Policy Pathways Beyond the Shoreline

2. Features and characteristics of island economies

Abstract

The chapter analyses island economies in OECD countries, focusing on how insularity, defined by small size, remoteness and fragmentation, affects their development. It identifies structural constraints such as limited markets and economies of scale, high transport and service costs, dependence on external resources, seasonal employment, and vulnerability to global trends like globalisation, digitalisation, demographic ageing and climate change. These factors contribute to productivity gaps, lower income levels, higher unemployment and elevated public service costs. The analysis is structured around the economic, environmental and social dimension and identify ways to enhance connectivity, diversify local economies, promote renewable and circular-energy systems, strengthen human capital and improve multi-level governance. The chapter also highlights emerging opportunities in digitalisation, innovation, the blue and green economy, and the sustainable management of islands’ natural and cultural assets

Territorial and economic characteristics of islands

The strategic significance of island regions

Islands form an integral part of the national territory of many OECD and partner countries. They contribute to economic activity, environmental diversity, and cultural heritage, while presenting distinct governance and development challenges. Several OECD members count thousands of islands within their jurisdiction, notably Sweden (267 570), Norway (239 057), Finland (178 947), Canada (52 455) and the United States (18 617) (WorldAtlas, 2022[1]).

Within the European Union, island regions host more than 20 million inhabitants, representing about 4.6% of the total EU-27 population (Haase and Maier, 2021[2]). In Greece, islands account for over 18% of national territory and 15% of the population (General Secretariat for the Aegean and Island Policy, 2025[3]), while in Italy they cover about 20% of the territory and 12% of the population (EESC, 2017[4]).

Despite wide differences in size, geography and institutional status, island regions share structural features that shape their socio-economic performance and resilience. Understanding these conditions that are often summarised under the concept of insularity, is essential for designing effective, place-based policies that promote inclusive and sustainable development.

Insularity and structural characteristics

Insularity refers to the permanent physical separation and peripherality of islands from continental landmasses and major markets. It entails not only geographic distance but also limited accessibility, small internal markets and dependence on external flows of goods, energy, people and information (Deriu & Sanna, 2020[5]). In archipelagos, fragmentation amplifies these effects by complicating transport logistics, public administration and service delivery.

Most islands are small in both area and population, resulting in limited domestic markets, constrained economies of scale and higher costs for infrastructure and public services. Topographical constraints limit arable land and usable space, increasing pressure on housing and resources and generating competition for land use between economic sectors. Spatial disparities between coastal, urban and rural areas can further intensify inequalities.

Policy considerations:

• Integrate territorial and land-use planning to manage competing demands for limited space.

• Improve infrastructure efficiency and promote compact, resource-efficient settlements.

• Strengthen human capital and skills to mitigate small-market and labour constraints.

Connectivity and accessibility

Limited accessibility is one of the most significant barriers to island development. Transport to and from islands relies primarily on ferry and air connections whose frequency and cost depend on distance, weather and market size. These factors generate high transaction costs for households, firms and governments. Transport services often operate under quasi-monopolistic conditions, leading to inefficiencies and price distortions. Non-transported services such as education, healthcare and administration, are also costly to deliver given the small user base.

Improving connectivity is therefore central to enhancing competitiveness and territorial equity.

Policy considerations:

• Support integrated multimodal transport systems and public service obligations to ensure reliable connectivity.

• Expand digital infrastructure to offset geographic isolation.

• Strengthen inter-island and regional co-ordination to achieve economies of scale in transport and service delivery.

Economic dependence and diversification

Island economies typically depend on a narrow production base and external sources of supply. Common dependencies include:

• Food and water: limited arable land and freshwater sources create import reliance.

• Energy: many islands depend on imported fossil fuels, exposing them to price volatility.

• Goods and services: small markets restrict local production of consumer and capital goods.

• Specialised services: advanced healthcare and higher education often require travel to the mainland.

Seasonality compounds these challenges. Tourism, which is a dominant sector in many islands, generates strong income inflows but creates vulnerability to demand fluctuations, global shocks and climate variability. Agriculture and fisheries are similarly constrained by seasonal patterns and environmental pressures.

Policy considerations:

• Promote economic diversification through innovation and emerging sectors (digital services, creative industries, circular economy).

• Expand renewable energy production and local value chains to reduce import dependence.

• Develop sustainable tourism models that smooth seasonality and preserve natural assets.

Vulnerability and resilience to global megatrends

Due to their size and concentrated economic structures, islands are particularly exposed to global megatrends such as globalisation, digitalisation, demographic change, technological transformation and climate change.

• Globalisation and trade. Island economies are sensitive to shifts in trade costs, external demand and supply chain disruptions.

