Chapter 3. Caribbean Tourism in the Global Marketplace: Trends, Drivers, and Challenges (2024)

Introduction

The Caribbean region is highly dependent on tourism. The role of tourism in economic activity in the region increased steadily following the dismantling of the system of agricultural trade preferences in the late 1980s and early 1990s, and the tourism industry has proved to be resilient even as traditional output and export sectors waned. Beginning from a base of about 4 million tourists in 1970, the region now receives more than 26 million visitors a year. The sector accounts for a large share of many economies in the region, ranging from 7 percent to 90 percent of GDP, and 32 percent as a simple average (Figure 3.1). According to the World Tourism and Travel Council, the sector also directly accounts for, on average, almost 12 percent of total employment, and indirectly for another 20 percent.

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Despite tourism’s growing economic importance in the Caribbean, the region’s share of the global tourism market has declined steadily since the 1990s, leveling off only in 2014–15 with a recovery in arrivals. The sector experienced a prolonged slump in many countries in the Caribbean following the global financial crisis in 2008–09, contributing to weak GDP growth, high unemployment, and a widening of fiscal and external current account deficits. Since the Caribbean economies are very open and highly dependent on major advanced economies as the source of tourist arrivals, they are extremely vulnerable to external shocks. This weakness is compounded by existing macroeconomic, structural, and geographical vulnerabilities in the region arising from an overhang of public debt, relatively high cost structures, and frequent natural disasters.

An understanding of whether tourism matters for growth is necessary to an assessment of whether the deceleration in the sector is perilous for the region. Although the literature analyzing this relationship is limited, some studies clearly suggest that tourism does indeed have a positive and significant impact on growth, particularly for low- and middle-income countries (Eugenio-Martín, Martín, and Scarpa 2004). A study by Thacker, Acevedo, and Perrelli (2012) that includes a large group of tourism-dependent small island states finds that tourism not only boosts economic growth, it also helps reduce growth volatility. Specifically, a 10 percent increase in tourist arrivals (as a share of a country’s population) raises real per capita GDP growth by about 0.2 percentage point. Moreover, both tourist arrivals and higher-end tourism, as determined by tourists’ average spending per day, are found to have a positive effect on productivity, with the former having a bigger impact. One could, therefore, argue with some conviction that the tourism sector is an important engine of growth for countries in the Caribbean.

In addition, the tourism industry also offers many backward links to the rest of the economy, such as agriculture, trade, transportation, communications, construction, and entertainment. The link between tourism and the domestic economy has not been fully developed in the Caribbean and offers immense scope for bringing about stronger, broader-based growth in tourism- dependent economies.

Against this backdrop, and with a focus on promoting growth resilience in the Caribbean, the IMF has been analyzing the performance and prospects for the tourism sector, notably by examining issues pertaining to competitiveness and the role of industry-specific factors. This chapter brings together these strands of research and their findings, which include the following:

Relative tourism prices in the Caribbean, highlighting the cost differentiation of a beach holiday in the region compared with other beach destinations around the world
The sensitivity of tourist arrivals and spending to price and income factors in the source markets
The role of airlift, including an examination of how key factors of airlift supply affect U.S. tourist arrivals in the Caribbean
The effects of hurricanes and hurricane-related damage on tourism

Based on these analyses, important policy implications are drawn to strengthen the performance of the tourism sector, as well as the overall productivity and competitiveness of tourism-based economies in the region.

Countries in the Caribbean will likely be faced with future challenges and opportunities arising from further rapprochement between the United States and Cuba, including the potential increase in U.S. tourist arrivals in Cuba, an issue that is analyzed in Chapter 4.

Stylized Facts

Rising tourist arrivals. The volume of tourists has more than doubled in the Caribbean, from 12 million in 1995 to 26 million tourists in 2014, fueled by steady growth in key advanced economies and strong inflows of foreign direct investment. The notable exception is The Bahamas, where tourist arrivals have remained mostly flat since the mid-1990s, largely because of the maturity of its market. The regional expansion, including in smaller countries, has taken place despite the very rapid growth experienced by the larger destinations (for example, Dominican Republic, Cancun,1 and Cuba) over this period (Figure 3.2). The most rapid expansion took place in the 1990s, when tourist arrivals to the region increased by about 6 percent per year, and was followed by a marked slowdown in the 2000s, when the growth of tourist arrivals to the region declined sharply to 2.9 percent as the region was affected by the attacks of September 11, 2001; the dot-com bust in 2001–02; and most notably, the global financial crisis in 2008–09. Although growth in the sector has recovered in recent years, performance has been uneven (Figure 3.3)

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Chapter 3. Caribbean Tourism in the Global Marketplace: Trends, Drivers, and Challenges (8)

Declining global share. Despite strong growth, the Caribbean share of the global tourism market has steadily declined, falling from about 2.6 percent in 1995 to about 2.1 percent in 2013 (Figure 3.4). Part of this loss reflects the surge in global tourism demand for relatively new markets such as China. However, even abstracting from this structural change (as denoted by the dotted counterfactual line in Figure 3.4, which is calculated on the assumption that tourism growth in Asia is capped at the same rate as in the rest of the world), the Caribbean’s market share would have still declined. Within the Caribbean there have been significant shifts in market shares between 1995 and 2014, as Cancun, Cuba, and the Dominican Republic emerged as significant players with market share gains ranging from 5 percent to 10 percent (Figure 3.5, panel 2).

