View
7
Download
0
Category
Preview:
Citation preview
Small and Medium Sized Enterprises (SME s) in Aruba: A path to
sustainable development
Don Taylor , MSc, CPA , LLB
Department of Hospitality and Tourism Management Studies
University of Aruba
JE Irausquinplein 4
Oranjestad , Aruba
Tel:( 00297) 5823901
Email: donald.taylor@ua.aw
Abstract
Entrepreneurship, as a viable approach to development
should be taken seriously by those who desire economic
growth that is sustainable and have depth in terms of
allocating economic benefits within the community.
There are local challenges to this proposed model of
development, which concerns the seeking out of profitable
opportunities to create private and social wealth in the local
economy.
Capital accessibility is just one of several institutional
impediments to risk taking and innovation that is necessary
to de-link development from being externally imposed to
being driven by internal structures that are self sustaining.
Limited, sporadic and uncertain access to capital constricts
the development of entrepreneurship and encourages the
formation of isolated and ethnocentric capital pools that
further facilitates disparities in capital accessibility and on a
wider scale promote societal inequalities . This paper
encapsulates a review of the current literature and is a
research in progress paper which is the sub theme for my
Phd thesis on financial intermediary structures in the
Caribbean.
Categories and Subject Descriptors
J.4 Social and Behavioral Sciences ;Economics, Sociology
,Psychology
General Terms
Governance, Tourism
Keywords
Financial intermediaries, SME s, societal inequalities,
entrepreneurship, sustainable development
Permission to make digital or hard copies of all or part of this work
for personal or classroom use is granted without fee provided that
copies are not made or distributed for profit or commercial
advantage and that copies bear this notice and the full citation on
the first page. To copy otherwise, or republish, to post on servers
or to redistribute to lists, requires prior specific permission and/or a
fee.
1. INTRODUCTION
Firstly, it should be noted that there is no widely accepted
definition of a small state [12] and small island developing
states (SIDS) and definitions have been based upon
arbitrarily chosen cut-off values[12]. For purposes of this
paper though we are limiting the context and the definition
to Caribbean island states.
Policy makers in small island developing states [SIDS] are
concerned about economic development and growth and a
desire not to be left behind as the world becomes a much
more dynamic place even as world population increases
and resources dwindle. Tourism has helped some SIDS
attain some level of development , but its spread is uneven
at best with some islands enjoying a steady and constant
flow of tourists while others are at a different end of the
spectrum[17]. It is development by tourism that is
constantly looked upon by policy makers to attract foreign
investment flows and to reduce poverty rates . It is clear
that such a development approach will not work in all cases
and it is time that policy makers seek alternative models of
development that fosters indigenous growth that is self
sustaining and allows for distributive equity [15] .
1.1 Research Question
The basic research question is a sub theme for the main
thesis of my Phd proposal is :
To what extent can SMEs be considered as
complementary to or as an alternative approach to
sustainable development in small island development
states (SIDS) like Aruba?
While there are many sub questions that can be garnered
from this main question , the focus of this paper is not to
examine those but to attempt to introduce and explicate
this primary question. The reason for this is that there
seems to be a myopic view of development that is attached
to a paradigmatic position of development for SIDS being
externally driven rather than being internally led . The
institutional frameworks that exists are therefore designed
to capture some segment of international capital flows
rather than structured to facilitate indigenous development
that is sustainable .
In many instances it appears to an observer that policy
makers do not actively look at other options for
development but are vested in a developmental paradigm
that essentially looks outward for help. This paper argues
that this approach is not the only path to development for
SIDS .
In this paper we will look at the current data available on
Aruba to determine the level of company formation as an
indication of entrepreneurship on the island . Part 2
involves a current review of Caribbean realities and in
part 3 we will look at the theoretical underpinnings and
literature review of our main thesis .In part 4 we will
critically assess the main points of parts 2 and 3 and finally
we conclude in part 5 and in part 6 we will discuss future
research activities .
It is also important at this point to define small and medium
sized enterprises (SME s), this term is related to its context
and considers, size of the economy, and the size of other
enterprises in that economy. No all encompassing
definition exists as to what is an SME [3]. In essence
though to be considered an SME a business should be
evaluated on criteria such as number of employees, size of
capital and sales , which are determined relative to the size
of other organizational structures in the economy[3] .For
purposes of this paper and considering the context of
SIDS the threshold criteria for SME s is the number of
employees ( 10-50 employees) while firms with less than
10 are considered micro enterprises [3]. For purposes of
this paper we will anchor our conceptual definition to small
island economies .
1.2 Research Design and Methodology
Because of the lack of empirical studies in this area , as
well as the sporadic , intermittent nature of papers
published focusing on this topic for small island developing
states (SIDS) , I believe a multiple embedded case study is
needed to examine in depth this contemporary social and
economic phenomena This research has policy implications
for all SIDS . The research involves direct observation of
the impact SME s have on creating a viable alternative or
being complementary to, the accepted development path as
well as interviews and collection of historical and current
economic data . The goal from the case study is to then
expand and generalize theories and develop policy
frameworks that are contextual [3,31].
As Yin notes the case study approach is an empirical
inquiry that investigates a contemporary phenomenon in
depth and within its real life context when the boundaries
between phenomenon and context are not clearly evident [
31]. This type of research is clearly relevant in this case.
