Size and Sectoral Specialisation: The Asymmetric Cross‐country Impacts of the 2008 Crisis and Its Aftermath

Abstract

This paper analyses the cross‐country impacts of the 2008 global financial crisis and the subsequent recovery process, with a specific focus on small economies. Key growth volatility variables highlight the critical exposure of small economies to the transmission of exogenous shocks owing to their high degrees of trade openness and inherent output and export specialisation, notably in financial services and tourism. These factors also constrain the mitigation of exogenous shocks giving rise to greater growth volatility. The paper demonstrates systematic asymmetries between countries with respect to the impact of the crisis and its persistence according to their size and patterns of sectoral specialisation. Small tourism‐dependent economies and nonsovereign entities were particularly adversely affected although an offshore financial sector partly mitigated the impacts. The robustness of the findings is examined further in the appendix with regard to truncation problems arising from the use of international datasets. © 2020 John Wiley & Sons, Ltd.

The non-sovereign territories: Economic and environmental challenges of sectoral and geographic over-specialisation in tourism and financial services

“…The analysis of small economies involves serious data deficiencies and this is even more severe for non-sovereign territories, so raising critical methodological issues. These problems are discussed at length elsewhere (Armstrong et al, 1998; Armstrong and Read, 2020a) but are summarised here. The principal global harmonised datasets all suffer from severe systematic truncation problems, particularly the exclusion of smaller economies (both sovereign and non-sovereign).…”

“…Many small economies continue to rely heavily on markets in their former/current metropoles (Bertram, 2004). This critical dependence upon export markets in the principal epicentres of Europe and the United States was a primary factor in the transmission of the 2008 crisis to many small economies, over and above their sectoral structures (Armstrong and Read, 2020a).…”

“…The most successful small economies are those specialising in some combination of international tourism, financial services and resource exploitation (Armstrong et al, 1998; Armstrong and Read, 2000, 2020a). Analysing niche sectoral specialisation in non-sovereign territories, however, suffers from serious data deficiencies and requires extreme care in collating and interpreting statistics.…”

“…In just over a decade, however, many of them have experienced a series of devastating external shocks. The 2008 financial crisis triggered a major global economic recession, the impacts of which were particularly severe for small entities because of its distinct sectoral – on tourism and financial services – and geographic effects – that is, their reliance upon markets in Europe and North America (Armstrong and Read, 2018, 2020a). Those with more diversified tourism sectors, however, may have been better able to recover from the initial shock of the crisis (Podhorodecka, 2018).…”

Global shocks and the dynamics of EU countries' specialisation

“…The relationship between trade and global shocks is multifaceted. Indeed, it is well established that particularly severe natural disasters or armed conflicts may affect specialisation patterns through their devasting effects on the stock of physical capital, investment and human capital, and that these effects may vary according to the size of the hit economies (Armstrong & Read, 2020). It is also known, on the one hand, that global shocks may temporarily affect the magnitude of trade flows, generating trade collapses of different intensity and duration; on the other hand, that localised but severe shocks can be transmitted to other countries through trade (e.g.…”