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Insufficient diversification of source markets. Caribbean countries remain relatively undiversified in their tourism source markets (Figure 3.5, panel 1), although there have been some changes. In some countries, such as Aruba, The Bahamas, Cancun, Jamaica, and St. Kitts and Nevis, U.S. tourists make up more than 60 percent of total arrivals. The main growth market for the Caribbean has been Canada, while tourist arrivals from Europe have declined, likely owing to the prolonged recession there. Indeed, since early 2008, the share of U.S. tourists has held roughly steady, while the share of European tourists has fallen by a fourth, partially replaced by more tourists from Canada and other markets.

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In addition, the lack of diversification in source markets has meant that economic cycles in advanced economies are easily transmitted to the Caribbean. This was particularly evident in the aftermath of the global financial crisis, as output contracted sharply in the United States, Canada, and the United Kingdom; unemployment in these countries remained at elevated levels for several years; and U.S. household net wealth dropped sharply. In 2009, 23 out of 28 destinations in the Caribbean experienced an average decline in tourist arrivals of about 8 percent. The only exceptions were Cuba, the Dominican Republic, Guyana, Haiti, and Jamaica, which managed to weather the crisis with price cuts. Although by 2010 most of the countries saw a recovery—with only 9 out of 28 destinations still suffering from the decline in demand—tourist arrivals remained weak until 2014. Coincidentally, the decline in the number of U.S. flights to the Caribbean following the financial crisis did not begin to change course until 2012. The global recession also left a more profound and lasting impact as weaker tourism demand pushed hotel occupancy rates down and hindered new investment.

Relatively high pricing. Tourism is a competitive market, and relative price comparisons indicate that vacationing in the Caribbean is substantially more expensive than in other parts of the world.2 Based on an index—called the Week-at-the-Beach Index—LaFramboise and others (2014) show that the nominal cost of an average one-week beach holiday in the Caribbean (dark red bars in Figure 3.6) is higher than elsewhere in the world. This result is consistent across different data sources and indices (LaFramboise 2016).3 To the extent the Caribbean remains an attractive tourist destination, one could conclude that nonprice factors, such as superior beaches, clearer water, and proximity to its main market (the United States), make the marginal benefit of a beach holiday in the Caribbean high enough to exceed the elevated cost of a holiday there. However, the higher prices for Caribbean destinations have undoubtedly affected the region’s competitiveness and capacity to attract more tourists, and could explain, in part, the declining global market share.

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The Week-at-the-Beach index also shows that both Cuba and the Dominican Republic offer considerably lower cost vacations than the rest of the Caribbean, with costs comparable to those of Central America. This affordability not only makes both countries tough competitors in the regional tourism market, but may also pose challenges to the rest of the region if the United States decides to allow tourism travel to Cuba (see Chapter 4).

Other risk factors. The Caribbean is one of the most vulnerable regions in the world to natural disasters. In fact, 15 out of the top 25 countries worldwide with the most tropical cyclones per square kilometer are Caribbean islands (Figure 3.7). Hurricanes have caused major damage to hotel facilities and disrupted tourist arrivals, particularly since tourism infrastructure is usually concentrated in coastal areas, which are most exposed to hurricanes and floods. For example, when Hurricane Ivan hit Grenada in 2004, it damaged most hotels, while Hurricane Omar in 2008 essentially wiped out tourism in Nevis by damaging the main hotel on the island. In 2012, Hurricane Sandy caused severe disruptions to hotel operations in The Bahamas.

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Given the declining global share of Caribbean tourism, the deceleration of the sector during the past decade, risks from weak diversification of source markets, and the role of natural disasters, a better understanding of tourism drivers, including the potential impact of economic cycles in source markets combined with the effects of domestic supply factors, is important to developing the right policy actions to tap the full potential of the sector.

Tourism in the Caribbean—Demand and Supply Factors

Building on the work by Thacker, Acevedo, and Perrelli (2012) on the contribution of tourism to growth in the Caribbean, recent IMF research has focused on assessing the demand factors influencing tourist arrivals, as well as possible supply factors. Specifically, LaFramboise and others (2014) examine the factors that influence tourist arrivals to the Caribbean and whether these factors have changed since the 2008–09 global financial crisis.

