WEEK FOUR

Dr. Jacqueline LAGUARDIA MARTINEZ

INSTITUTE OF INTERNATIONAL RELATIONSUNIVERSITY OF THE WEST INDIES

Jacqueline.Laguardia-Martinez@sta.uwi.edu

INRL 6003 SMALL STATES IN THE GLOBAL SYSTEM

MIRAB model and small states

What is MIRAB?• Concept Developed by Bertram and Watters (1985)• Significant discrepancy between export production and import consumption (defining

characteristic of MIRAB economies)• To finance a current-account expenditure, a MIRAB economy rely on various types of current-

account transfer payments to finance a large part of their import requirements• Two sets of current-account transfer receipts (remittances and official aid) plus one sort of no

tradable output, government services • “Conventional models of economic and social development… incorporate labor migration,

remittances, overseas aid, and the government sector, but assume that these form part of the development process without dominating it. Our concern here is with a class of economies and societies in which the combined effect of ‘MIRAB’ now determines the evolution of the system” (Bertram and Watters 1985: 497).

A economic process where remittances and foreign aid are the main economic resources of the local economy

Flow charts for two processes that sustain the functioning of MIRAB economies

Clem Tisdell, The MIRAB Model of Small Island Economies in the Pacific and their Security Issues

• The stock of overseas-resident migrants and their descendants, to which were harnessed the flows of remittances and new migration; and

• The stock of domestic public-sector employment sustained by the flow of aid

Those two stock-flow nexuses made up our acronym MIRAB

MIgration Remittances, and Aid-Bureaucracy

The Pacific region• https://www.youtube.com/watch?v=FqnqQK7rf7g

• https://www.youtube.com/watch?v=-Lq-7b1e77w (Samoa, SIDS, 2014)

Why the Pacific?

• Concept initially applied to Pacific Islands, which are many (20,000 – 30,000) and dispersed

• To explain transition from the former colonial export economies occurred in the Pacific Islands (Cook Islands, Niue, Tokelau, Kiribati, Tuvalu, Samoa and Tonga)

• Infrastructure (schools, hospitals, roads, reef passages, port facilities, airfields, radio communication links, housing, water supply, wastewater treatment, government buildings), all had been provided by the colonial powers, and were kept in operation by post-colonial aid

• Larger export-oriented ventures kept alive only by ongoing subsidies or special treatment from aid donors

Why the Pacific?

• Open economies

• Draws attention to ‘rentier’ nature of Pacific economies

• Aid and remittances perform same function as resource ‘rents’ (oil)

• Leads to ‘Dutch disease’: ↑ rents = ↑ foreign exchange earnings = ↑ currency appreciation (no tradable sector) = ↓ external competitiveness …

• External debt remains modest

• The provision of foreign aid is mainly used to fund the government bureaucracy

• Subsistence agriculture/fishing as an ‘insurance floor’

• Gross inequalities of income and wealth are the exception rather than the rule

• Close integration of informal and formal sectors of the economy

Logic of a MIRAB

• Remittances, interest and dividend payments, aid, and other official transfer payments, are sources of disposable income that do not arise directly from the sale of commodities

• The expanded bureaucracy has no productive role other than the administration of infrastructure and the spending of salaries within the local economy

• Little stimulation of tradable sector (even with aid aimed at this)

CRITICS

Critics to the MIRAB model• It is considered a reductionist exercise, which fails to engage with the richness and detail of social

and economic reality (economics – centered)

• Great reluctance on the part of officials and economists, from South Pacific countries, regional institutions, donor country agencies, the International Monetary Fund, or the World Bank, to accept this development model as a valid and sustainable one

• The model is in some sense derogatory of islanders because it applauds economic “failure” (by the standards of development orthodoxy)

• Aid and remittances keep the domestic economy “frozen” in a state of low productivity