2. A review of Caribbean realities
It is well recognized that a small open economy like Aruba
dominated by tourism [7,8].It is essentially a small mono
economy which continues to be impacted by the throes of
the US recession over which it has no control and which
reflects the extent of its openness [7].
The chart below highlights the current US recessions length
and breadth . This is considered the longest and deepest
recession in recent history and the relevance to Aruba is
that since US based tourism drives the economy ,the
island‟s economic growth is substantially determined by
this recession in the US . It is a deeply structural feature of
the limitations of the Aruban economy.
Source : Wall Street Journal
According to Aruba‟s Central Bank data nominal GDP fell
by 8.9% in 2009 with negative growth expected in 2010 (-
1.8%) and positive growth in 2011 (12%) [7]. This
projected turnaround is aggressively optimistic and
contrasts sharply with published international assessments
of Aruba‟s growth trajectory by the IMF and Standard and
Poor‟s.
Annual Forecasts for Aruba 2009 2010 2011
GDP
Nominal -8.9 -1.8 12.0 Real -10.5 -3.7 9.0
Year/year % change Source : Central Bank of Aruba-Economic Forecast
Monitor Jan. 5, 2011
According to the IMF the medium-term growth outlook
depends heavily on U.S. consumption, given that two-thirds
of tourists come from the United States. However, U.S.
consumption growth is projected to remain significantly
below pre-crisis levels. Moreover, the potential for a
further quantitative expansion of tourism is limited .This
means that growth and recovery will be much more muted
and it is estimated that long-term potential annual real
growth at about 1½ percent [16].
With regard to Standard and Poor‟s – an international
rating agency, their most recent report on Aruba noted that
they have revised the outlook to negative to reflect the
rapid growth in the Aruban government's debt burden
because of both the recent global downturn and structural
factors such as a narrowing tax base. The general
government debt could exceed 51% of GDP this year
compared with only 41% in 2008 and could approach
55%-60% of GDP by 2015. Such a level of debt for a small,
open economy with a fixed exchange rate would risk
weakening its creditworthiness, possibly leading us to
lower the ratings by one notch [30].
This report highlights the constraints on development and
the limits to the capability of government to act in the
national interest if that is translated into more spending.
The government then has a limited range of options to
encourage development through entrepreneurship. For
example one of the approaches the government can take is
to eliminate the turnover tax (BBO), the concern for
international agencies (IMF, Standard and Poor‟s) is that
this adds to the structural deficit since there is no
replacement of the “ lost “ tax by something else . This is
one of the reasons why they are favorably disposed to a
value added tax (VAT) despite the consequences for
business on the island [16] .
So the question becomes then, given its constraints, can
Aruba develop a sustainable culture of entrepreneurship
and does the government has the capability to help?
2.1 Entrepreneurship
Before we move on ,it behooves us to define and
contextualize the concepts of entrepreneurship and
development that we will be using in this paper. One
definition states that entrepreneurship is the relentless
pursuit of opportunities without regard to resources
currently controlled [28]. It means that those who seek and
exploit opportunities for wealth creation are not
constrained by the limits of the resources they control[27] .
It is manner of looking at the world and thinking in terms
of opportunities and innovation despite uncertainties and
risks[27,28]. Given the smallness of the islands and their
limited resources, entrepreneurship provides a way
whereby resource limitation does not inhibit development.
It is consistent with Schumpeter‟ s definition of an
entrepreneur as one who seeks to combine resources in new
ways [27] .
Entrepreneurs are inherently risk takers and innovators that
use existing resources to add value to the economy [27].
Resources that would otherwise lie idle, if not used. This
attitude towards risk and resources is not necessarily
confined to small or medium sized start ups and can be
found in pockets within large companies. The fact remains
though that small and medium sized enterprises (SME s )
are the drivers of such innovativeness on small islands and
the challenge is that of sustaining entrepreneurship in the
face of attempts to limit it by governments who fail to
recognize its potential.
Public policies or approaches that places limits on
capitalism and entrepreneurship can stifle innovation to the
extent that a non entrepreneurial environment is fostered or
engendered. This includes , inter alia, excessively high
taxation, complicated regulations and inordinately
excessive paperwork which are considered anti – capitalist
policies and which limits wealth creation potentials
[14].Where the political and social structures do not
support capitalism , not in ideological sense but as an
economic phenomena that allows for societal wealth
accumulation at an inter generational level, then an anti
business class culture limits its potential. If this is not a
socially valued undertaking it does not become embedded
in the cultural dynamics of the society despite its promise.
This is because, there are often attempts to equate the
returns to entrepreneurship with monopoly power and
super profits without a recognition of the innovativeness
this bring to the economy through SME „s.[25]. However,
it should be clear that investments in risky entrepreneurial
projects are only rational if the losses on failure are
balanced by above-normal returns associated with
success[25]. In other words if there is adequate
compensation for risk taking significantly above the cost
of capital [18,27].This is what encourages and drive
innovation [27,28].
This is not to say that there are no ethno centric pools
where this activity is valued even within the context of a
society where it is not highly regarded , but this limits its
potential societal value as it becomes somewhat self
confining. What is often observed is that while an
entrepreneurial culture may be embedded in a particular
ethnic group it fails to translate to societal wealth creation
because of a low social value placed on it by the general
population and lack of public policy approaches designed
to encourage and foster this path to development. One of
the reasons for low social acceptance throughout SIDS
may be due in part to the perception that capitalism and its
ideological underpinnings are first world phenomena
despite the success of those ethno centric pockets of
entrepreneurship in the midst .
