Insularity and economic development: a survey

Abstract

This survey reviews theoretical and empirical evidence on the impact of insularity on regional economic development. Far from being a mere geographical condition, insularity can be regarded as a permanent phenomenon of economic and social peripheralization that prevents islands to reach the goals of sustainable development that are reached by the mainland. Even if the issue of the consequences of insularity on economic development is garnering greater interest in the light of the growing recognition of the significant economic disadvantage faced by islands, both the theoretical and empirical literature in this regard are fragmented. More importantly, the effects of insularity on economic development are not disentangled from similar conditions such as remoteness, smallness and peripherality. The survey focuses as well on the two-sided nature of insularity, since if it is true that islands suffer from permanent handicaps, adequate policy interventions may not only mitigate insularity effect, but also transform insularity into an asset leading a great potential for growth. Finally, some policy suggestions are drawn, highlighting the need for custom-tailored policy measures.

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Notes

  1. 1.

    Even if islands may have some degree of self-administration, they do not benefit from high political autonomy (Gloersen et al. 2012).

  2. 2.

    “In order to promote its overall harmonious development, the Community shall develop and pursue its actions leading to the strengthening of its economic and social cohesion. In particular, the Community shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions or islands, including rural areas”.

  3. 3.

    The report by ESPON (2010) identifies two indexes that have been used in order to summarize the main findings about the islands regions: a “state index”, for the situation of the islands in comparison with the member states they are located in, and a “change index”, capturing changes that have taken place approximately during the last decade.

  4. 4.

    Supply-side constraints, interpreted as labour–supply constraints, are at odds with reality. Using southern Italy as an example, D’Acunto et al. (2004) highlight that in the last fifty years, southern Italy has never suffered from a lack of labour force.

  5. 5.

    These literature contributions focus on Italy, which represents an interesting case study, having an homogenous institutional and political environment but high observed level of discrepancy between northern and southern regions.

  6. 6.

    Armstrong and Read (1995) analysis regarded Western Union, whereas Armstrong et al. (1996, 1998) and Armstrong and Read (2000, 2002) analyse a global dataset.

  7. 7.

    The existence of fixed links can be associated, to some extent, to regular ferry (Gloersen et al. 2012). However, as Armstrong et al. (2006) point out, excluding island with fixed links is not as clear as it appear. Indeed, there may be limits (i.e. tools, bad weather) preventing the usage of such linkages, so that they remain barriers to integration.

  8. 8.

    As Musotto (2007) pointed out, one should look at others indicators besides per capita GDP and unemployment when exploring the socio-economic situation of island region. The fact that GDP is broken down on the basis of NUTs categories discriminates against the smallest regions and it does not consider heterogeneity among different territories. This may lead to significant distortions, penalizing territories which experience significant migration, public transfers and transfers of private funds.

  9. 9.

    In over half the islands, the public sector accounts for over 25 % of jobs (Musotto 2007).

  10. 10.

    The highest share of employees in tourism can be found in medium-sized islands with populations of 100,000 to 1 million (Gloersen et al. 2012).

  11. 11.

    Borgatti (2007), using an augmented gravity model, analyses the Pacific islands’ bilateral trade between 1980 and 2004. She eventually found that trade is negatively affected by distance, since the positive effect of remoteness is not big enough to compensate for distance.

  12. 12.

    As Briguglio (1995) point out, the role of remoteness in the definition of islands needs to be tackled with care, since not all islands are situated in remote areas. However, since insularity and remoteness give rise to similar problems associated with transport and communication, these two issues can be analysed together.

  13. 13.

    Dependency from maritime and air transport causes an agglomeration of firms nearby airport and port zones, where there is the concentration of all the logistical services for stocking, trading and distributing goods.

  14. 14.

    Keeping large stocks is the only way to face unexpected changes in demand in the case transport is not frequent or regular. In the case of archipelagos, internal geographic fragmentation may exacerbate these problems (Armstrong et al. 1998).

  15. 15.

    “First contribution to the future of social and economic cohesion”, Conference of the presidents of the RUP, Las Palmas, February 2002.

  16. 16.

    Roll-on/roll-off (RORO or ro-ro) ships are vessels designed to carry wheeled cargo such as automobiles, trucks, semi-trailer trucks, trailers or railroad cars that are driven on and off the ship on their own wheels.