They study the effects on tourist arrivals of demand variables like prices—based on the real effective exchange rate calculated using tourism source market weights— income and employment in the main source market countries; supply variables, such as the number of hotel beds in the region and the number of airlines flying to the Caribbean; and exogenous factors, such as natural disasters and crime. This chapter uses data for 16 Caribbean countries to estimate a dynamic panel regression with tourism arrivals and tourism expenditure from 2000 to the end of 2015 as the dependent variables. The sample is divided into “higher-end” and “lower-cost” destinations—as defined by the share of four- to five-star hotels in each market—to differentiate elasticities across destinations.

Consistent with earlier studies, the analysis shows that income factors in source markets play an important role in affecting tourist arrivals and expenditures.4 Specific findings are provided below, with a focus on arrivals, for which data quality is superior relative to expenditure data.

Estimated Price and Income Elasticities

An increase in price leads to a decline in arrivals, except in higher-end destinations. A 1.0 percent appreciation of the tourism-weighted real exchange rate is associated with a 0.17 percent decrease in arrivals in the baseline specification. In contrast, tourism arrivals and expenditure in higher-end tourism destinations are not sensitive to price.5

The analysis also shows that arrivals in the Caribbean are highly elastic to economic conditions in source countries. For example, a decrease in income or increase in unemployment in source country markets leads to an important decline in tourist arrivals. A 1.0 percent increase in the tourism-weighted unemployment rate in the source markets (which proxies the income effect) implies a 1.8 percent decrease in arrivals during 2000–15. The impact on arrivals is almost double (3.2 percent decline) in those markets deemed higher-end destinations (Annex Tables 3.1.1 and 3.1.2).6

Other Factors Influencing Tourist Arrivals and Expenditure

The panel regression incorporated a vector of time-varying explanatory variables including two tourism-supply factors—the number of airlines serving the Caribbean and the number of hotel rooms—and other factors including homicide rates in destination countries (a proxy for crime risks), a hurricane dummy, and a dummy for the September 11, 2001, terrorist attacks in the United States. The number of airlines was found to have a positive and statistically significant impact on arrivals (and expenditure), but the number of hotel rooms was found to have no statistically significant impact on arrivals or expenditure, even after controlling for reverse causality.

Other factors, such as hurricanes (see “Tourism’s Vulnerability to Natural Disasters” below) and the September 11, 2001, terrorist attacks in the United States, were found to have negative and significant impacts on tourist arrivals and expenditures, but crime was found to have no significant impact. This outcome could reflect the perception that beach resorts in the Caribbean are physically well protected and secured, which mitigates tourists’ exposure to crime risks.

Implications

Policymakers could usefully integrate the sensitivity of tourist arrivals to economic conditions in source markets into their macroeconomic and fiscal planning frameworks. Efforts to diversify tourism markets would reduce vulnerability to the key advanced economies, which tend to follow the same economic cycle. In addition, risk-mitigation strategies such as regional coordination and better marketing of the “Caribbean brand” to make it attractive to a wider audience could help increase growth and the region’s global market share.

In the higher-end destinations, where price does not appear to affect arrivals, countries should ensure that the physical plant of the tourism sector (for example, hotels, grounds, restaurants) and services remain of a quality commensurate with the higher-end brand. This requirement highlights the importance of ensuring that the supporting infrastructure and institutions provide quality public goods and services desired by higher-end tourists. In the lower-cost destinations, where arrivals are more price sensitive, the focus could be on reducing costs, particularly for labor and energy. The exchange rate could also be a useful shock-adjustment mechanism to help countries maintain or regain competitiveness (for countries with flexible exchange rate regimes), with due consideration to its broader economic and financial implications.

The Role of Airlift in the Caribbean

Supply factors are a crucial determinant of tourism flows to the Caribbean. One such critical supply factor is airlift, which, given the small size of the Caribbean islands and their geographical separation from their large markets, plays a key role in connecting tourists with Caribbean destinations. Using a broad concept of airlift that includes supply factors such as the number of flights, seats, airlines, and departure cities, this section identifies airlift’s effect on U.S. tourist arrivals to the Caribbean.7,8

Intuitively, better airlift between the United States and a Caribbean destination would promote tourism, but it is not immediately obvious which airlift factor contributes the most. Understanding this issue is important, not only because it has a large impact on tourism-intensive island economies, but also because Caribbean countries have at times struggled to get their desired level of airlift services, which has affected the region’s tourist arrivals growth. Countries have resorted to incentive schemes for airlines involving minimum seat or revenue guarantees or marketing support in source markets for routes and airlines to a particular destination, all of which carry fiscal costs in these countries, many of which are already in a vulnerable fiscal situation.