This perception, encouraged by some politicians, has
limited the deepening and the social acceptability of
capitalism as a means of poverty alleviation . The constant
political attacks on the wealthy is standard fare among
Caribbean intellectuals and politicians , so that wealth and
the making of it , is not to be admired or aspired to. Yet
within our current economic systems on SIDS it is not the
state that generates wealth , rather in much of the SIDS , it
is the state which consumes much of the wealth produced
by the private sector.
In a cross sectional analysis of the Caribbean , Dana noted
that where there were high levels of negative government
intervention , economic regulation and redistribution
policies , there are lower GDP than those islands which
actively encourage and have public policy structures that
supports entrepreneurship [13].
In addition ,entrepreneurial values of hard work and risk
taking cannot be conducted in a legal vacuum where
property rights are not respected and contracts are
politicized and their enforceability is in question. In fact it
was first argued by Coase in his seminal essay „The
Problem of Social Cost „ (1960) considering the economic
context in which the legal system establishes and support a
pattern of rights in order to attain economic efficiencies
[11].
Comparisons of the Cayman Islands and say Dominica and
even Aruba highlights the diversity in economic activities
that are encouraged to take flight in a pro SME atmosphere
that limits regulatory and tax impacts on SME s. As
indicated by Dana there is a positive correlation between
GDP per capita , with social value attached to
entrepreneurial activity and level of government
involvement which when coupled with a laissez faire style
policy of small government drives economic growth [13].
There is another quality about entrepreneurship that makes
it better suited as a development policy approach than
many others. It is the fact that it is gender neutral and race
neutral , given the particular cultural and historical
dynamics that is peculiar to the Caribbean this is a great
leveler in terms of providing social and economic
opportunities to the disenfranchised . The entrepreneur can
be anyone who seeks to exploit opportunities regardless of
background and connections of class. External features
does not matter in terms of the outcome. At the end of the
day success comes to those willing to take risks and work
extremely hard to be successful .For women it provides a
path out of poverty for their progeny and sets a tone for
others to follow while facilitating socio economic mobility
.
2.2 Development
While the traditional model of developmental success is
measured by an increase in GDP and per capita income
,Amartya Sen (1999) reminds us that the role of economic
growth is to expand opportunities that needs to be
embedded in the foundational understanding of the process
of development as the expansion of human capability to
lead more worthwhile and more free lives [26]. It is the
social dimension of development , that is just as or even
more important than its economic dimensions .According
to Sen social aspects of development by facilitating an
increase in human capabilities, allows all impacted by it to
lead longer, freer and more fruitful lives and places human
beings not as input factors , but also includes them as the
end of the exercise [26].
For small island developing states, (SIDS) , development
often implies aspiring to provide the community with the
standard of living and social benefits mirrored along first
world dimensions supported by an economic structure that
is self sustaining. This is so despite the fact that there is a
lack of resource capacity that serves to enhance their
vulnerability and limit the potential for economic growth .
Development then, is often perceived in hard economic
terms and is reflected in data on GDP growth , inflation
and per capita income . The social aspects are considered a
burden and a cost to the community , not as essential
elements that helps to drive the economy forward [26].
Another point of note for SIDS is the extent to which they
are plugged in to an increasing globalized world where the
international capitalist model of development is taken to
the extreme[19,20]. Development is often substantially
driven by capital from the outside rather than being
derived from indigenous sourcing [20] . This limits the
deepening of capital accessibility within the community
and reinforce the fragility of SIDS. Since development
requires sustained economic growth and is reflective of
the stability of that growth, volatility then impedes it [22] .
To the extent that there is a high or constant volatility in
economic growth , not only does it impact economic
growth but also pushes poverty alleviation programs to the
back burner and exact a social cost on the poor in terms of
the inconsistency of consumption patterns[22]. In SIDS
therefore volatility is exacerbated by the dependence on
external capital to fund economic development.
2.3 Aruba and Entrepreneurship
It should be noted that data on company formation in Aruba
is extremely outdated and this limits the inference that can
be drawn from it .The evidence of entrepreneurship‟s
strength in the cultural milieu of Aruba is somewhat
limited on the island with just about 3,000 companies
established here as at 2006 [8] . Growth in new enterprises
have also been slow with just 107 companies or 3.6%
established between the periods 2001 to 2006 .Further ,
while it is generally believed to be tourism led growth in
small businesses this growth was substantially due to
developments in the Goods sector , particularly in
Manufacturing with an absolute growth of 67 companies
[8].
What is remarkable though is the exit rate of enterprises
and their volatility as well as the paucity of real growth in
new business enterprises [8] .
Source: Central Bureau of Statistics, Enterprises In Aruba
2001-2006
From a broad perspective the trend is a decline in
new business formation in almost all sectors of the
economy as the new entrants have barely kept pace with
those seeking exits [8].
In contrast for Curacao, the level of company
formation appears to be substantially higher [9] .From the
data though , it can be deduced that company formation is
no indication that the business is actively engaged.
