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The Challenges and Diseconomies of Scale in Small Island Developing States (SIDS)

The Challenges and Diseconomies of Scale in Small Island Developing States (SIDS)

 

July 10, 2024

 

One obvious aspect of a Small Island Developing State (SIDS) is its small scale. This small scale results in a limited pool of talent and a shortage of resources. However, this is not universally applicable. For instance, Curaçao has no shortage of sports talent, particularly in baseball. Remarkably, Curaçao produces more Major League Baseball players per capita than any other country. Similarly, Suriname is abundant in natural resources and is considered the greenest country on earth.

The issue for SIDS is not necessarily the availability of talent or resources. Instead, it is the size of the economy. Is it big enough to achieve economies of scale? Is the home market large enough to foster competition that stimulates efficiency? Often, this is not the case.

Take utilities in Curaçao as an example. The island is not large enough to support more than one utility company effectively, and the presence of three or four telecom providers on the island is not sustainable. Some economic theories suggest that a market starts functioning efficiently when it exceeds 300,000 inhabitants. Tourism can only partially offset this threshold.

This is why immigration policy is crucial. Increasing the population can help enlarge the market, fostering competition and efficiency. Another way to mitigate the small scale is through market agreements. This is why Curaçao's status as an associate member of CARICOM is significant. Although this status does not provide full access to the CARICOM market, it is a step toward economic integration and expansion.

In conclusion, while SIDS, like Curaçao and Suriname, have unique strengths and resources, their economic development is hampered by their small market size. Policies encouraging population growth and market integration are essential for overcoming these limitations and achieving sustainable economic growth.

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Miguel Goede

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