Some interesting stylized facts emerge illustrating issues surrounding the U.S.-Caribbean airlift market. First, as expected, larger destinations (such as Cancun, the Dominican Republic, Jamaica, and The Bahamas) enjoy more flights, from more airlines, with direct connections to several U.S. cities (see Annex Table 3.2.1). However, after controlling for a country’s land size or its hotel room capacity, the smaller islands have more airlift supply than the larger destinations (see Annex Table 3.2.2). In other words, despite their limited size and markets, the tourism sectors of the smaller islands appear to be adequately serviced by the airline industry, when compared with their larger neighbors.

Miami is the main U.S. hub for travel to the Caribbean, accounting for 20 percent of flights. American Airlines is the primary airline serving the Caribbean, accounting for 20 percent of flights to the region (Figure 3.8). Although the air travel market to the Caribbean region as a whole is competitive with regard to the number of airlines, some individual destinations have high market concentration in a few airlines. Moreover, air traffic connections with the United States to most of the smaller destinations are highly concentrated, leaving them vulnerable to service changes in a few airlines.9

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Estimation Results

To identify the effects of the different airlift supply factors on U.S. tourist arrivals to each Caribbean destination, a structural vector autoregression model (SVAR) is used. The SVAR model enables the disentangling of the reverse causality between tourist arrivals and airlift factors in which tourist arrivals are not only affected by the supply of airlift services but also have an impact on how much airlift the airlines are willing to provide.10

The results (Figure 3.9) for the panel SVAR show that all four airlift supply factors have a positive and significant impact on tourist arrivals to the Caribbean.

The number of flights has the largest impact and seems to be the most effective way to increase arrivals to a country. A 1.0 percent increase in the number of flights to a destination instantly increases tourist arrivals by 0.3 percent, and the cumulative increase of tourist arrivals is estimated to be about 1 percent after 10 months.
The airlift factor with the smallest impact on tourism is the number of U.S. cities with nonstop flights to the Caribbean.

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To study possible differences across countries, individual countries’ SVARs were also estimated. Table 3.1 shows the response of tourist arrivals to each airlift factor.

For individual countries, the number of flights is once again the most important factor influencing tourism flows—it has not only the largest impact, but also the most persistent and significant effect on tourism.
The other three demand factors are important and significant in only some destinations. For instance, increasing the number of airlines has an important bearing on tourist arrivals in St. Kitts and Nevis, but not in most other countries (except Bermuda and Cayman Islands).
The least important airlift factor is the number of airlines, with the lowest impact on tourist arrivals and the lowest significance across countries.

Table 3.1.

Heterogeneity in the Response of Tourist Arrivals across Countries

Source: Authors’ calculations based on country-specific structural vector autoregressions.Note: The first four columns show the immediate response of tourist arrivals to a shock in the four airlift supply variables. The number in the cells indicates the immediate percent change in tourist arrivals after the shock. The green color indicates the significance. Dark green indicates that the response is different from zero for more than four periods; the lighter green for more than two periods.

Table 3.1.

Heterogeneity in the Response of Tourist Arrivals across Countries

	Immediate Impact of a 1% Shock to				Cumulative Impact (Fifth month) of a 1% Shock to
	Airlines	Cities	Flights	Seats	Airlines	Cities	Flights	Seats
Average	0.11	0.11	0.37	0.13	0.27	0.29	1.19	0.51
Antigua and Barbuda	0.02	0.12	0.19	0.23	0.05	−0.12	0.38	0.51
Aruba	−0.04	0.21	0.35	0.18	0.17	0.90	1.68	0.54
The Bahamas	0.08	−0.04	0.24	0.21	0.09	−0.30	0.11	0.47
Barbados	0.17	0.12	0.31	0.17	0.00	0.57	0.85	0.60
Belize	0.06	0.31	0.14	0.07	0.29	1.13	0.94	0.31
Bermuda	0.12	0.17	0.48	0.02	0.51	0.27	0.84	−0.09
Cancun	0.33	0.19	1.55	−0.03	0.21	0.31	3.97	0.59
Cayman Islands	0.30	0.10	0.52	0.21	0.73	−1.07	2.49	1.01
Dominica	0.02	−0.17	0.19	0.12	0.21	−0.08	0.43	0.46
Dominican Republic	0.09	0.10	0.25	0.14	−0.13	0.58	1.06	1.10
Grenada	0.06	0.03	0.20	0.00	0.40	0.33	0.92	0.17
Jamaica	−0.04	0.01	0.34	0.05	−0.11	0.02	0.94	0.28
St. Kitts and Nevis	0.34	0.17	0.21	0.16	0.97	0.50	1.03	0.36
St. Lucia	0.06	0.19	0.21	0.29	0.45	1.07	0.97	0.80

Table 3.1.