Economic sector Companies
Relative
Growth
Absolute
Growth
Maufacturing 234 40.1% 67
Total Goods Sector 580 19.6% 95
Real Estate,renting and business activiries 578 7.6% 41
Health and Social Work 216 20.0% 36
Other coimmunity, social and personal services 309 6.6% 19
Financial intermediation 97 15.5% 13
Transport, storage and communications 100 1.0% 1
Total Services Sector 2,474 0.3% 7
Total Economy 3,063 3.6% 107
3. Literature Review
Establishing a distinctive island development paradigm has
been hindered by disparate disciplinary and methodological
approaches and by severe data constraints [21]. The data
constraints are clear and obvious, data that is used in this
paper , for example, have not been updated to reflect a
current picture of entrepreneurship on this island , we can
only infer from fairly old data what the current conditions
are [8].
However, there is no one true path that islands can pursue
towards development. What we can do here is to point out
the challenges inherent within the subscribed international
economic and ideological framework and try to find
Aruba‟s place in it .For small island economies the
established literature is replete with the stated theories of
the instability and vulnerabilities at the macro level. We
need not in my opinion restate them here in any depth .
These range from openness , import dependence, to
transport constraints and population density to overall lack
of resources[21,23]. Given the resource constraints and the
growth imperative primarily because of population increase
and diminishing opportunities for migration , small islands
have sought out to exploit their limited potential by
aggressively pursuing tourism as the path to self
development .
2003 2004 2005 2006 2007 2008
New registrations
Offshore Companies 579 520 582 573 631 632
Local Companies 1833 1931 1775 1964 1968 2089
Total 2412 2451 2357 2537 2599 2721
Cancellations
Offshore Companies 944 1130 753 812 799 643
Local Companies 1127 1552 1449 1819 1804 2128
Total 2071 2682 2202 2631 2603 2771
Offshore Companies 17224 16135 15444 14776 14191 13870
Local Companies 15217 15693 16114 16371 16642 16642
Total 32441 31828 31558 31147 30633 30512
1. Registered Companies, Curaçao
Registered Companies per December 31
Source: Chamber of Commerce and Industry
The challenge is not whether this has been the best option
most small islands have taken but how effective it is in not
just having the appearance of development as measured in
the infrastructures , but in poverty alleviation and in
reducing the sense of economic dependence on the
developed world . In a fairly recent study (2006) , McElroy
used the tourism penetration index (TPI) to assess the
impact of tourism on economic development in small
islands [21]. Research has indicated that successful
destinations go through six stages in succession , analogous
in scope to a product or firm‟s life cycle . These are
identified by McElroy as [21]:
Emergence
Involvement
Growth
Consolidation
Maturity or Stagnation
Decline or Rejuvenation
As the island develops there is an increased focus on
infrastructure development ,increased and expanded
facilities to accommodate the guests but with potentially
negative , accelerated and cumulative ecological impact.
The table below is an extract and highlights Aruba‟s
position as one of the most developed destinations in the
Caribbean.
The most developed group are in dominant positions since
they attract the most visitors and have the highest capture
rates for guest expenditures .What then is the impact of
tourism on development and what is the depth of tourism‟s
impact on the economy , ie how deep does it go to foster
development of entrepreneurship or should we conclude
that such linkages are tenuous at best ?
One thing that is clear from this research is that
development by tourism offers viable options in terms of
fostering modernization , and maintaining dynamic
linkages with the developed world [21,23]. The table below
illustrates markers for development which includes
literacy , per capita income and labor force participation .
These are among the most developed tourist destinations in
the Caribbean and much if not all development is tourism
driven and has propelled these islands to a standard of
living akin to those in First World countries. In comparison
the per capita income of the intermediate to least developed
are extracted for a sample of islands below:
In fact the disparity between the per capita income of the
most and the least developed is as follows:
These disparities are striking in that it highlights the good
fortune of being accessible to the largest market in the
world and also how effective and efficient to long term
development tourism investments are . But is this enough ?
Because along with the success of tourism development
there is an inherent vulnerability that have placed Aruba in
a position of dependence . Before we examine the options
though lets provide more developmental data from
McElroy‟s seminal paper [21].
Island
Spending/ Pop -
USD Density/1000 Rooms/km TPI Score
Most Developed
UK Virgin Islands 16048 413 33.8 0.793
St Maarten 13694 219 74.8 0.774
Aruba 12714 235 40.3 0.614
Cayman Islands 16250 258 20.9 0.614
Turks and Caicos 17278 193 5.1 0.511
Bermuda 5484 84 64.7 0.461
Island Literacy Income/pop Unemployment Phones/pop LFPR
Most Developed
UK Virgin Islands 97.80 16000 3.0 460 NA
St Maarten
Aruba 97.00 28000 0.6 465 58.6
Cayman Islands 98.00 35000 4.1 475 50.0
Turks/Caicos 98.00 9600 10.0 259 40.1
Bermuda 98.00 35200 4.5 806 58.1
Island Literacy Income/pop Unemployment Phones/pop LFPR
Intermediate
Anguilla 95.00 8600 6.7 390 47.5
Antigua 89.00 11000 11.0 431 44.1
Dominica 94.00 5400 20.0 300 35.7
Least developed
Tonga 98.50 2200 13.3 93 31.5
Marshall Islands 93.70 1600 30.0 74 50.9
Island Literacy Income/pop Unemployment Phones/pop LFPR
Averages
Most developed 97 22,600 6.1 494 46.5
Intermediate 93 7,970 13.5 307 40.8
Least developed 86 2,375 22.9 115 43.3
Difference
Intermediate 4.40 14,630 -7.4 187 5.7
Least developed 11.50 20,225 -16.8 379 3.2
From the data it is clear that there is a substantial distance
between the most and least developed of the islands and the
degree a tourism development policy has contributed to
these communities , in the form of better health care,
increased living standards and greater life expectancy. But
while tourism development has propelled these islands to a
better standard of living , it may not be enough to sustain
these islands in the medium to long term . This is not only
due to the competition among destination factors , but also
changes in the major markets in terms of the length of the
recession , the ability of most middle class to travel to
exotic destinations , changes in spending patterns as the
uncertainty continues [15] as well as vulnerabilities to
mega events such as hurricanes.
