According to the World Bank, all economies with a population of less than 0.5 million are considered to be “micro.” At present, there are 29 such countries which constitute around 15% of the total number of countries in the world. They are typically clustered and widespread in three regions: the Caribbean, the Pacific, and Africa. These are mostly landlocked or island nations and are usually there in groups.
Due to their geographical positioning, these nations are mostly far away from most macroeconomic nations and are isolated from the markets. This increases the cost of transportation of goods and services which is reflected in the price of the final product. With increased prices, the goods become unfavourable in the international markets and are not able to survive the competition, hence exports suffer.
Moreover, the labour supply market is limited. This leads to labourers having to indulge in multitasking which hinders specialization and productivity as well. The market can not take advantage of specialization and labour segregation. Such factors, along with poor competition and high manufacturing costs, contribute to the micro island nations being “diseconomies of scale”.
With low levels of population and being unable to specialize, these nations are able to obtain little diversification and specialize in one or two goods and services in which they have an advantage over the other economies.
These economies are generally monopolies owing to a lack of incentives for new producers. When a company gets a monopoly in a market then the prices can be adjusted according to his will and are most of the time. Also, the product does not have close substitutes that do not allow a choice of product to the customer. Hence the power usually lies within the hand of the producer. This leads to poverty and income inequalities within the country.
The per capita Gross National Product (GNP) is also extremely low due to limited production generally for micro island nation economies. Being diseconomies of scale also hinders social and economic infrastructure development. Since the population is low, the number of taxpayers is also low which doesn’t collect as much revenue for the government to ensure infrastructural developments such as highways and roadways, and social infrastructures like hospitals and schools.
Dependence & Vulnerability
One of their major sources of income includes tourism which constitutes an important part of their GDP and also the imports exports too. But this also makes the country vulnerable to events and shocks in the international realm. These economies also dwell on one of the parent economies which is fairly near and most of the trade activities are carried out with them only. Caribbean States depend upon Mexico and the US, the ones in Pacific depend upon Australia and New Zealand. Hence the fate of these economies is also largely dependent on the global market well being of the parent economy.
Being island countries they face other natural challenges as well which includes natural disasters and calamities along with global warming. With rising sea levels they are at an increased risk of complete disappearance.
However, they also have some advantages as well. Being cluttered and in faraway places, they have exposure to the vast territory of oceans and hence are paid charges by foreign multinational corporations for accessing these territories for fishing and extraction of resources. This is an important part of income. Also, they are seen as very advantageous for other countries to set up military bases on their territories.
Involvement In Money Laundering
Economical & Social Threats
Money laundering is a crucial concern for the world as it interferes with the global economy’s cash flow. Unchecked money laundering increases the demand for money, danger to bank soundness, contamination impact of legitimate financial transactions, enhanced instability of foreign capital movements, and exchange rates due to unexpected cross-border movements of commodities. Besides, it widens the gap between the rich and the poor. It provides the fuel for drug dealers, terrorists, illegal arms dealers, corrupt political officials, and others to operate and expand their criminal enterprises.
Root Cause for the Lucrativity
These economies serve as tax havens for rich billionaires and multinational corporations in other countries as they have very lax or no tax laws. Due of the prevalent tax scenario, in those nations where it stays free, people tend to keep their extra cash or black money away from the trail of their homeland so they don’t get challenged about how the money was received. It may have been possible that the company or person might have been involved in illegal activities to earn the extra money but they are the perfect hotspots for money laundering with the weak security in these micro island nations.
The Bahamas is one such micro island nation that has high levels of money laundering activities in the past. Their positioning near Florida makes them a suitable transit point for drugs heading to the United States. The trafficking is carried out by commercial and private planes and also by blending in with other pleasure crafts which also strengthens the criminal activities. It is “The Bahamas is an international business and financial center with an open economy. The high volume of transactions involving massive, cross-border funds raises the possibility of money laundering by private banks, trust institutions, insurance agencies and corporate service providers. Such methodologies for money laundering may involve purchasing real estate and precious metals and gems.
In a report by the United States Department of State, the Bahamas was listed among major international money laundering jurisdictions in 2018, also highlighting sources of laundered proceeds included firearms trafficking, human smuggling and tax fraud. The US observed that the country had not maintained official records of the business’ beneficial ownership, or required resident paying agents to report payments to domestic tax authorities to non-residents. The findings were detailed in the March 2019 Bureau of International Narcotics and Law Enforcement Affairs – International Narcotics Control Strategy Report Volume 2 on Money Laundering.
Many of the factors that have been found to be responsible for these practices in these nations are: Bahamas law enforcement agencies lack the capacity to successfully execute operations into money trafficking, such as specialized human resources. The legal proceedings against such activities is not that stringent with no convictions for evasions of international taxes. Because of a poor security system and a comparatively lenient judiciary, many corrupt officials and businessmen are fleeing to these nations in case they have to flee their own country.
The Cayman Islands is yet another popular name when it comes to hiding money by rich persons and businesses due to the low tax scenario. It hosts more than 100,000 companies which is a questioning data as it outstrips the local population as well. However, the government of the Cayman islands justify the company listings saying that it meets global standards and cooperates with authorities around the world. It is owned by the British and has been set free to set its own taxes.
The British territory realized that it “faces internal and external money laundering and terrorist financing threats,” making it a probable place for international fraud, tax circumvention, as well as drug trafficking and smuggling.
Broad inquiries and convictions on money laundering are non-existent and the use of the Financial Reporting Agency to conduct investigations is benign; the latest mutual evaluation report by the Caribbean Financial Action Task Force has concluded.
The major deficiencies seem to be there in the accounting methodologies, lack of focus on international money laundering and terrorism financing threats.
The economies of micro island nations are at severe disadvantages and need to integrate with the World Economy to grow and prosper as depending on a single country or economy makes them vulnerable and at a disadvantage. However, with the opening of the economies, some have been able to show tremendous growth such as Maldives and Fiji. Other economies can also look into their growth profile, demographics, and take relevant measures. Moreover, due to the tax structure, money laundering has been an extremely frightening problem as it has various social as well as economic impacts. Anti-money laundering laws and regulations, although started, need to be strengthened and properly implemented so as to counter it.