This study aims to test within a relatively homogeneous group of small states what
differentiates the growth performance of Pacific island countries (PICs) from their peers. We
find that PICs are disadvantaged by distance and hampered by lower investment and exports
compared with other small island states, but greater political stability, catch-up effects from
lower initial incomes, and slower population growth have helped offset some of these
disadvantages. On balance, policy-related factors, together with geography-related
disadvantages, have led to growth rates in PICs that are much lower than in other small states.
We also examine how real exchange rate appreciation, unfavorable developments in the
external trade environment, and rising international transport costs may have contributed to
PICs’ slower growth over the past decade.
