World Markets

The World's 5 Smallest Economies

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Credit: Photo by Christine Roy on Unsplash

Nations around the world differ in size, climatic conditions, natural endowments, population, terrain and gross domestic product (GDP), among other things. The difference between the GDP of the largest and smallest five nations is huge.

The largest economies dominate more than 55% of the global GDP, which is $103.72 trillion, according to IMF’s 2022 projections. Meanwhile, the smallest five economies capture only a tiny fraction of the global GDP. However, this does not undermine their presence.  

Here's an overview of the five smallest economies in the world in terms of nominal GDP.

1. Tuvalu

Tuvalu, formerly known as the Ellice Islands, is one of the world's smallest independent nations in the world. The islands of Tuvalu, all low-lying atolls, are located midway between Hawaii and Australia in the South Pacific Ocean. The island nation is home to around 11,000 people with the majority living in the capital, Funafuti. The nation became independent from the United Kingdom in October 1978 and is a constitutional monarchy. The country’s private sector is small and underdeveloped, and the major economic driver is the public sector.

According to the Fisheries Department’s annual report, “The physical and economic health of the Tuvalu population depends upon the health of its inshore and oceanic fisheries.” Subsistence activities dominate Tuvalu’s fisheries sector; however, fisheries licensing is now the major source of revenue for the government. Based on IMF estimates, Tuvalu’s GDP is $66 million while its per capita income is $6,046.53. Australian currency is legal tender in the country. Tuvalu is an upper middle-income nation according to the World Bank.

2. Nauru

The Republic of Nauru is the world’s smallest island country located north-east of Australia. In the early 1980s, Nauru was one of the richest countries in the world on the back of its state-run phosphate industry, however, economic mismanagement led to sovereign default in 2004. According to an ADB report, “Relatively little is known about the Nauru Phosphate Royalties Trust (NPRT), reflecting its nontransparent governance and weak managerial arrangements. However, the trust was badly mismanaged and had a history of poor investment decisions. The NPRT had an estimated value of A$1.5 billion in 1990. Upon entering receivership in 2004, its value was estimated at only A$100 million.”

While phosphate mining and exporting are a source of revenue but the royalties from the industry are declining. The other major source of revenue include the license fee for fishing as well as direct and indirect revenue resulting from the establishment of the Regional Processing Centre (RPC) for asylum seekers under an agreement with the Government of Australia. Nauru is a high-income nation as per the World Bank classification. The size of its GDP is $134 million with a per capita income of $10,004.73.

3. Kiribati

Kiribati, an independent republic within the Commonwealth of Nations and located in the central Pacific Ocean, is one of the most isolated countries in the world. Kiribati consists of 33 coral islands divided among three island groups: the Gilbert, the Phoenix and the Line Islands. Apart from the abundant marine resources, the country has limited endowment of natural resources which makes Kiribati depend on sea for revenue, food security, employment and income.

“The combined value of all Kiribati lagoon, coastal and oceanic fisheries is estimated to exceed A$110 million per annum,” according to a report. Overall, tourism, earnings from fishing licenses and remittances from citizens employed abroad (mainly seafarers) are important sources of income for the government. In addition, the country depends on foreign aid. The country has a GDP size of $216 million and a per capita income of $1,745.09, lowest among the five smallest economies. The World Bank classifies Kiribati as a lower middle-income nation. Kiribati uses the Australian dollar as its currency.

4. Palau

Palau is an independent country in a Compact of Free Association with the United States,  which was entered on October 1, 1994. Under the Compact, the U.S., through the Department of the Interior, “provides economic and financial assistance, defends Palau's territorial integrity, and allows uninhibited access by Palauan citizens to the United States in return for exclusive and unlimited access to Palau's land and waterways for strategic purposes.”

In addition, the economy of Palau is driven largely by tourism, fishing and subsistence agriculture. Palau has created one of the world’s largest areas of protected ocean based on its plans announced in 2015. Within the sanctuary, which covers 80% of Palau’s national waters, all extractive activities such as fishing and mining are now prohibited. Domestically managed fisheries are still permitted to operate within the remaining 20% of Palau’s exclusive economic zone (EEZ). Palau is an upper middle-income nation as per the World Bank. The country has a GDP size of $244 million and a per capita income of 13,705.65, highest among the five smallest economies.

5. Marshall Islands

The Republic of the Marshall Islands (RMI) is a sovereign nation. The Compact of Free Association between the U.S. and the RMI entered into force in 1986. Pursuant to the Amended Compact entered in 2004, “the U.S. government provides more than $80 million in assistance every year, along with a variety of federal programs and services, until FY 2023, including contributions to a jointly managed trust fund.” 

RMI uses the U.S. dollar as its currency. The population of the Marshall Islands is around 56,000, spread out over 1,200 small islands and islets. The country has a narrow export base (fish, coconut oil, copra cake, handicrafts) and limited production capacity. Commercial fisheries and tourism are the other sources of revenue. The Marshallese economy remains dependent on foreign aid in additional to the assistance provided by the United States. RMI has received aid from Australia, Japan, Taiwan, the United Arab Emirates, Thailand and the European Union. The country has a GDP of around $221 million and per capita GDP of $4,755. The World Bank lists Marshall Islands as an upper middle-income nation.

Disclaimer: The rankings are based on IMF data for Gross Domestic Product released in April 2022. Nominal GDP is mentioned as GDP is at current prices, U.S. dollars. GDP per capita, current prices, U.S. dollars is interchangeably written as per capita income. The report has been carefully prepared, and any exclusions or errors in it are totally unintentional. The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Prableen Bajpai

Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.

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