Island economies range from some of the world’s most advanced, such as Japan and the UK, to some of the poorest. They include everything from the chilly shores of Greenland and Iceland to the tropical climes of the Caribbean and South Pacific; and from vast, heavily populated archipelagos such as Indonesia and the Philippines to diminutive single-island states such as Barbados and Nauru. At the higher end of the development scale, a few have diverse, well-balanced economies while others remain reliant on fishing, resources or tourism. 

Because island nations span the globe and span the full spectrum of economic situations, generalising about them is difficult. But, taking away the most advanced economies and the largest of the island nations from consideration, there are many shared challenges among the others, especially the smaller, less developed and more vulnerable islands – from rising tides and environmental threats to one-dimensional and recession-prone economies.  


Many island nations are small in land mass, population and economic size, and therefore struggle to attract large-scale, market-seeking inward investment and build up solid industrial bases. Tempted by the lure of tourism dollars, reliance on the tourism and hospitality industry became too easy for many of them, with dire consequences when the global financial crisis caused a crash in visitor numbers. Likewise, those that courted tax exiles and built their investment offerings on solely fiscal advantages and financial services found themselves exposed in a post-crisis and then post-Panama Papers world. And many island economies are also based heavily on natural resources and raw materials and have felt the brunt of the downturn in the global commodity cycle. These strategies have left them too often at the mercy of economic winds swirling around them.

Caribbean challenges 

The Caribbean region typifies many of the challenges. “The Caribbean is a small region made up of many countries, of many small islands with limited internal markets. Therefore the question of quality is essential in their value proposition to FDI because it’s never going to be primarily a market-seeking FDI,” says Fabrizio Opertti, chief of the trade and investment unit of the Inter-American Development Bank. “At the same time, being small scale, these countries are very dependent on FDI as a source of economic growth.” 

Having been burned by the financial crisis, Caribbean governments are putting increasing focus on economic diversification, as evidenced by the assertions of ministers representing the Caribbean islands of Grenada, Haiti, Trinidad and Tobago, and their non-island regional neighbour Suriname. Island nations in other parts of the world are taking the cue. Progress in these efforts is uneven, but at least the message has filtered through that economic diversification is the pathway to economic stability. fDi’s first ever Diversification Index – an analysis of diversity of inbound FDI among sectors – highlights the island economies that are making strong headway, with Asia’s Sri Lanka showing how it is done as the most diversified island economy in the study.