Heterogeneity in the Response of Tourist Arrivals across Countries

	Immediate Impact of a 1% Shock to				Cumulative Impact (Fifth month) of a 1% Shock to
	Airlines	Cities	Flights	Seats	Airlines	Cities	Flights	Seats
Average	0.11	0.11	0.37	0.13	0.27	0.29	1.19	0.51
Antigua and Barbuda	0.02	0.12	0.19	0.23	0.05	−0.12	0.38	0.51
Aruba	−0.04	0.21	0.35	0.18	0.17	0.90	1.68	0.54
The Bahamas	0.08	−0.04	0.24	0.21	0.09	−0.30	0.11	0.47
Barbados	0.17	0.12	0.31	0.17	0.00	0.57	0.85	0.60
Belize	0.06	0.31	0.14	0.07	0.29	1.13	0.94	0.31
Bermuda	0.12	0.17	0.48	0.02	0.51	0.27	0.84	−0.09
Cancun	0.33	0.19	1.55	−0.03	0.21	0.31	3.97	0.59
Cayman Islands	0.30	0.10	0.52	0.21	0.73	−1.07	2.49	1.01
Dominica	0.02	−0.17	0.19	0.12	0.21	−0.08	0.43	0.46
Dominican Republic	0.09	0.10	0.25	0.14	−0.13	0.58	1.06	1.10
Grenada	0.06	0.03	0.20	0.00	0.40	0.33	0.92	0.17
Jamaica	−0.04	0.01	0.34	0.05	−0.11	0.02	0.94	0.28
St. Kitts and Nevis	0.34	0.17	0.21	0.16	0.97	0.50	1.03	0.36
St. Lucia	0.06	0.19	0.21	0.29	0.45	1.07	0.97	0.80

This section also studies the dynamic effects between the variables using the SVAR. For example, although the number of airlines has a limited effect on tourist arrivals in most countries, adding more airlines results in an expansion of the number of cities and flights, which indirectly increases tourist arrivals. However, this connection appears to be short lived. It is interesting to note that an increase in the number of departure cities does not appear to increase the number of flights. This result suggests that opening routes from new U.S. departure cities does not increase the overall frequency of flights to a destination because airlines instead shift flights from established routes to new ones, leaving the total number of flights unchanged.

Implications

To boost tourist arrivals, policymakers across the Caribbean would benefit from focusing their efforts on increasing the number of flights to the region. Although all the other airlift factors have positive impacts on tourist arrivals, increasing the number of flights provides the most benefit. The implication is not that countries should limit themselves to only one airline with frequent flights—variety and diversification are also important and the results support that. However, given the choice between negotiating with an airline already serving the island to increase the frequency of flights or with a new airline to initiate flights to the island, the analysis indicates that countries would be better served by adding one more flight from an existing airline.

This finding is highly relevant since many destinations, particularly the smaller ones, provide subsidies or incentives of some kind to entice airlines to their islands. Without jeopardizing market competition, governments may find fiscal savings by negotiating with a smaller pool of airlines for more frequent flights rather than seeking to increase the number of airlines and direct connections.

Tourism’s Vulnerability to Natural Disasters

The Caribbean countries, because of their size and geographical location, are exposed not only to policy and economic shifts in the United States and other large economies, but also to natural disasters, mostly hurricanes. This section discusses the economic impact of hurricanes, notably on tourist arrivals.

The Costs of Disasters

Weather has a direct impact on tourists’ decisions, particularly for the Caribbean’s “sun, sand, and sea” type of tourism. For example, Forster and others (2012) find that 40 percent of surveyed tourists in Anguilla considered the hurricane season when making their travel plans. Not surprisingly, they also found that tourists are less willing to travel when the probability of a hurricane strike increases, or when the hurricane strength of a potential storm increases. Sookram (2009) estimates the effect of weather variables on tourist arrivals in the Caribbean, finding that higher average temperature and precipitation in a destination adversely affects tourism flows.

Hurricanes have a devastating effect on Caribbean economies. They destroy buildings and roads, damage crops, disrupt businesses, and upset tourism services. Since most of the tourism infrastructure in the Caribbean is located near the coast, and therefore highly vulnerable to hurricanes, the economic impact is enduring. For example, after Hurricane Ivan hit Grenada in September 2004, tourist arrivals fell by almost 34 percent in the following 12 months. More generally, LaFramboise and others (2014) find that a hurricane reduces tourist arrivals by 1.2 to 2.0 percent in the year of the disaster. Previous work by Granvorka and Strobl (2013) shows similar results, indicating that an average hurricane reduces tourist arrivals by 2 percent.

Acevedo and others (2016) distinguish between the effects of moderate and severe natural disasters (mostly hurricanes). A disaster is considered “moderate” if more than 0.01 percent of the population is directly affected, or “severe” if 1 percent or more of the population is affected. Figure 3.10 presents the responses of tourist arrivals to a natural disaster shock.11 As expected, countries have different responses depending on the severity of the disasters they experience.

