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Chapter 12

 

 

 

The Advantages of Diversification: Profit/Site versus MIRAB

Small-Island Profiles

 

Marie Ellen Ehounou

 American University in Washington, DC, USA

Jerome L. McElroy

Saint Mary’s College, Notre Dame, Indiana, USA

 

 

Abstract

 

The MIRAB formulation [Bertram & Watters, 1985] has defined the island development paradigm for the past two decades. Recently two alternatives have surfaced. First, Baldacchino’s PROFIT model focuses on small (less than one million population) sub national island jurisdictions that rely on jurisdictional autonomy to gain control over immigration, resources, taxation and finance from their metropolitan patrons and so achieve diversification. Second, McElroy’s [2006] SITE model stresses tourism’s role in furthering insular prosperity. This chapter argues that SITEs are a species of the PROFIT genus, and it constructs comprehensive profiles of 20 PROFIT/SITE destinations and 17 MIRAB islands across 23 variables. With the use of a two-sample means test, results show the former are superior to the latter economically, socially and demographically revealing that the contrasting models have empirical validity.

 

 

 

 

 

 

 

 

1. Introduction

 

In the past two decades, the MIRAB model developed by Bertram & Watters [1985] based on migrant remittances and the export of diplomatic services (aid) has dominated the small-island economy literature. Very recently two challenges to the MIRAB orthodoxy have surfaced. In the first case, Baldacchino [2006] has argued that small sub-national island jurisdictions (SNIJs) less than one million in population have successfully diversified their colonial economies by gaining local control over immigration, national resources, taxation and finance from their metropolitan patrons. In contrast to the external orientation of the MIRAB model, this so-called PROFIT formulation emphasizes the importance of domestic policy flexibility in stimulating a dynamic private sector. In the second instance, McElroy [2006] developed the SITE model that focuses on the postwar restructuring of small island economies towards the growth imperatives of international tourism.

To date there has been no systematic attempt to gauge the empirical validity of these island variants and to assess their relative development performance. This chapter attempts to partially address this gap. The point of departure is to argue that SITE destinations represent a special species of the more general PROFIT genre, and to construct contrasting socioeconomic and demographic profiles of a combination of PROFIT-SITE islands with their MIRAB counterparts. The purposes are two-fold: (1) to detail and assess the relative performance of the two island subgroups, and (2) to provide some brief explanation for the differences that surface.

 

 

2. Literature Review

 

The historical gestation of the island economy literature has followed three primary threads focusing sequentially on various aspects of structure, performance and policy. The early postwar pioneers, Seers [1964] and Demas [1965], emphasized the necessity for openness and dynamic export specialization to overcome the structural limitations of resource scarcity, the diseconomies of scale imposed by small domestic markets [Knox, 1967], and geographic remoteness [Selwyn, 1978]. This research was followed by a second wave of structuralists who variously stressed specific handicaps associated with small size: the transportation stranglehold [Brookfield, 1990; Hein, 1990], export concentration and export market concentration [Jalan, 1982], the problem for local control with a dominant foreign sector [Dommen & Hein, 1985] along with other constraints. This strand of structural rigidities culminated in the island vulnerability thesis of Briguglio [1995] and Crowards & Coulter [1998] who both emphasized insular macroeconomic instability sourced in high export concentration, heavy import dependence, and—particularly for warm-water islands--a propensity for natural disaster.

Bertram & Watters [1985] developed the first island economy model based on the MIRAB structure drawn primarily from Pacific experience. They posited stocks of emigrant labor and public-sector employment and twin corresponding flows of remittances and aid that sustained an equilibrium system in the face of a moribund private sector. Many small countries were identified as insular outposts relying on rural subsistence, primary exports, off-island labor and geo-strategic assets desired by their respective metropolitan patrons [Bertram & Poirine, 2007]. This model—Migrant/Remittances and Aid/Bureacracy—dominated the literature until the recent emergence of the thread emphasizing performance. In a series of papers [1998, 2000, 2002], Armstrong & Read carefully detailed how small mainly island economies outperform larger countries, and how dependent islands outperform their sovereign counterparts, a finding also noted by Poirine [1998] and McElroy & Mahoney [2000]. They located this behavioral advantage in diversification primarily towards tourism and offshore banking, and secondarily toward light export manufacturing. In follow-up work, McElroy & Pearce [2006] empirically demonstrated that small insular dependencies are not only more affluent than their sovereign neighbors, but also more socially progressive and demographically mature, i.e. more modernized societies.

