The distance from external balance: Pacific Island states

This paper seeks to illustrate the potential relevance of the ‘distance from external balance’ concept as a calibration tool for use in the analysis of the external imbalances experienced by small island states. The paper draws on data from several Pacific Island countries to illustrate the measurement and policy issues involved. The paper defines the distance from external balance, provides estimates of its magnitude for the selected Pacific Island countries, and illustrates how the distance from external balance has changed over time. It is found that the small microstates are furthest from external balance. Finally, policy options to address cases of chronic external imbalance are identified.