It is therefore incumbent upon the local authorities to
further develop and exploit the institutional framework that
tourism development has brought and to ensure that there
is deep and sustainable economic structures in place to
drive the islands to continue to develop an economic
architecture that is self sustaining and less vulnerable to
external shocks than tourism [3,15] .It has been the focus
of my proposed Phd thesis that entrepreneurship is one of
the most dynamic and innovative of structures that
reinforces and deepens linkages within the economy and
allows private investors and not governments to lead
developmental efforts in a managed and fair regulatory
framework that minimizes incomes disparities in the
community [27]. Entrepreneurship at the micro and macro
level enhances transparency in government and society. It
allows for the reinforcement of property and contractual
rights [6,10], the de politicization of contractual
arrangements and greater adherence to the rule of law.
Singapore is often the poster child of small island
development in which entrepreneurship has been allowed
to flourish fairly unabated.
According to Singapore‟s statistical office , there were over
26, 420 companies formed in 2009, a 4.3% increase from
2008 , unfortunately we have no comparable statistics on
Aruba [8]. However , when one analyses the data up to
what was available in 2003 , the rate of business formation
, as an indicator of the depth of entrepreneurship appears
abysmally low [8].
Source: Central Bureau of Statistics Aruba
One can postulate that entrepreneurship is contextually
driven and that it flourishes best within a social , political
and economic architecture where it is actively
encouraged[1,2,3,4] . Therefore a comparison between
Aruba and Singapore would be unfair .
While there is an argument for that position, it is not just a
failure of the institutional framework that limits
entrepreneurship but failure of political will [3,13] . Despite
Islands
Net
Migration
Infant
Mortality
Rate
Life
Expectancy
Most Developed
UK Virgin Islands 10.5 18.8 76.1
St Maarten NA NA NA
Aruba 0 6.4 78.8
Cayman Islands 19.3 8.6 79.7
Turks/Caicos 12.3 16.9 74
Bermuda 2.6 9.1 77.4
Islands
Net
Migration
Infant
Mortality
Rate
Life
Expectancy
Averages
Most developed 5.9 10.1 77.6
Intermediate 1.3 16.6 73.2
Least developed -3.4 35.7 67.6
Difference
Intermediate 4.6 -6.5 4.4
Least developed 9.3 -25.6 10
Yearbook of Statistics Singapore, 2010
8.1 FORMATION OF COMPANIES BY INDUSTRY
Number
Industry 1999 2004 2005 2006 2007 2008 2009
Total 8,506 17,151 19,497 21,495 25,903 25,327 26,414
Manufacturing 512 812 940 1,157 1,391 1,509 1,321
Construction 730 778 850 999 1,296 1,353 1,455
Wholesale & Retail Trade 2,651 5,520 6,043 6,209 6,597 6,406 7,268
Transportation & Storage 353 753 818 892 1,132 1,139 1,110
Accommodation & Food Service Activities 292 731 770 1,004 1,338 1,337 1,443
Information & Communications 954 1,188 1,392 1,489 1,526 1,581 1,708
Financial & Insurance Activities 1,027 1,929 2,382 3,024 4,319 3,563 3,115
Real Estate Activities 271 304 350 463 764 447 526
Professional, Scientific &
Technical Activities 864 2,380 2,686 3,066 3,675 3,764 4,315
Administrative & Support
Services Activities 388 1,174 1,266 1,114 1,321 1,342 1,223
Education, Health & Social Services 207 733 893 823 1,050 1,095 1,292
Arts, Entertainment, Recreation &
Other Service Activities 232 765 976 1,100 1,270 1,546 1,421
Others 25 84 131 155 224 245 217
Source : Accounting and Corporate Regulatory Authority
Note: The industries are classified according to the Singapore Standard Industrial Classification 2010.