In countries with more frequent and severe disasters, such as Antigua and Barbuda, The Bahamas, Grenada, and St. Kitts and Nevis, tourist arrivals drop significantly following a disaster. In the month that a severe disaster strikes, the immediate drop in tourist arrivals ranges from 25 to 50 percent relative to its average monthly growth, and on average the cumulative decline in tourist arrivals during the next year exceeds 90 percent following a severe disaster, compared with a no-disaster situation. The sector usually starts to grow again only 10 to 12 months after the disaster.
In contrast, in countries that commonly experience moderate disasters the impact on arrivals does not seem to be significant. This is the case for Barbados, the Cayman Islands, the Dominican Republic, and Jamaica, which tend to experience more moderate disasters.

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Implications

Natural disasters can have devastating socioeconomic effects. They damage or destroy physical structures and depress economic activity. The adverse effects, while directly felt by the tourism industry, have a broader and profound impact on the macroeconomy and growth. Thus, policy implications go beyond the tourism sector and include broader macroeconomic management and structural measures.

In a region that is highly susceptible to natural disasters and severe weather events such as the Caribbean, it is paramount that measures be taken to adapt to these vulnerabilities. These measures could involve, for example, upgrades to infrastructure, better zoning, improved insurance coverage, and better access to finance, especially for small businesses, to reduce the impact of disasters both on local communities and on the tourism sector. A detailed discussion of the broader effects of natural disasters and the associated policy recommendations is in Chapter 5, including improving economic activity and the countries’ fiscal positions.

Conclusions and Policy Implications

Steady growth in advanced economies and strong inflows of foreign direct investment have helped tourism become a key growth engine in the Caribbean since the 1980s. However, since the 2008–09 global financial crisis and the ensuing collapse in external demand, the recovery in the tourism sector has been uneven across countries. With the Caribbean’s relatively weak growth rates, declining share in global tourism, and exposure to natural disasters, it is now more important than ever for stakeholders in the region to understand the drivers of and risks to tourism, such that policies could be geared toward accelerating growth in the sector and recovering some of the lost ground in the share of Caribbean tourism in the global market. Having a strong tourism sector and developing its backward linkages to the rest of the economy—an area for future research—would further support tourism as a strong source of growth.

The chapter highlights four key drivers of tourism in the Caribbean: (1) pricing and cost structures, which are high and undermine competitiveness in the global market for tourism; (2) income in source markets and expenditures, suggesting tourism recovery in the region will continue to be fragile until the main markets (United States, Canada, United Kingdom) experience stronger economic growth; (3) the number of flights serving the region, which has a positive effect on tourist arrivals; and (4) vulnerability to natural disasters, which entails significant costs to the industry and engenders slow recovery from disasters.

Given the potential for tourism to be a viable contributor to growth for the region, how should countries respond to build the sector? In the short term, countries should revisit options to maximize the number of flights serving their countries, which would also help minimize associated fiscal costs.

In the longer term, policymakers should focus on significant structural reforms to improve competitiveness, strengthen resilience, and increase the quality of the tourism product:

Ensuring that the supporting infrastructure and institutions provide quality public services and security will foster continued arrivals to higher-end destinations. Focus on reducing energy, labor, and food costs through a more diversified energy matrix, labor laws that encourage labor market flexibility, and the strengthening of domestic sector links to hotels will improve competitiveness without resorting to fiscal incentives. Domestic sector links will help develop other economic sectors (for example, agriculture), which, in time, could become growth drivers themselves.
Stronger physical infrastructure would not only help ensure quality while lowering costs but would also help strengthen resilience to natural disasters. Improving building codes and preparedness and better zoning laws will help countries weather large storms and speed up recovery. Improving access to finance (including lower transaction costs and better access to credit) and strengthening financial sector soundness would help improve businesses’ safety nets and help them handle reconstruction costs.
Diversifying markets (especially to emerging markets) and reducing reliance on the United States will greatly help the region protect against the longer-term impact of Cuba’s development. In this regard, tapping into new markets and historical links, together with diaspora resources, could help provide a much-needed boost.

Annex 3.1. Regression Results

Annex Table 3.1.1.

Determinants of Tourism Arrivals and Expenditure

Note: “2014 WP” refers to LaFramboise and others 2014.Robust standard errors in parentheses.*** p < 0.01, ** p < 0.05, * p < 0.1

Annex Table 3.1.1.