• Digitalisation. Connectivity gaps risk widening the digital divide and limiting innovation potential.

• Demographic change. Out-migration and ageing populations reduce labour supply and tax bases.

• Technological shifts: advances in communication and transport can reduce isolation but may also disrupt traditional activities.

• Environmental pressures. Climate change, rising sea levels and biodiversity loss present long-term risks to island ecosystems.

Policy considerations:

• Expand renewable and low-carbon energy systems and local adaptation plans.

• Build digital infrastructure and skills to integrate islands into the global digital economy.

• Support climate adaptation, disaster-risk management and demographic resilience (e.g. youth entrepreneurship, return migration).

Socio-economic performance and labour markets

Island economies often rely on a limited set of activities primarily in agriculture, fisheries, tourism and public administration. Manufacturing tends to be under-represented due to scarce resources and high logistics costs (Planistat & Dunbar, 2003[6]). This hyper-specialisation constrains productivity and innovation (ESPON, 2013[7]).

Across the European Union, island regions systematically underperform relative to continental averages. About 94% of European islands and outermost regions record GDP per capita below the EU mean, and typically 20–25% lower than in urban regions (CPMR, 2017[8]). For 362 inhabited islands (over 50 residents each), average GDP per capita stands at 79% of the EU-27 average, with limited convergence since the 2000s (CoR, 2017[9]). Unemployment rates in many island regions range from 1.5 to 4 times the EU average (CoE, 2005[10]).

Public sector employment frequently acts as a stabiliser but can crowd out private activity and create fiscal dependency (ESPON, 2013[7]) (Deidda et al., 2014[11]). Service provision costs remain high due to diseconomies of scale and dispersed populations. Even high-income islands remain vulnerable because of their concentration in low-value-added or seasonal sectors.

Policy considerations:

• Foster local entrepreneurship and innovation systems to raise productivity.

• Strengthen skills development and labour mobility to address mismatches.

• Enhance fiscal and administrative efficiency to manage high per-capita service costs.

Building sustainable and inclusive island economies

The structural features of insularity call for tailored, multi-level policy responses that combine short-term mitigation with long-term resilience strategies.

Key priorities include:

• Enhancing connectivity – through efficient transport and digital networks that reduce isolation and support trade and mobility.

• Promoting economic diversification – by supporting renewable energy, sustainable tourism, abd value-added sectors that build local value chains.

• Strengthening human capital and skills – to increase productivity, retain youth, and support innovation.

• Improving governance and service delivery – through inter-island co-operation, decentralised administration, and fiscal frameworks that reflect higher service costs.

• Advancing environmental resilience – by integrating climate adaptation, resource efficiency, and circular economy principles into island development strategies.

These policy directions align with the OECD’s broader agenda on place-based development and territorial resilience, underscoring that islands, despite their structural constraints, can leverage their unique natural, cultural and human assets to pursue sustainable and inclusive growth (OECD, 2025[12]).

Table 2.1 below, summarises how key insularity conditions shape the socio-economic mechanisms and performance outcomes that influence development in island regions.

Table 2.1. Structural characteristics of islands and associated socio-economic implications

Insularity characteristics	Socio-economic mechanisms	Performance outcomes
Small territorial scale and population	• Limited internal markets and reduced local demand • Limited economies of scale raising infrastructure and administrative costs • Small labour and skills base • Pressure on land and resources	• Low productivity and diversification • Weak innovation capacity • Low competitiveness and employment • High per-capita service costs
Peripherality, isolation and remoteness	• Limited access to markets and agglomeration • High transport and service costs • Out-migration and ageing • Reduced attractiveness for skilled workers	• Slower development and productivity • Limited R&D and competitiveness • Lower income levels • Persistent demographic imbalances
Vulnerability and dependence	• Reliance on mono-activities (tourism, fisheries) • Dependence on imported resources • Seasonal employment • Labour shortages and depopulation	• High exposure to external shocks • Fragile development prospects • Predominance of low-value-added sectors • Environmental and resource stress

Main challenges and opportunities for islands

This section summarises the main challenges and opportunities that shape island economies across the economic, environmental, and social dimension, followed by a synthesis of enabling policy areas to support inclusive and resilient development.

Economic dimensions

• Structural and competitiveness constraints. Small and fragmented markets limit economies of scale, diversification and innovation. Micro-enterprises dominate production structures, often with limited access to finance, research systems and broadband (EESC, 2012[13]). Agriculture, livestock and fisheries remain important employers but face low diversification and climate risks. Depopulation and ageing further reduce labour supply (ESPON, 2019[14]).