Relative growth of the number of establishments from 1997 to 2003 for the fastest growing economic sectors
Sector Growth %
1998 1999 2000 2001 2002 2003
Education 22% 9% 13% 15% 7% 15%
Hotels and Restaurants 9% 10% 11% 15% 13% 10%
Other community 7% 7% 10% 12% 13% 6%
Wholesale and retail 8% 8% 10% 8% 7% 5%
Construction 9% 18% 12% 6% 2% 4%
Transport , storage and communication 5% 4% 5% 7% 5% 4%
Manufacturing 8% 7% 9% 8% 9% 3%
Health and Social Work 9% 8% 7% 6% 5% 3%
Grand Total 7% 8% 9% 8% 7% 5%
any suggestions to the contrary research has made it clear
that politics and political affiliation are factors that cannot
be ignored when discussing developmental paradigms. For
example research by Armstrong and Read has pointed out
that politically dependent countries (colonies ) have higher
living standards and are further along the development
path than independent islands for islands where tourism is
the driver of the economy[1,2]. Post colonially dependent
islands have a higher TPI (tourist penetration index) and
exhibit more propensity for growth partly because of direct
and indirect linkages to the developed world. Given the
comparisons between dependence and growth and
independence and low growth most of those island states
are reluctant to seek full independence [1,2,21].
Source: J.L. McElroy 2006 University of Wellington
In McElroy‟s paper he noted the critical role of tourism for
small island economies in driving growth and in economic
development, in his opinion it has proven to be a viable
engine of growth given the limited options for development
available [21]. Tourism is also a path to socio economic
modernization and progress along the demographic
transition [21]. However , as I have already stated ,
although it may be the best of possible viable options for
growth , its limitation is its fragility and vulnerability and
potential for long term negative environmental impact on
small islands . The fact that tourism investments are
essentially foreign direct investment (FDI) flows means
that there are limitations as to how deep such investments
can go towards achieving social as well as sustainable
economic objectives [24,26]. Other, more robust
developmental policies must be considered and pursued to
minimize the impact of an economy dependent on external
factors beyond its capacity to effectively control or
influence in any significant way [20,24].
3.1 Offshore Financial Centers
Crises and instability are part and parcel of the dynamics of
imperial finance and impacts small island states more
deeply [20] . It should also be noted that for those islands
who have sought to diversify their economic base by
developing offshore financial centers have been challenged
on their moral and ethical groundings by what Don
Marshall calls an epistemic community of largely Western
experts who are deconstructing the current international
architecture and preparing a new one through newly
constituted international structures that suspiciously view
those who differ from the norm [20]. This has in fact made
it difficult if not impossible to add offshore financial
centers (OFC s) to the portfolio of economic activities that
would minimize risk and fortify the robustness of island
economies . While Don Marshall and other Caribbean
intellectuals frame the discourse as one between North and
South with the rational North othering the sexualized
South , it does not help the islands that many of them lack
the political fortitude to implement legislation that
reinforces financial rationality [20,24].
4. Critical Review and Discussion
The best option for development then lies in fostering
indigenous enterprises and a spirit that is not limited to an
islandness mentality for opportunities. To do this
effectively means building the infrastructural framework
that allows small and medium enterprises (SMEs) to be
self sustaining and viable and that also meet social goals of
poverty reduction and reduction in income inequalities
[26]. In doing this it involves , apart from regulating the
financial sector , encouraging more competition and
transparency within the financial sector and directing
resource allocation to the productive sectors of the
economy and away from consumer led spending. These are
critical first steps and minimizes strains of
disconnectedness within the economy .For example in
Aruba there are substantial profits in the local banking
system despite a significant drop off in GDP in Aruba and
an increase in unemployment [7,16].
It is important to note that SME s are critical to
developmental efforts of small islands , in that it fosters a
democratization of wealth , and de- elitizes capital [23]. It
allows for a more equal distribution of household income
and contributes to societal welfare by breaking barriers to
social mobility . Ideas can be transformed into wealth by
endogenous processes and cannot be monopolized by the
societal elites. This further contributes to positive social
change and political stability within an island democratic
context . In addition for some societies , micro capitalism
allows for the accomplishment of distributional and
developmental goals and for the majority of people at the
fringes of economic activity in these islands , eg the
Average tourism and socio economic indicators
Indicator Dependent Independent
Population ('000) 141.0 214.0
Per Capita GDP (USD) 14,138.0 6,429.0
Unemployment -% 12.8 13.4
Phones/1000 408.0 222.0
Tourists ('000) 335.0 361.0
Hotel rooms 3,660.0 3,767.0
Spending/pop USD 6,899.0 1,026.0
Visitor density 113.0 36.0
Rooms/km squared 16.9 9.6
Net Immigration 6.3 (4.9)
Infant Mortality Rate 11.8 26.8
Life Expectancy 76.6 65.6
Literacy 96.0 88.6
informal importer in Jamaica, the stall operator in Aruba ,
it provides an opportunity for self confidence and self
empowerment.
Far more fundamental to economic growth in small island
developing states dependent on tourism to a significant
extent is the understanding that there are limits to the extent
tourism can foster both growth and societal welfare. The
managerial infrastructure of most hotels are feudalistic in
tone , with expatriate senior managers and locals in every
other lower level positions . This is reflected in societal
structures that mirrors the internal managerial structure
because income levels defines social status on small
islands. For example while expat managers can afford to
live in exclusive gated communities, and travel extensively
as socio economic elites , their workers are often supported
by the state‟s social welfare policies to some extent.
Therefore the organizational structures are reflected in
social structures and in Aruba , where tourism is a
significant component of GDP even more so. This limits
the social and economic mobility of ambitious citizens and
reinforces income and social inequality and distancing
between the expatriate elites and the “locals”.
To compensate , the political structures offers the
upwardly mobile the channels of opportunities for growth.
