the economists that seem to think of small economic units as disadvantageous. Kuznets argued that small states could weather turbulent economic periods by either relying on their proportionally large resource endowments or by ensuring continued support form a greater economic power. The experience of Cyprus and Malta indicates that things are than in Kuznets' assertion. Cypriot copper mining experienced a serious and severe downturn during the great depression. The natural resource endowment of copper was still subject to global prices, meaning that incomes of small states such as Cyprus are even more vulnerable during uncertain global trade conditions. The low price for copper, combined with the devastation of the agricultural sector due to drought, led to a deep and sustained fall of output during the great depression, wiping out all the per capita growth that took place in the 1920s. Malta might have escaped the worst effects of the great depression due to the expenditure of the British armed forces, but at the same time the relationship had significant negative effects: Maltese economic growth was related to a function of British defence policy, while the military deemed that such expenditure gave it the right to undermine attempts of diversification and political independence if it believed that its interest on the archipelago were under threat. Thus Kuznets supposed refuge for small economies have significant negative repercussions, that affecting their economic performance: a large resource endowment relative to the economy's size exposes the economy to violent downturns at times of global trade turbulence, while a economy dependent on military expenditure might isolate itself from a world recession but expose its self to greater dependency and the undermining of its political and economic independence.

In fact, small island economies are "fair weather" performers: at times of global trade expansion and economic liberalisation, such economies prosper, while during the turbulent interwar period their economic performance was poor. It is not surprising that Easterly and Kray seem to think that small states have "small problems" since their period of analysis is 1960-1995 a period of near uninterrupted trade liberalisation and massive trade expansion. The ability to trade for goods and services enables these economies to overcome the serious disadvantages of their small economic size, particularly in developing manufacturing. During the interwar period it was the manufacturing sector that provided the largest opportunity for productivity enhancements as Europe assimilated the advances of the "second industrial revolution". Yet the islands could not capitalize such advances because of the increasing protectionism in Europe and the Mediterranean. Without trade one could not achieve the minimal efficiency scale for modern manufacturing units; without the modernisation of manufacturing the islands were hampered from achieving the largest productivity advances in the interwar period. Unlike Greece or Turkey, the islands of Malta and Cyprus could not stimulate domestic manufacturing through protectionist measures, since internal market was too small. Small island economies should be the strongest proponents of free trade since the economic history of Cyprus and Malta indicates that protectionism is partly to blame for their poor economic performance in the interwar period.

Sources:
Kuznets, S., “Economic Growth of Small Nations” in Robinson, E.A.G. Economic Consequences of the Size of Nations, (London: Macmillan, 1960), p.14; Kuznets, Modern…, (1966)

Easterly, W. & Kray, A., “Small States, Small Problems? Income, Growth and Volatility in Small States” World Development, Vol.28, No.11, (2000), pp.2013-2027, p.2014

World Trade Organisation, “Information-World Merchandise Trade 1921-38” http://www.wto.org/gatt_docs/English/SULPDF/91320046.pdf as consulted 21 Dec 2009

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