• Connectivity and energy dependence. Geographical isolation and limited connectivity increase production and trade costs. Developing and maintaining transport and energy infrastructure is costlier than on the mainland, often requiring subsidised “public service obligations” to maintain accessibility (ESPON, 2019[14]) (EPRS, 2016[15]). Dependence on imported fossil fuels and weak grid connections expose islands to price fluctuations and supply disruptions. Double and multiple insularity, as seen in archipelagos such as Greece and Croatia, further limits accessibility by adding extra legs, time and cost to every journey, and should therefore be treated explicitly in connectivity, subsidy and service-provision policies. (ESPON, 2019[14]).

• Labour market and skills challenges. Seasonality in tourism and agriculture causes employment fluctuations and skills underutilisation. Limited tertiary and vocational institutions constrain human capital formation (Planistat & Dunbar, 2003[6]) (EPRS, 2016[15]). Shortages of specialised staff, notably in ICT and technical fields, hinder competitiveness.

Policy considerations

• Promote economic diversification and SME support in sustainable and innovative sectors.

• Expand renewable energy and interconnection projects to reduce import dependence.

• Invest in education, vocational training, and digital skills tailored to island labour markets.

Environmental dimensions

• Fragile ecosystems and climate risks. Islands combine rich ecosystems with high vulnerability to climate change. Rising sea levels, extreme weather and biodiversity loss pose systemic threats (OECD, 2020[16]). Limited freshwater sources and waste-management capacity heighten resource pressures, especially during tourism peaks.

• Sustainability of tourism and resource management. Tourism drives growth but can generate environmental degradation and rising living costs for residents (EESC, 2012[13]). Uncontrolled expansion threatens natural assets and local well-being.

Policy considerations

• Integrate climate adaptation and ecosystem protection into all development planning.

• Promote sustainable and high-quality tourism that balances growth and conservation.

• Invest in renewable energy, circular economy systems, and efficient water and waste management.

Social and demographic dimensions

• Access to services and infrastructure. Remoteness and small populations limit access to health, education and administrative services. Diseconomies of scale lead to high unit costs (ESPON, 2013[7]). In archipelagos, service fragmentation exacerbates inequalities. These inequalities are often most acute in islands facing double or multiple insularity, where residents depend on one or more intermediary islands to access core services such as healthcare, education and administration.

• Demographic change and migration. Population ageing and out-migration of youth and skilled workers erode community vitality (Planistat & Dunbar, 2003[6]). Some islands experience in-migration of foreign residents, which can support local economies but strain housing and utilities (EESC, 2012[13]).

Policy considerations

• Improve access to services through digitalisation and decentralised delivery models.

• Implement youth retention and return-migration strategies to revitalise communities.

• Support social innovation and participatory governance to strengthen cohesion and inclusion.

Strategic opportunities for island development

• Sustainable and quality tourism. Tourism remains a cornerstone of many island economies, driving diversification and employment. Linking tourism to local agri-food production, crafts, and cultural industries can increase value added while protecting local identities (EESC, 2012[13]). Strategic, sustainable tourism planning supported by digital technologies can enhance resilience and inclusiveness.

• Digitalisation and innovation. ICT adoption enables islands to overcome remoteness, access new markets and expand service provision. Digital skills and innovation, both technological and organisational, can raise productivity and competitiveness (ESPON, 2013[7]).

• Blue and green economy. Sustainable maritime industries, offshore renewables and blue biotechnology offer growth opportunities while preserving ecosystems (EU, 2018[17]) (CoE, 2005[10]). Green growth and circular-economy initiatives can enhance resource efficiency.

• Natural and cultural assets. Unique ecosystems and heritage resources strengthen territorial identity and attract investment when managed sustainably (Deriu & Sanna, 2020[5]).

Policy considerations

• Foster innovation and digital ecosystems to bridge distance and boost competitiveness.

• Advance blue- and green-economy initiatives aligned with environmental goals.

• Leverage natural and cultural assets through integrated tourism and conservation strategies.

Synthesis: challenges, opportunities, and policy priorities

Insularity is a defining and enduring feature of island economies. It raises costs and limits competitiveness; but also creates distinctive opportunities for sustainable and inclusive growth. Effective policy responses must address structural disadvantages while leveraging local assets, including human capital, renewable energy potential, cultural heritage and strong community cohesion.

The following table summarises how these interlinked challenges and opportunities can be addressed through integrated, place-based policy approaches that strengthen island resilience.

