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

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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].

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