It was left to Baldacchino & Milne [2000] in their examination of North Atlantic islands to explicitate the third thread, the central role of policy in explaining in particular the advantages enjoyed by small so-called sub-national island jurisdictions (SNIJs). Given these SNIJs’ often amorphous legal status as offshore territories, the authors identified their policy “wiggle room” as the strategic use of jurisdictional autonomy to deliberately manipulate metropolitan links for insular benefit. Later Baldacchino [2006] formalized the idea into the so-called PROFIT model whereby SNIJs, through creative and flexible diplomacy, wrested incrementally from metropolitan powers local control over People (immigration), Resources, Overseas Managment (Diplomacy), Finance, Insurance/Taxation and Transport. Three facets that clearly distinguish PROFIT from MIRAB formulations are: (1) the dynamism of the private sector, (2) the active role of policy, and (3) the strategic orientation towards diversification. Examples would include tax and insurance havens, offshore banking centers, duty-free manufacturing exporters and so on.

At the same time, McElroy [2006] introduced the tourist-driven so-called SITE model to explain how many Small (warm water) Island Tourist Economies, particularly in the Caribbean, had overcome their structural constraints by restructuring their colonial economies to the most sustained growth engine in the postwar global economy. His work confirmed the conclusion of Brau et al. [2003, p. 9] that: “Smallness per se can be good for growth as long as it is combined with tourism specialization.” He also demonstrated descriptively that there were considerable socioeconomic and demographic distances between the most affluent SITEs and several MIRAB islands so identified in the literature, and between SNIJs and sovereign islands. He further linked these differences to the tourism-conducive advantages of affiliation (same language, currency and customs for patron visitors, no passports etc…) as well as special tax and duty-free trade concessions from the metropole. McElroy concluded [2006, p. 76] “SITEs represent an interesting special case [model] of island development and a clear MIRAB alternative that deserves further study.”

In a follow-up review of the literature, Bertram [2006, p. 1] made four salient observations that included: (1) “…the emergence of a new three-way taxonomy of small-island socioeconomic formations, comprising MIRAB, PROFIT and SITE ideal types; (2) the significant overlap between SITE and PROFIT destinations; (3) the significant lack of overlap between PROFIT and MIRAB cases; and (4) the need for further conceptual and empirical work. In his words [2006, p. 6], “A rich research agenda clearly remains to be explored.” As a piece of that effort, this chapter argues that SITE destinations represent a special species of the more general PROFIT genus. SITEs possess vibrant private sectors, pursue aggressive tourism promotion and many of the most successful are highly diversified towards offshore finance and other export goods and services: Bahamas, Bermuda, British Virgin Islands, Cayman Islands, Cyprus and Mauritius. Thus they can be legitimately grouped together with PROFIT islands and in combination analyzed against their MIRAB neighbors.

 

 

3. Methodology

 

In order to construct economic, social and demographic profiles of PROFIT/SITE and MIRAB economies, 23 standard variables were selected from The World Factbook [CIA, 2007]. Four were employed to measure macroeconomic performance: per capita GDP (Purchasing Power Parity) as a measure of the standard of living (SOL); electricity consumption as an SOL proxy; and the unemployment rate. A measure of land area (km2) was also used as an indicator of resource availability/scarcity. Three measures were used to compare social and health differences: adult literacy, life expectancy, and infant mortality. Since demographic patterns often parallel development contrasts, ten measures were used to calibrate demographic differences. They included: population growth and size, median age, the distribution of young (0-14), working age (15-64), and old (65+) cohorts, as well as crude birth, death, migration and fertility rates.

In this first-pass exploration, to measure the influence of economic diversification on island performance, five measures were employed. Three standard indicators of economic structure were used: the share of GDP in agriculture, in industry, and in services. It was assumed that these aggregate measures provided some indirect indication of the level of diversification. The service/GDP ratio in particular was interpreted as an indicator of tourism and/or offshore finance development. In addition, two other indirect measures of tourism infrastructure were used: the number of kilometers of paved roads as well as the number of airports with paved runways. Finally, because of its repeated importance in the literature, political status was included as a dummy variable, with zero (0) representing dependent or territorial status and one (1) representing independent or sovereign status.