Determinants of Tourism Arrivals and Expenditure

	2014 WP Baseline	Updated Baseline	2014 WP Baseline	Updated Baseline
Variables	Ln(tourism arrivals)		Ln(tourism expenditure)
ΔLn(real exchange rate)	−0.158*** (0.010)	−0.172*** (0.016)	−0.101*** (0.003)	−0.115** (0.038)
ΔTourism-Weighted Unemployment Rate	−2.081*** (0.429)	−1.803*** (0.483)	−3.707*** (0.487)	−3.230*** (0.244)
ΔHurricane	−0.0138** (0.006)	−0.0123* (0.007)	−0.0226** (0.008)	−0.0203** (0.008)
ΔSeptember 11 Terrorist Attacks	−0.0229*** (0.006)	−0.0215*** (0.007)	−0.0036*** (0.011)	−0.0348*** (0.011)
ΔHomicide Rate	−0.0011 (0.001)	−0.00113 (0.001)	−0.00155 (0.001)	−0.0015 (0.001)
ΔLn(number of airlines)	0.0846*** (0.018)	0.0693*** (0.014)	0.0960*** (0.034)	0.0836*** (0.022)
ΔLn(number of hotel rooms)	−0.0104 (0.066)	0.000757 (0.065)	0.0365 (0.007)	0.0802 (0.068)
Observations	141	167	141	171
R²	0.345	0.318	0.345	0.209

Note: “2014 WP” refers to LaFramboise and others 2014.Robust standard errors in parentheses.*** p < 0.01, ** p < 0.05, * p < 0.1

Annex Table 3.1.1.

Determinants of Tourism Arrivals and Expenditure

	2014 WP Baseline	Updated Baseline	2014 WP Baseline	Updated Baseline
Variables	Ln(tourism arrivals)		Ln(tourism expenditure)
ΔLn(real exchange rate)	−0.158*** (0.010)	−0.172*** (0.016)	−0.101*** (0.003)	−0.115** (0.038)
ΔTourism-Weighted Unemployment Rate	−2.081*** (0.429)	−1.803*** (0.483)	−3.707*** (0.487)	−3.230*** (0.244)
ΔHurricane	−0.0138** (0.006)	−0.0123* (0.007)	−0.0226** (0.008)	−0.0203** (0.008)
ΔSeptember 11 Terrorist Attacks	−0.0229*** (0.006)	−0.0215*** (0.007)	−0.0036*** (0.011)	−0.0348*** (0.011)
ΔHomicide Rate	−0.0011 (0.001)	−0.00113 (0.001)	−0.00155 (0.001)	−0.0015 (0.001)
ΔLn(number of airlines)	0.0846*** (0.018)	0.0693*** (0.014)	0.0960*** (0.034)	0.0836*** (0.022)
ΔLn(number of hotel rooms)	−0.0104 (0.066)	0.000757 (0.065)	0.0365 (0.007)	0.0802 (0.068)
Observations	141	167	141	171
R²	0.345	0.318	0.345	0.209

Note: “2014 WP” refers to LaFramboise and others 2014.Robust standard errors in parentheses.*** p < 0.01, ** p < 0.05, * p < 0.1

Annex Table 3.1.2.

High-End versus Lower-Cost Destinations

Note: Robust standard errors in parentheses.*** p < 0.01, ** p < 0.05, * p < 0.1

Annex Table 3.1.2.

High-End versus Lower-Cost Destinations

	Updated Higher End	Updated Lower Cost	Updated Higher End	Updated Lower Cost
Variables	Ln(arrivals)	Ln(arrivals)	Ln(expenditure)	Ln(expenditure)
ΔLn(real exchange rate)	−0.142 (0.069)	−0.162*** (0.016)	−0.224* (0.086)	−0.109** (0.041)
ΔTourism-Weighted Unemployment Rate	−3.365*** (0.284)	−1.243*** (0.223)	−2.692** (0.530)	−3.141*** (0.416)
ΔHurricane	−0.0068 (0.006)	−0.00968 (0.012)	−0.00232 (0.016)	−0.0168 (0.018)
ΔSeptember 11 Terrorist Attacks	−0.0354 (0.016)	−0.0186*** (0.006)	−0.0243 (0.043)	−0.0325** (0.010)
ΔHomicide Rate	0.000322 (0.001)	−0.00199 (0.001)	0.00293 (0.004)	−0.00223 (0.002)
ΔLn(number of airlines)	0.0205 (0.049)	0.0704*** (0.017)	0.1 (0.090)	0.0848** (0.027)
ΔLn(number of hotel rooms)	−0.207** (0.051)	0.103* (0.053)	0.0473 (0.049)	0.0805 (0.138)
Observations	52	115	51	120
R²	0.529	0.366	0.275	0.209

Note: Robust standard errors in parentheses.*** p < 0.01, ** p < 0.05, * p < 0.1

Annex Table 3.1.2.