This impinges on the private sector in an environment
which has a significant amount of regulation and
bureaucracy and where permits are needed for almost every
economic activity. The economy is transformed to a
politicized economy where political favors drives
performance by limiting opportunities to the well
connected .This then stifles innovation.
One of the other major impediments to entrepreneurship on
Aruba is the tightness of the lending environment and the
banks aversion to risk which appears excessive on the
surface. It is a fact that most local banks rely on
relationship lending as a strategy rather than on lending
policies based on transactions driven approach .
Relationship lending is based substantially on soft
qualitative information gathered through consistent
interaction over time with the entrepreneur and the
members of the local community [6,14]. It tends towards
providing a holistic , though subjective assessment of the
riskiness of loans to the SME , and is proprietary to the
loan officer and are not easily observed by others , verified
by others or transmitted to others within the financial
institution [5,6,14].
One of the consequence of this approach is that the cost of
capital has been raised to unseemly levels that does not
encourage risk taking which is an essential element of
entrepreneurship [28,29].It is a fact that the lack of
external finance imposes a constraint on SME development
and in recent years there has been substantial research on
the interconnectedness between financial development and
growth of SME s [4]. Berger and Udell describes the
financial institutional structure as the market presence of
different types of financial institutions that provide credit to
SME s as well as competition among these institutions [5].
It is not just capacity to provide finance that is of concern
but the differences in the financial institution structure and
lending infrastructure that will impact the availability of
resources to SME s. The local banks are protagonist of
relationship loans , that have higher rates even though
adequately securitized as they seek to maximize their
economic rents . It is argued here that because the banks are
in fact rent seeking institutions that they have little interest
in modifying a behavior on which they earn substantial
profits in order to enhance societal welfare. Research has
indicated that increased market concentration of financial
institutions may impact the supply of credit to credit
worthy SME s by reducing it [5,6,14].
The impact of increased concentration is reflected in a
number of ways ; by raising profits through higher interest
rates or fees on loans to SME s , by tightening credit
standards which reduces the riskiness of oversight or by
being less aggressive in seeking out or serving valuable and
creditable SME s by asserting market power[5,6,14].
5. Conclusion
The challenges that SME s on a small islands face are
exacerbated by the inability of politicians and key members
of the community to connect the dots between sustainable
growth , innovation and entrepreneurship [27] . Most look
to foreign direct investments (FDIs) in hotels and the
tourist sector as drivers of the economy , without giving a
enough thought to the potential impact of SME s . The
informed though , are aware that the driver for FDI s in
Aruba has always been and will always be shareholder
wealth maximization (SWM) for multinational enterprises
(MNEs) [3]. This is reinforced by the current ideological
narrative in the finance literature [18].
For multinationals with shareholders not invested in the
islands emotionally or lacking a stake to anchor them to a
particular place this has broader implications . It means that
the island has built its economic development on fragile
grounds and such development lack depth and
sustainability. On the other hand indigenous based or
driven SME s have an emotional, cultural and personal
stake in the island and therefore development based on
encouraging this linkage to the land is sustainable for
generations. The political and institutional infrastructure in
Aruba does not aggressively encourage SME growth as a
viable sustainable option for a developmental model and
so the economy is much more exposed to the vagaries of
external shocks and capital movements.
The over dependence on one developmental approach that
is essentially externally based and mono economic and the
lack of its capacity exacerbated by the outflow of profit
distribution from the island limits its effectiveness . More
should be done to encourage a greater depth to which the
tourist dollars flow in the local economy before it flows
back out in the form of imports . This is what
entrepreneurship fosters ;the greater use of resource flows
locally , to generate profits that remains longer on the
island , builds up a capital base or a capital market for
continued island based investments. This will facilitate
novelty and differentiation which is what innovation and
entrepreneurship fosters [25,27]. As Ramsaran noted
lacking domestic savings governments have become more
accommodating to foreign investors and more amenable to
the dictates of others who have their own perceptions of the
management of the world economy and the directions it
should follow [24].
The best environment for SME s and entrepreneurship is
one in which there is limited government intervention in
the market and where the institutional and infrastructural
groundings have been established from the perspective of
legal , ethical and financial framework. It behooves policy
makers to establish, encourage and execute guidelines that
do not unduly restrict risk taking or capital accumulation
and is not envious of wealth . It also requires an
institutional framework that facilitates the cultural
deepening of entrepreneurship and greater social
acceptability and value among the population. Further, as
Dana points out by understanding policies and
socioeconomic environments which do not unduly restrict
entrepreneurship, we are able to design environments
which foster and sustains entrepreneurship [10].
The relevant benchmarks for entrepreneurship includes the
absolute level of economic performance that provides a
return for enterprising effort and the social contribution of
the individual‟s effort [25,29].When the entrepreneur
succeeds everyone wins , since social wealth is enhanced
by new jobs, productivity increases and new industries
emerge [25,27,29] .
6. Future Research and Methodology
Future research will involve cross sectional analysis of
island data on SME s with a focus on small Caribbean
island states and follow much along the research done by
Dana in the early 1990s.As we indicated earlier a multiple
case study approach will be taken .
The islands selected will be based on such criteria
as size, level of economic activity (GDP) and
population . Those islands not in the Caribbean
and with population over 250,000 will not
considered as subject of this research .
There should be commonality in terms of
colonialism and dependence . This common
historical legacy forms a backdrop of how islands
are not limited by their history when
entrepreneurship is actively encouraged and
valued.
