Globalization poses new questions regarding size and development. Inparticular, it makes all countries smaller when compared to the relevant world market. Therelative importance of large national markets has declined, and even larger economies areincreasingly dependent on external conditions.

Nonetheless, small developing economies continue to be at a disadvantagein the global economy, regarding access to economies of scale, diversification andmacroeconomic policy autonomy. They are not small enough to rely only on exports of a fewcommodities or services, nor are they large enough to reap the benefits of economies ofscale or to successfully diversify into dynamic products. These countries, then, run therisk of been caught in a development trap.

Although the challenge of keeping up and getting ahead in a globalizedworld is substantial for small economies, the region has had its share of success stories.Service-based economies of the Caribbean have shown the most robust response toglobalization, in activities such as tourism, informatics, e-commerce and finance. Incountries where agriculture and mining are competitive, 'clusters' associatedwith their key primary sectors are also an interesting option. Upgrading the'maquila' industry to include more value-added ladder products is yet anotheroption, as Costa Rica has shown.

The mix of an active investment strategy, strong human capitalaccumulation and a broad macroeconomic stability framework could help to improve exportcompetitiveness. Progress on these fronts will require major institutional andorganizational efforts. In this context, an investment strategy is less an exercise in'picking winners', than an effort to identify opportunities and to directnational and regional action needed to ensure that some of them bear fruit.

Opportunities for small economies are also highly dependent on regionalintegration efforts. Countries in Latin America and the Caribbean have advanced further inthis field than those of any other area in the developing world. Nonetheless, regionalintegration processes will need to be deepened in the future if they are to remainrelevant. Macroeconomic policy co-ordination can help to smooth out the effects ofexternal shocks. Avoiding tax competition is also an essential objective that could beachieved by means of common tax provisions. Steps must also be taken to develop regionaland subregional financial institutions and innovation systems that include the developmentof broader schemes for co-operation in education, research and technical development.

Divergent development levels associated with scale economies and thevulnerabilities specific to small economies, provide a strong argument for special anddifferential treatment for these economies. In multilateral trade agreements, this wouldinclude longer transition periods to meet new policy demands, more flexibility in settingthresholds or defining legal and institutional obligations, more manoeuvring room foractive investment strategies, broader safeguards and the provision of technicalassistance.

Greater international labour mobility should also be a clear priority forsmaller economies, since it smoothes out the social costs of adjustment, guarantees accessto the required pool of skilled workers and provides much-needed external resources viaremittances to foreign exchange-constrained economies. The benefits of return migrationare enormous when professionals who have studied and worked abroad return home. Thus,migration issues should be included in the hemispheric agenda, in multilateralnegotiations between the region and the European Union, and in regional integrationprocesses.