Sustainable Economic Development Model for Small Island States

Abstract:     
Existing economic growth models by Harrod-Domar, Solow–Swan, Lucas, and Romer, have no capacity to explain the evolution or the collapse of economic growth of small islands that are inheritably featured by the remoteness, smallness and also their vulnerability to natural disasters in the islands economic systems. The resilience and vulnerability of Small Island states were studied by Briguglio (2004); socio-economic views, Galea, Cordina (2004); the vulnerability of natural disasters in small islands, Bernard (2007); and Boise and Morriss (2007) discussed the vulnerability of external regulatory changes with the case of the Netherlands Antilles. This study pursues a theoretical approach to an economic growth model that should reflect the limits and the traits of small island states. A dynamic model in discrete steps is presented using the optimal control theory for a longer-term sustainable economic growth for small islands. An analytical framework is formed for a sustainable economic growth with the small islands’ industry such as tourism and the offshore financial intermediation services that have been introduced into small island-tax-havens over the past two decades. The results from numerical simulations indicate that policies such as sector diversification, sound environmental management and proactive policy implementation over the external changes are vital for resilience and welfare for the future of small island economies.

Keywords: Economic growth, offshore financial centre, tax, cross-border arbitrage

JEL Classification: H87, F23, F21, F20, H21, L11

working papers series