The islands should be politically independent or
on the path of independence from colonial
powers. Political and economic independence are
key components of the research criteria since
responsibility is devolved to local policy makers
and politicians and their impact on SME s.
The economies must allow for a mix free market
capitalism and foreign direct investments to
compare the relative impact of both activities on
development.
It is the goal of this research to empirically validate the
argument that SME s innovation and growth can be used to
transform small island economies and encourage
development which is sustainable and less vulnerable to
external shocks. The hope is that this can be accepted by
policy makers as a route to minimize income inequalities
and facilitate distributive equity as their economies grow
[15].
References:
[1] Armstrong, H, and Read , R. (1998) The
international political economy of micro states; an
overview, Bank of Valletta Review
[2] Armstrong, H, and Read , R. (2000) comparing the
economic performance of dependent territories and
sovereign micro-states, Economic Development
and Cultural Change
[3] Altenberg, T (2000); Linkages and Spillovers
between transnational corporations and small and
medium sized enterprises in developing countries;
May 2000, German Development Institute p 8
[4] Beck, T. et al (2000) Financial Structure and
Economic Development ;The World Bank
Development Research Group ,August 2000
[5] Berger, A, and Udell, Gregory F.( 2004) ; Small
and Medium Enterprises: Overcoming Growth
Constraints ;World Bank Conference
[6] Beck, T, and Demirgic-Kunt,Ali (2006); Small and
Medium Size Enterprises: Access to Finance as a
Growth Constraint ; World Bank Paper
[7] Central Bank of Aruba ; Economic Forecast
Monitor ;Statistical Tables ; November 2010 last
updated January 5, 2011
[8] Central Bureau of Statistics : Enterprises in Aruba
, 2001-2006 ,published September 2009 ,pp43-54
[9] Central Bureau of Statistics Netherland Antilles
2010 website
[10] Compers, P and Sahlman, W; Entrepreneurial
Finance; John Wiley & Sons 2002 pp1
[11] Coase, Ronald H.(1960);The Problem of Social
Cost; Journal of Law and Economics , pp1-44
[12] Crowards,Tom (2000); Defining the category of
„small‟ states; Journal of International
Development Volume 14, Issue 2, pages 143–179,
March 2002
[13] Dana,Leo Paul; Public Policy and
Entrepreneurship in the Caribbean: Nine Styles of
Policy; Journal of Private Enterprise, 1995,pp.
119-135
[14] Demirguc-Kunt (2006) ; Finance and Economic
Development: Policy Choices for Developing
Countries ;World Bank Policy Research Working
Paper 3955 , June 2006
[15] Economic Survey of Latin America and the
Caribbean (ECLAC) 2009-210 pp 6
[16] IMF Report-Kingdom of the Netherlands-Aruba:
Concluding Statement of the 2010 Article IV
Consultation Mission , September 8, 2010, p.1-4
[17] Commentary: Caribbean economies must do better
;Al Edwards ,;Jamaica Observer Sat., Oct23
,2010
[18] Jansen, Michael (2001):Value Maximization,
Stakeholder Theory and the Corporate Objective
Function” Journal of Applied Corporate Finance,
14 no.3 (Fall 2001), p. 11
[19] Konings, M. and Panitch, L.;US Financial Power
in Crises; Historical Materialism 16 (2008) pp 3-
34
[20] Marshall, Don D (2007) ; The new International
Financial architecture and Caribbean OFCs
;confronting financial stability discourse ;Third
World Quarterly , Vol. 28, No.5 , 2007 pp917-938
[21] McElroy. J. (2006) ;Small island tourist
economies across the life cycle ; Asia Pacific
Viewpoint , Vol.47, No.1, April 2006
[22] Mobarak,Ahmed (2005); Democracy , Volatility ,
and Economic Development ;The Review of
Economics and Statistics, May 2005 ,87(2);pp348-
361
[23] Peterson, R. ,Taylor Don; Designing Financial
Systems for Competitive Island
Economies:Developing a case for the Caribbean;
Phd Research in Progress Paper presented at
Salise Conference 2010
[24] Ramsaran, R (1999) ; The Caribbean and the
Global Competition for foreign Capital; Lynne
Reinner Publishers
[25] Rumelt ,R (2005): Theory, Strategy and
Entrepreneurship; Handbook of Entrepreneurship
Research ,2005, pp 12-31
[26] Sen, Amartya (1999); Development as Freedom;
New York, Anchor Books
[27] Schumpeter, Joseph A (1950).; Capitalism,
Socialism and Democracy 3rd edition ;G. Allen &
Unwin Publishers
[28] Stevenson, H.H., Sahlman. W.A ;(1986) ;The
Importance of Entrepreneurship; Entrepreneurship,
Intrapreneurship and Venture Capital ,Lexington,
M.A:Lexington Books
[29] Venkataraman,S.(1997);The Distinctive Domain
of Entrepreneurship Research; Advances in
Entrepreneurship and Growth , Vol. 3 pp 119-138
[30] Wall Street Journal article ;S&P Lowers Aruba
Outlook; Says Govt. Debt Burden Could Rise
;November 2, 2010
[31] Yin, Robert (2009); Case Study Research ;design
and methods 4th edition ;California ,Sage Inc
Recommended