Very small economies may achieve high levels of development, as evidenced by Iceland and Mauritius, notwithstanding the facts of their high import dependence, limited capacity for export diversification, open financial markets and susceptibility to external shocks. This paper explains how unorthodox fiscal and monetary policies may be employed to ensure stability and maintain competitiveness and growth in the face of oil price shocks, the impact of natural disasters, capital flight and contraction in foreign investment, in countries characterised by this economic structure. The key to success is the management of aggregate demand through fiscal policy, and the promotion of external competitiveness through the maintenance of balance of payments stability, efficient public administration, high quality public services and modern, well maintained infrastructure.