Table 2.2. Challenges and opportunities facing island economies and indicative policy priorities

Themes	Main challenges	Main opportunities	Indicative policy priorities
Economic	• Small market size and limited diversification • High transport and energy costs • Weak integration with national networks • Limited innovation capacity • Seasonality and skills shortages	• Sustainable and diversified tourism • High-quality agri-food and fisheries products • Innovation and digitalisation • Blue economy and renewable energy • Cultural and creative industries	• Economic diversification and SME support • Sustainable and quality tourism • Smart specialisation and innovation • Transport, energy and digital connectivity • Skills development and labour inclusion
Environmental	• Climate vulnerability and natural hazards • Resource scarcity (water, waste, land) • Environmental degradation and biodiversity loss • Uncontrolled tourism pressures	• Green and blue economy potential • Unique natural resources and ecosystems • Renewable-energy development • Environmental innovation	• Climate adaptation and resilience planning • Green growth and circular economy • Sustainable resource and land-use management • Integrated environmental governance
Social and institutional	• Ageing and depopulation • High service and infrastructure costs • Limited institutional capacity and remoteness • Inequalities between islands	• High quality of life and social cohesion • Cultural identity and heritage • Community participation and co-operation	• Digital and transport connectivity • Education and skills • Social innovation and service delivery • Strengthened local governance and fiscal frameworks

Box 2.1. The long-term effects of COVID-19 on island economies

The COVID-19 pandemic reshaped global and local dynamics, with particularly strong effects on islands. Two shifts were most notable: the rapid digitalisation of work and services and changing perceptions of proximity and mobility.

Digital acceleration. Teleworking, online learning and e-services expanded rapidly, enhancing digital literacy and creating new opportunities for remote employment. For islands, this reduced dependence on physical connectivity but exposed persistent broadband and skills gaps.

Redefined proximity and mobility. Travel restrictions and new traveller preferences boosted demand for nature-based, low-density destinations. The “digital nomad” phenomenon created opportunities for long-stay visitors, provided that local infrastructure and housing adapt. More regionalised value chains may also alter maritime transport patterns, with implications for island supply logistics.

Policy implications. Islands can leverage these shifts by investing in high-quality digital infrastructure, promoting flexible housing and workspace models, adapting maritime transport systems, and developing sustainable tourism strategies that integrate remote working and eco-tourism

Source: (Alderighi, 2021[18])

Conclusions

Island economies occupy a distinctive place within national and regional development landscapes. Their geography shapes both their constraints and their potential. These include small markets, high service delivery costs, and physical isolation with rich natural and cultural assets, strong community identity, and opportunities for innovation in sustainability and digitalisation. Insularity, while structural, does not necessarily imply disadvantage. With the right policy frameworks, it can become a driver of resilience and transformation.

The analysis in this chapter shows that islands face persistent challenges of limited connectivity, economic dependence, and demographic vulnerability. Many island regions remain reliant on a narrow set of sectors, particularly tourism and public administration, which stabilise local economies but constrain productivity and increase exposure to external shocks. Small enterprise size, seasonal employment, and the outmigration of skilled workers further limit diversification and innovation capacity. As a result, most island economies continue to underperform relative to national and EU averages in income and employment outcomes.

At the same time, major global transitions, notably digitalisation, the green economy, and shifts in global value chains, present new avenues for island development. Islands can act as testing grounds for renewable energy systems, circular economy initiatives, and digital service delivery, using their compact scale and community cohesion to pilot sustainable solutions adaptable to other regions. Strategic investment in connectivity, skills, and innovation can therefore unlock a more diversified and resilient growth model.

To capitalise on these opportunities, connectivity must remain the foundation of island policy. Improved transport and broadband infrastructure are essential to reduce isolation, support trade and labour mobility, and enable equitable access to services. At the same time, policy should foster economic diversification beyond tourism, promoting local entrepreneurship, value-added production, and participation in the blue and green economies. Strengthening human capital, through targeted education, vocational training, and digital skills, is equally critical to retaining youth and improving job quality.

Sustainability and environmental resilience must underpin all future development strategies. Islands are on the front line of climate change and resource scarcity; integrating renewable energy, water management, and ecosystem protection into territorial planning will not only preserve fragile environments but also enhance competitiveness and self-sufficiency.

Finally, achieving these objectives depends on strong, co-ordinated governance. Multi-level co-operation between national governments, regional authorities, and local communities is vital to ensure that policy design reflects the specific realities of island regions. Fiscal and regulatory frameworks should account for higher service costs, while inter-island collaboration can improve efficiency and share resources across small jurisdictions.

In summary, islands should no longer be viewed solely as peripheral or dependent regions, but as strategic spaces for sustainable innovation and inclusive growth. By coupling investment in connectivity and skills with environmental stewardship and effective governance, island regions can transform their structural constraints into long-term advantages and with it improve their resilience and sustainability.

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