• Crowding-out effect of remittances, combined with “easy subsistence lifestyle”: remittances appear to be spent mostly on “nonproductive” housing and consumption expenditure not for productive investment

• Crowding-out effect of aid on the public sector’s human resources: the management of aid requires much time from the best civil servants, which detracts from other important tasks

• This situation is not sustainable in the long run

• There are numerous case studies of island economies which do not exhibit the MIRAB characteristics

VULNERABILITY

The sustainability or otherwise of MIRAB economies remains an open research issue, since in the long run, remittances may suffer decay and aid donors may suffer fatigue

• Remittances are motivated by altruistic motives, and as a result, are likely to decline over time as the altruistic feeling might weaken with years away from home• Possible decline in transnational engagement among second and

subsequent generation members of diaspora• Later generations of migrants exhibit loss of motivation to remit and to

participate in home nation-building

Logics to justify the MIRAB model• The “unsustainability” of economies based on migration, remittances, and aid might need to be

reconsidered• The MIRAB territories do not get money for nothing. They export LABOR (migration and

remittances) and “GEOSTRATEGIC SERVICES” (foreign aid)• By exporting labor and geostrategic services MIRAB economies make the best use of the only

comparative advantage they may have that allows them to gain from international trade• The Islanders are just taking full advantage of the open-economy situation when allocating

resources (labor) where returns are higher• Donor countries and migrant host countries also gain from this form of international specialization• Remittances are repayments of a loan made earlier to the remitter by relatives to help finance

human capital investment; money lent to young children or other relatives to help them finance their education; and money sent to prepare for future retirement in the home country (informal family credit market)

• As long as the migrant population is composed mainly of adults wishing to retire in the home country, it is very unlikely that the remittance flow will decay over time

GEOSTRATEGIC SERVICES• Islands have more strategic importance than continental countries of

equivalent land area1. they command great surfaces of ocean (fishing resources)2. they are often just off the coast of great continental countries3. they are ideal “aircraft carriers,” missile bases, or radar bases in case of war4. they are used for atomic or ballistic experiments, because they are “out of

the way” and difficult to spy on by rival powers, and because their isolation minimizes the risk of such experiments for the home population

What when the demand for strategic services falls somewhat?

Which is the appropriate model(s) that best captures the structure, behavior and development strategy of small island economies today?

The rapid expansion of tourism as a leading sector and offshore banking was not predicted in the original MIRAB model (services-oriented small economies)

Alternative classifications: PROFIT

• The three aspects that distinguish PROFIT from MIRAB models are: the dynamism of the private sector, the active role of domestic policy, and the strategic orientation towards diversification (Baldacchino, 2006) • PROFIT would have more manufacturing and resource management; a

diplomacy driven by procedural considerations rather than a direct quest for aid; a low reliance on aid and remittances to sustain local incomes, and strong financial management• Also PROFIT economies would differ from MIRAB by being more interested in: a

shrewd immigration and cyclical migration policy; engaging in tough external negotiations concerning the use of local mineral, natural, political and other imaginative resources; securing and controlling viable means of transportation; and luring foreign direct investment via very low/no taxes• PROFIT examples would include tax and insurance havens, offshore banking

centers, and duty-free manufacturing exporters

• Five dimensions of local jurisdictional autonomy are laid out by Baldacchino:1. P (people considerations): powers over movement of persons (including issues of

citizenship, residence and employment rights)2. R (resource management): powers over environmental policy, especially regarding

natural resources3. O (overseas engagement and ultra-national recognition): the exercise of “para-

diplomacy” by sub-national governments acting as though they are sovereign states4. FI : finance, insurance and taxation5. T (transportation): powers over access by air and seaBaldacchino highlights the ability of small nations to make strategic political decisions in the global context which enhance their economic welfare, for example, act as tax havens, provide flags of convenience for shipping, obtain rents from their natural resources and benefit from the presence of military installations. In some instances, these attributes are combined with tourism, foreign aid and remittances.

