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International Monetary Fund
The small states of the Asia and Pacific region face unique challenges in raising their growth potential and living standards. These countries are particularly vulnerable because of their small populations, geographical isolation and dispersion, narrow export and production bases, lack of economies of scale, limited access to international capital markets, exposure to shocks (including climate change), and heavy reliance on aid. In providing public services, they face higher fixed government costs relative to other states because public services must be provided regardless of their small population size. Low access to credit by the private sector is an impediment to inclusive growth. Capacity constraints are another key challenge. The small states also face more limited policy tools. Five out of 13 countries do not have a central bank and the scope for diversifying their economies is narrow. Given their large development needs, fiscal policies have been, at times, pro-cyclical. Within the Asia-Pacific small states group, the micro states are subject to more vulnerability and macroeconomic volatility than the rest of the Asia-Pacific small states.
Ms. Patrizia Tumbarello, Ezequiel Cabezon, and Mr. Yiqun Wu
The small states of the Asia and Pacific region face unique challenges in raising their growth potential and living standards relative to other small states due to their small populations, geographical isolation and dispersion, narrow export and production bases, exposure to shocks, and heavy reliance on aid. Higher fixed government costs, low access to credit by the private sector, and capacity constraints are also key challenges. The econometric analysis confirms that the Pacific Island Countries (PICs) have underperformed relative to their peers over the last 20 years. Although these countries often face more limited policy tools, policies do matter and can further help build resilience and raise potential growth, as evidenced in the recent business cycle. The Asia and Pacific small states should continue rebuilding buffers and improve the composition of public spending in order to foster inclusive growth. Regional solutions should also continue to be pursued.
International Monetary Fund

studies ( Yang and others 2013 ). The APD small states as a whole have also underperformed relative to the average small states, but this difference is not statistically significant (Models 3 and 6). Finally, higher fixed government costs, capacity constraints, less openness, and higher GDP volatility relative to other small states also contribute to explain the difference in growth performance. Policy Implications: How to Raise Growth Potential and Enhance Resilience? Decisive policy measures by Asia-Pacific small state governments can go a long way toward

Ms. Patrizia Tumbarello, Ezequiel Cabezon, and Mr. Yiqun Wu

.193 0.052 0.037 3.144 1/ All regressions include a full set of regional dummies, dummies for OECD and oil exporters. V. Policy Implications: How to Raise Growth Potential and Enhance Resilience Decisive policy measures by Asia-Pacific small state governments can go a long way toward addressing the challenges they face . Given their high vulnerability to external shocks and still low potential growth, these countries should continue rebuilding policy buffers in a way that reinforces efforts to implement growth-enhancing reforms