It's been years since I've had to scale units to fit very small areas, but it's definately possible. Personally, I've done it with regards to a world map on an open RPG that I was a part of a very long time ago.
Yes, there is much more to it than just scaling it so that it looks like it's small enough to fit in it. All you're doing by making it look small is just that, the system needs to also be told that it's pathway needs to match it's new scaling size.
It's the same theory as when you enlarge, let's say, a building to three times it's normal size. Notice you'll be able to practically walk in it and through it?
That's basically the same concept, only backwards. Your characters need to have their "invisible" scale decreased in addition to their visible size. Also, you will have scale shadows and walk speed to match their new scaled size, unless you want them to be running at two hundred miles per hour on the small world terrain.
Then again, the world map I was building has everything minature sized, and mountains or cliffs still need at least SOME space to walk through path-wise.
I'm not able to tell by your screen shot if it will work, but some of the sharp turns on there might need to be adjusted if you don't want to do some of the other suggestions. | 
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