To operationalize the test, following McElroy & Pearce [2006, pp. 531-532], 37 small islands were selected with less than one million in population, with one exception—Mauritius (1.2 million)—for which nearly complete data were available. Because of the serious data requirements necessary to construct comprehensive profiles, as well as the need to employ comparable measures from a standard source, many SNIJs included in previous studies were excluded in this analysis. The major criterion employed to classify islands into the two groupings was the level of diversification, i.e. postwar economic restructuring, as measured by the percent of GDP contributed by agriculture. Generally, islands with more than ten percent of GDP in agriculture and primary production were classified as MIRAB, and those below selected as PROFIT/SITEs. In the few cases where there were discrepancies (overlaps), appeal was made to the literature. For example, although the agriculture/GDP ratios for Kiribati and Palau were less than ten percent, these countries have consistently been classified in the recent literature as MIRAB because of their heavy dependence on aid and/or remittances [Bertram 2006; Bertram & Poirine 2007]. Likewise the agriculture/GDP ratios for Dominica and Maldives exceeded ten percent; yet these islands were categorized as PROFIT/SITE because both maintain some of the fastest growing tourism sectors—cruise in Dominica and overnight in Maldives—in the island world [McElroy, 2006].

The resulting groupings included 20 PROFIT/SITE islands and 17 MIRAB economies. The former located primarily in the Caribbean and the Indian Ocean included: Anguilla, Antigua, Aruba, Bahrain, Bahamas, Barbados, Bermuda, British Virgin Islands (BVI), Cayman Islands, Dominica, French Polynesia, Isle of Man, Maldives, Malta, Mauritius, Netherlands Antilles, St. Kitts, St. Vincent, Seychelles and the United States Virgin Islands. The latter located primarily in the Pacific included: American Samoa, Cape Verde, Comoros, Cook Islands, Federated States of Micronesia, Kiribati, Marshall Islands, Mayotte, Montserrat, Palau, Samoa, St. Helena, St. Pierre and Miquelon, Sao Tome and Principe, Tonga, Tuvalu and Vanuatu.

To construct statistically distinct profiles, average values across the 23 variables were calculated for each respective grouping, and statistical differences were determined using a two-sample means test. Given previous research, it was hypothesized that the PROFIT/SITE economies would demonstrate higher levels of economic performance, and stronger export service (tourism/offshore finance) orientation, social progress and demographic maturity than their MIRAB counterparts. It was also assumed that the former would exhibit a higher degree of economic diversification.

 

 

4. Results: Performance

 

Table 1 shows average values of the 23 variables for the two island groupings classified by model and/or development type. P-values are included to assess statistical significance based on the two-sample means test. Generally the outcomes conform to expectations. In most cases, the contrasts between the indicator averages of the PROFIT/SITE islands versus the MIRAB destinations are in the hypothesized directions. In broad brush, the analysis demonstrates there are empirically verifiable and distinct socioeconomic and demographic profiles among small islands classified into PROFIT/SITE and MIRAB camps.

Specifically they differ in economic performance. In perhaps one of the most glaring contrasts, average per capita income in PROFIT/SITE economies of $21,058 is over five times the average level of $3,812 in MIRAB islands. This affluence suggests a greater level of PROFIT/SITE development and modernization and is mirrored in the even sharper difference between average per capita levels of electricity consumption where the gap is over eighteen-fold: 1,039 versus 56 kWh (millions). Similarly, in another indicator of macroeconomic performance, the average unemployment rate in PROFIT/SITE destinations (9.3%) is 40 percent lower (6 percentage points) than the MIRAB average (15.2%), although because of small sample size and likely wide variance the difference is only statistically significant at the 6 percent level.

Consonant with this economic divide, social patterns also differ between the two profiles. This is especially true with respect to health standards. For example, according to Table 1, PROFIT/SITE islands enjoy significantly higher life expectancy—75 versus 70 years—than their MIRAB neighbors. Similarly, the former’s infant mortality rate is 50 percent lower than the latter’s: 15 deaths per 1,000 live births versus thirty. In addition, the former average higher adult literacy (95%) than the latter (89%), although the difference is not statistically significant.