  17. 17.

    In Tinbergen (1962), original formulation of the gravity equation, the size of the trade flow between any pair of countries is estimated by an OLS regression, where the explanatory variables are the import of exports, the size of the importing market and the geographical distance between the two countries, used as a proxy of the transport costs.

  18. 18.

    In order to ensure a proper conduct of transactions and to prevent opportunistic behaviour, international trade requires some level of trust and degree of commitment between the involved parties. From this perspective, trust and commitment are facilitated by a deep understanding of the norms and values of the trading countries (Elsass and Viega 1994). Furthermore, pronounced cultural differences can complicate interactions and hinder development of the rapport and trust necessary to complete transactions (Doz and Hamel 1998).

  19. 19.

    Besides traditional agglomeration advantages related to clusters, there are other two agglomeration forces which affect the relocation of economic activities. On one hand, agglomeration may help in reducing innovation costs, so that relocating in the agglomerated region may be cost-saving for R&D performing firms. On the other hand, a firm might be attracted in the agglomerated area because it will find a wider variety of inputs at a lower cost.

  20. 20.

    Besides traditional agglomeration advantages related to clusters, there are other two agglomeration forces which affect the relocation of economic activities. On one hand, agglomeration may help in reducing innovation costs, so that relocating in the agglomerated region may be cost-saving for R&D performing firms. On the other hand, a firm might be attracted in the agglomerated area because it will find a wider variety of inputs at a lower cost.

  21. 21.

    R&D is made more difficult to fund as a result of a small domestic market, weakening the development of indigenous technologies and restricting the emergence of high-tech industrial sectors (Briguglio 1995).

  22. 22.

    There are only few cases of clusters created with adjacent countries, i.e. Malaysia with Indonesia and Singapore.

  23. 23.

    This is due not only to economies of scale constraints, but also to a limited labour supply.

  24. 24.

    In particular, trade often happens with adjacent states, with the main ferry terminals.

  25. 25.

    As Armstrong and Read (2004a) point out, many small states such as Andorra or the Isle of Man either choose not to have their own currency or to operate with a rigidly fixed exchange rate and guaranteed convertibility with the adjacent large state. Indeed, currency devaluation serves simply to directly drive up the domestic price level, and moreover, import substitution will not occur on any large scale since the wholly domestic sector from which resources would need to be freed up is so small.

  26. 26.

    In the case of archipelagoes, because of heterogeneity between islands, benefits related to social capital are likely to be weaker.

  27. 27.

    The authors also found that neither being an archipelago nor a mountainous territory negatively affects GDP levels. However, states which are remote from global markets or landlocked are shown to have weaker levels of economic performance. The authors do not explain the reason behind such result. Furthermore, they show that the significance of the coefficient associated with being landlocked is not robust to the inclusion of other regressors in the multivariate analysis.

  28. 28.

    Planistat (2003) identified 286 EU15 islands using other objective criteria: (a) being at least one kilometre from the continent and (b) have no permanent link with the continent.

  29. 29.

    These policies support the key export sector as soon as things go well, moving to another niche sector when the first one has been exploited.

  30. 30.

    This is subject to the condition that adequate fiscal policies are implemented.

  31. 31.

    The authors use a data set where public capital stock is disaggregated by economic macro-sectors (economic infrastructures, HK infrastructures, social infrastructures and housing and by levels of government.

  32. 32.

    Ascari and Di Cosmo (2005) and Aiello and Scoppa (2000) investigate TFP determinants in Italian regions. They eventually found that endowment of infrastructures, structure and development of the financial system, enforcement of property rights and crime rates, level of public intervention are the main determinants of TFP differences across Italian regions.

  33. 33.

    The ADE report (2009) identifies three types of governance arrangements to deal with island problems: (1) high degree of political autonomy, (2) local government with no overlap with the mainland and (3) local government areas shared with the mainland.

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Deidda, M. Insularity and economic development: a survey. Int Rev Econ 63, 107–128 (2016). https://doi.org/10.1007/s12232-015-0238-8

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Keywords

  • Insularity
  • Islands
  • Regional development

JEL Classification

  • R12
  • O50
  • F63