PROFIT

SITE• STID (Small Tourism-driven Island Destinations) or (McElroy, 2006) SITE model

characterized by postwar diversification, stressed the role of labor-intensive tourism development and related construction as a major engine of insular modernization• The specialized tourist islands heavily reliant on foreign direct investment in infrastructure

and facilities and characterized by GDP growth volatility (itself a function of natural disasters and excessive export concentration), loss of preferential export markets, and in some cases drastic declines in per capita aid following the post-1990 collapse of the Soviet Union• Prominent role of government policy in promoting tourism, designing tax holidays to

attract foreign hotel investment, and negotiating airline access• PROFIT-SITE islands that share the common feature of restructuring away from colonial

agriculture (towards tourism, offshore finance or high-value manufacturing exports)• (Guthunz and von Krosigh, 1996) TOURAB typifies those economies that depend heavily

on tourism and the distribution of aid via the public bureaucracy. It has received little coverage in the literature

Geoff Bertram, The Mirab Model in The 21st Century

Differences between MIRAB and PROFIT-SITE economies

• In contrast to PROFIT-SITE destinations, the MIRAB economies generally exhibit relatively large public sectors, less effective use of jurisdictional power to create dynamic private sectors, lower levels of post-colonial restructuring and economic modernization, and a more systemic dependence on aid and remittances to maintain living standards

• The traditional pursuits of small-scale agriculture and fishing tend to be much more prominent in many MIRAB islands, while their geographic remoteness of developed economies inhibits the growth of other forms of private sector activity

What is the comparative advantage of a small island economy?

Is MIRAB still useful?

http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:23554937~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html

According to the World Bank• Nearly 1 out of 7 persons in the world being either an international or an internal migrant

• Women accounted for 48 % of international migrants

• Growth in remittance flows to developing countries is expected to accelerate to an annual average of 8.4 % over the next three years, raising flows to $436 billion in 2014 and $516 billion in 2016

• Rising anti-immigrant sentiment: Saudi Arabia deported more than 370,000 migrants in the 5 months since November 2013; about 1,000 Sudanese were deported from Israel; over 368,000 people were deported in 2013 in the US; anti-immigration movements appear to be gaining momentum in Europe

• Asylum claims in 44 industrialized countries reached 612,700 in 2013

• In contrast with common perceptions, South-South migration was larger than South-North migration: 82.3 million (36 %) of migrants from developing countries lived in another developing country, compared to 81.9 million (35 % of migrants from the South) lived in a developed country

Effects of migration in small states

Migrants, a resource?• Instead of viewing the emigration of skilled people as a loss, many

economists and policymakers view it as an opportunity to get trade and investment projects and new knowledge• Migration raises the domestic skill level because the hope of getting a

well-paying job with good working conditions abroad encourages citizens to enroll in professional schools• The skills of the diasporas can be tapped by establishing knowledge

exchange networks. Some initiatives include mentor-sponsor programs in certain sectors or industries, joint research projects, peer reviewer mechanisms, virtual return (through distance teaching and e-learning), and short-term visits and assignments

Boosting trade and investment flows• Migrants have a preference for their native country’s goods and services, thus supporting “nostalgic

trade” in ethnic products• Migrants facilitate bilateral trade and investment flows between their country of residence and their

home country by matching producers of consumer goods in one country with appropriate distributors in the other country

• Migrants increase investment flows between sending and receiving countries because they possess important information that can help identify investment opportunities and facilitate compliance with regulatory requirements

• Migrants may be more willing than other investors to take on risks in their origin country because they are better able to evaluate investment opportunities and possess contacts to facilitate the investment process

• Migrants provide reliable sources of funding and can be a more stable source of funds than other foreign investors because their familiarity with the home country often gives them a lower perception of risk

• Migrants generally are less concerned with devaluation risk because they are more likely to have a use for local currency

• Migrants may also provide origin-country firms access to technology and skills through professional associations