 

Table 1. MIRAB versus PROFIT/SITE Profiles

 

Variable

MIRAB

PROFIT/SITES

P-Values1

GDP per capita ($US)

3812

21,058

0.000*

Unemployment Rate (%)

15.24

9.28

0.057

Electricity (kWh millions)

56

1,039

0.024*

Area (km2)

1577

1121

0.607

Population size

147,083

231,757

0.295

Life Expectancy (yrs.)

70.2

74.7

0.013*

Infant Mortality Rate

30.1

14.8

0.011*

Literacy Rate (%)

88.9

94.7

0.124

Median Age (yrs.)

23.9

32.1

0.000*

0-14 yrs. (%)

34.0

23.8

0.000*

15-64 yrs. (%)

60.8

67.9

0.000*

65+ yrs. (%)

5.24

8.24

0.008*

Net Migration

-4.47

0.72

0.038*

Crude Birth Rate

25.15

15.4

0.000*

Crude Death Rate

6.38

6.85

0.377

Total Fertility Rate

3.35

2.08

0.001*

Population growth

1.3

0.94

0.323

Agriculture/GDP (%)

18.3

4.38

0.001*

Industry/GDP (%)

20.4

20.0

0.926

Services/GDP (%)

61.3

75.6

0.004*

Political Status2

0.71

0.55

0.314

Paved Roads (km)

232

935

0.002*

No. Paved Airports

2.65

5.60

0.218

Sources: Data from The World Factbook [CIA, 2007].

1 Asterisk (*) denotes statistical significance at the .05 level or better.

2 Measured as 1.0 for independents and 0.0 for dependents.

 

Likewise the two demographic profiles diverge sharply across almost every indicator. To illustrate, in contrast to MIRAB islands the PROFIT/SITE economies boast an older age structure as measured by their significantly higher average median age—32 versus 24 years—with a considerably smaller average share of young (0-14 yrs.) cohorts—24 versus 34 percent—and a noticeably larger average share of working age (15-64 yrs.) cohorts, i.e. 68 to 61 percent. These working-age discrepancies in particular reflect, on the one hand, the more dynamic PROFIT/SITE economies with assumed more buoyant employment opportunities and higher labor force participation rates, and on the other hand the more sluggish and moribund MIRAB islands. More specifically they demonstrate the demographic impacts of a heavy influx of workers in the former to service the labor-intensive demands of tourism, related infrastructure and facility construction, and offshore and other activity, and in the latter the sustained out-migration of labor characteristic of remittance-driven MIRAB societies. Finally, the fact that the former averaged a significantly higher ratio of older (65+ yrs.) cohorts may reflect in part the relative attractiveness of PROFIT/SITE islands as desirable retirement destinations.

The same disparate pattern is also confirmed in the net migration differences. According to Table 1, while PROFIT/SITE islands averaged net immigration of close to one person per 1,000 population, MIRAB economies averaged net emigration of 4.5 persons. Some specific examples highlight this contrasting behavior. For example, net emigration from two stagnant MIRAB outposts, American Samoa and Micronesia, was roughly 21 persons per 1,000 population for both, suggesting a population decline of over two percent per annum. In the reverse case, the net immigration experience of two of the fastest growing tourism and offshore havens in the Caribbean, Cayman Islands and British Virgins, was ten and nine persons per 1,000 population respectively. Aside from the sharp per capita income differences discussed earlier, no other indicator better captures the structural divide between the two profiles. These contrasting migration experiences clearly discriminate between the affluent, robust, labor-importing PROFIT/SITE economies and the stagnant, struggling, labor-exporting MIRAB outposts.

Finally, the PROFIT/SITE destinations exhibit greater movement through the demographic transition from higher to lower birth and death rates, an indicator consistently associated with developmental progress. They averaged markedly lower crude birth rates than the MIRAB societies, 15 versus 25 births per 1,000 population and roughly similar crude death rates. Likewise their total fertility rates averaged roughly two children per women of child-bearing age in contrast to the MIRAB average of 3.4 children. As a result, for the former the average rate of natural increase (crude birth minus crude death rates) was more than 50 percent lower, i.e. 8.6 births per 1,000 population versus approximately 19 for MIRAB islands. Such differences, in combination with the net migration figures, partly explain the slightly higher average population growth rate recorded for the latter. These profile contours favoring PROFIT/SITE islands partly reflect their relative affluence, older age structure and hence reduced future population momentum, better health levels and, in contrast to MIRAB destinations, a higher degree of demographic maturity and modernization.

 

 

5. Diversification

 

Much of the performance divergence derives from the differing structures of the two island types. MIRAB islands on average tend to be far more oriented toward agriculture and, by assumption, income-inelastic primary exports and far less oriented toward income-elastic export services (tourism, offshore banking etc.) and light manufacturing. For example, for the average MIRAB economy, nearly a fifth of GDP is contributed by primary production in contrast to the less than five percent for PROFIT/SITES (see Table 1). Some examples of the former include the Marshall Islands and Micronesia where agriculture accounts for roughly 30 percent of GDP. Similarly, only 61 percent of average MIRAB GDP is absorbed by services while the average figure is 76 percent for the PROFIT/SITES. The GDP contribution of industry is identical (20%) for both island groupings.

These results are not surprising since the MIRAB group contains many remote, partially modernized colonial-type agricultural/subsistence economies: the two Samoas, Cape Verde, Comoros, Micronesia, Kiribati, Marshall Islands, Tonga and Vanuatu. On the other hand, the PROFIT/SITE group contains some of the most popular tourist resort areas in the Caribbean (Aruba, Bahamas, Netherlands Antilles, U.S. Virgin Islands) and some of the most rapidly growing destinations in the Indian Ocean (Maldives, Mauritius and Seychelles). This group also includes some of the most successful and sophisticated offshore tax havens and financial centers in the world: Bermuda, British Virgin Islands, Cayman Islands and the Isle of Man.

Taken together such evidence suggests that these latter islands have more successfully diversified their economies away from traditional staples like sugar and copra than their MIRAB counterparts. These results also indirectly suggest the strategic role that policy has played in PROFIT/SITE relative prosperity. Although in this small sample there is no direct evidence that dependent political status and, by assumption, the territorial use of jurisdictional resources are an empirical basis for superior performance (see Table 1), there is some indication that tourism promotion discriminates the two groups. For example, PROFIT/SITEs had roughly twice the number of airports with paved runways and approximately four times the number of kilometers of paved roads than MIRAB islands, although on average the latter were considerably but not statistically larger in area. This difference in the provision of tourism infrastructure for a relatively homogeneous sample of small islands suggests the deliberate use of PROFIT/SITE economic diversification to overcome the constraints of resource scarcity and remoteness.

 

 

6. Conclusion

 

This limited, provisional examination of 37 small (less than one million inhabitants) mainly warm-water islands has detailed the empirical economic, social and demographic contours that discriminate between PROFIT/SITE and MIRAB island economy formulations. The resulting average profiles suggest that these different development models indeed have real-world validity since fourteen of the 23 indicators employed were statistically significant, and the majority of the rest were in the hypothesized direction. The outcomes also demonstrated that the PROFIT/SITE destinations were more economically affluent, socially advanced and demographically mature than their MIRAB counterparts. The major evidence offered to support this superior performance was a pervasive pattern of diversification frequently mentioned in the literature [Armstrong et al. 1998; Baldacchino & Milne 2000; McElroy 2006], specifically the former’s strong policy orientation toward export services (tourism, offshore finance etc.) and their postwar restructuring away from primary production. Other findings from the study were that size and political status played no significant role in distinguishing the two island types.

In summary, the discrete performances of the two models is perhaps best conceptualized and most clearly understood in the differential migration experiences characteristic of the two profiles. On the one hand, the average PROFIT/SITE island is typically an immigrant society that has progressed through the migration transition from labor exporter to labor importer mainly because of the labor imperatives of staffing a diversifying international service-based economy. On the other hand, the average MIRAB island is typically an emigrant society experiencing stagnation, high unemployment and chronic external migration. Finally, to connect with the general development literature, this study concludes with a paraphrase and expanded re-working of the conclusion of Brau et al., [2003, p. 9], namely that smallness per se can be good for island development as long as it is combined with diversification toward income-elastic exports, particularly tourism and offshore services.

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