Diaspora bonds• A diaspora bond is a debt instrument issued by a country to raise financing

from its overseas diaspora• The money raised through diaspora issuances could be used to finance projects

that interest overseas migrants— such as housing, schools, hospitals, and infrastructure projects that have a concrete benefit to their families or the community back home. • Diaspora bonds can tap into the emotional ties—the desire to give back—of the

diaspora and potentially help lower the cost of financing for development projects back home• Israel and India South Africa, Sri Lanka, Ghana, Kenya and the Philippines • No country in the Caribbean has actually issued a diaspora bond

https://www.youtube.com/watch?v=JDGu73_irJ0

How to encourage diaspora participation?

•A few African countries have established government agencies to encourage diasporas to invest, assist local communities and provide policy advice

• Eased restrictions on foreign land ownership

•Allowing dual citizenship

http://data.worldbank.org/indicator/DT.ODA.ODAT.CD/countries/1W?display=map

Official Development Assistance (ODA)

https://www.youtube.com/watch?v=csWQBsJhmVI

http://data.worldbank.org/indicator/DT.ODA.ODAT.CD/countries/1W?display=graph

Measuring bureaucratic quality

• The bureaucratic arena refers to all state organizations engaged in formulating and implementing policy as well as in regulating and delivering services• The relationship between bureaucratic performance and economic growth and development

outcomes has been a subject of interest• Bureaucratic quality normally is just one, and very often a marginal, aspect in assessments of

institutional quality• Linked to the assessment of:

1. Corruption

2. Government intervention

3. Influence of higher civil servants a part of the policy-making process)

4. Meritocracy

5. Accountability

6. Transparency (clear decision-making processes in the civil service)

7. Access to public services

Measuring quality of government• Several indicators1. level of bureaucracy government transparency2. level of effectiveness3. level of corruption• Several kinds of governance indicators for mapping and comparing

countries’ administrative performance and bureaucratic quality internationally• The number of available indicators is increasing, yet their use has

remained limited in the public administration research community• The relationship between rules and structures, on the one hand, and

performance, on the other, is difficult to establish

Steven Van de Walle, Measuring bureaucratic quality in governance indicators

Bibliography

• Geoff Bertram, The MIRAB Model in The 21st Century, VIII International Conference “Changing Islands – Changing Worlds”, November 2004• Geoff Bertram, The MIRAB Model Twelve Years On, “The Contemporary

Pacific”, Volume 11, Number 1, Spring 1999, 105–138• Ashley Oberst and Jerome L. McElroy, Contrasting Socio-Economic and

Demographic Profiles of Two, Small Island, Economic Species: MIRAB versus PROFIT/SITE, “Island Studies Journal”, Vol. 2, No. 2, 2007, pp. 163-176• Steven Van De Walle, Measuring bureaucratic quality in governance

indicators, Paper for the 8th Public Management Research Conference, Los Angeles, Sep 29th - Oct 1st, 2005• Bernard Poirine, Should We Hate or Love MIRAB?• Clem Tisdell, The MIRAB Model of Small Island Economies in the Pacific and

their Security Issues: Revised Version, Working Paper No. 58

Article Synopses

• Group 1: Bernal, R ‘Participation of Small Developing Economies in the Multilateral Trading System’, CIGI Working Paper No. 44, 2009. At: www.cigionline.org

• Group 2: Heron, T. ‘Small States and the Politics of Multilateral Trade Liberalization’, The Round Table, 97, 395, 2008

• Group 3: Bishop, M L, Heron, T and A Payne ‘Caribbean Development Alternatives and the CARIFORUM-European Union Economic Partnership Agreement, Journal of International Relations and Development, 2012, iFirst.

• Group 4: Ramsaran, R and R Hosein. ‘CARICOM: Some Salient Factors Affecting Trade and Competitiveness’, The Round Table, 97, 396, 2008.