High-End versus Lower-Cost Destinations

	Updated Higher End	Updated Lower Cost	Updated Higher End	Updated Lower Cost
Variables	Ln(arrivals)	Ln(arrivals)	Ln(expenditure)	Ln(expenditure)
ΔLn(real exchange rate)	−0.142 (0.069)	−0.162*** (0.016)	−0.224* (0.086)	−0.109** (0.041)
ΔTourism-Weighted Unemployment Rate	−3.365*** (0.284)	−1.243*** (0.223)	−2.692** (0.530)	−3.141*** (0.416)
ΔHurricane	−0.0068 (0.006)	−0.00968 (0.012)	−0.00232 (0.016)	−0.0168 (0.018)
ΔSeptember 11 Terrorist Attacks	−0.0354 (0.016)	−0.0186*** (0.006)	−0.0243 (0.043)	−0.0325** (0.010)
ΔHomicide Rate	0.000322 (0.001)	−0.00199 (0.001)	0.00293 (0.004)	−0.00223 (0.002)
ΔLn(number of airlines)	0.0205 (0.049)	0.0704*** (0.017)	0.1 (0.090)	0.0848** (0.027)
ΔLn(number of hotel rooms)	−0.207** (0.051)	0.103* (0.053)	0.0473 (0.049)	0.0805 (0.138)
Observations	52	115	51	120
R²	0.529	0.366	0.275	0.209

Note: Robust standard errors in parentheses.*** p < 0.01, ** p < 0.05, * p < 0.1

Annex 3.2 Airlift to the Caribbean

Annex Table 3.2.1.

U.S.-Caribbean Airlift Availability, 2014

Sources: Air Carrier Financial Reports from United States Department of Transportation; and authors’ calculations.Note: The vacancy rate is defined as empty seats as percent of all seats. ISO = International Organization for Standardization.

Annex Table 3.2.1.

U.S.-Caribbean Airlift Availability, 2014

Country	ISO Three-Letter Code	Number of Flights	Number of Passengers	Plane Size (Average)	Departing U.S. Cities	Number of Airlines	Vacancy Rate
Antigua and Barbuda	ATG	1,028	119,732	153	4	4	24
Aruba	ABW	4,822	646,257	159	10	9	16
The Bahamas	BHS	20,920	1,286,118	86	18	18	28
Barbados	BRB	1,306	197,440	178	3	4	15
Belize	BLZ	2,287	248,496	147	7	4	26
Bermuda	BMU	2,920	283,667	139	6	5	30
Cancun	CAN	25,360	3,426,071	160	33	14	16
Cayman Islands	CYM	4,005	400,035	139	11	6	28
Dominica	DMA	388	9,608	36	1	1	32
Dominican Republic	DOM	25,684	3,019,154	150	20	17	22
Grenada	GRD	440	54,427	154	2	3	19
Jamaica	JAM	13,327	1,591,018	151	16	12	21
St. Kitts and Nevis	KNA	1,621	84,198	74	5	6	30
St. Lucia	LCA	1,163	160,070	162	5	5	15

Annex Table 3.2.1.

U.S.-Caribbean Airlift Availability, 2014

Country	ISO Three-Letter Code	Number of Flights	Number of Passengers	Plane Size (Average)	Departing U.S. Cities	Number of Airlines	Vacancy Rate
Antigua and Barbuda	ATG	1,028	119,732	153	4	4	24
Aruba	ABW	4,822	646,257	159	10	9	16
The Bahamas	BHS	20,920	1,286,118	86	18	18	28
Barbados	BRB	1,306	197,440	178	3	4	15
Belize	BLZ	2,287	248,496	147	7	4	26
Bermuda	BMU	2,920	283,667	139	6	5	30
Cancun	CAN	25,360	3,426,071	160	33	14	16
Cayman Islands	CYM	4,005	400,035	139	11	6	28
Dominica	DMA	388	9,608	36	1	1	32
Dominican Republic	DOM	25,684	3,019,154	150	20	17	22
Grenada	GRD	440	54,427	154	2	3	19
Jamaica	JAM	13,327	1,591,018	151	16	12	21
St. Kitts and Nevis	KNA	1,621	84,198	74	5	6	30
St. Lucia	LCA	1,163	160,070	162	5	5	15

Annex Table 3.2.2.

Rankings of U.S. Airlift Availability in the Caribbean Controlling by Size (1990–21

Sources: Air Carrier Financial Reports from United States Department of Transportation; Caribbean Tourism Organization; and authors’ calculations.Note: The combined ranking is a simple average of the rankings for each airlift factor, that is, flights, seats, and so on. Countries are indicated by International Organization for Standardization country codes.

Annex Table 3.2.2.

Rankings of U.S. Airlift Availability in the Caribbean Controlling by Size (1990–21

Ranking of Airlift Availability per Land Area (km²)							Ranking of Airlift Availability per Hotel Room
Ranking	Flights	Seats	Passengers	Airlines	Cities	Combined	Ranking	Flights	Seats	Passengers	Airlines	Cities	Combined
1	BMU	BMU	BMU	BMU	BMU	BMU	1	BHS	BHS	BHS	KNA	KNA	BHS
2	ABW	ABW	ABW	GRD	ABW	ABW	2	BMU	BMU	BMU	BMU	BMU	BMU
3	GRD	GRD	GRD	ABW	GRD	GRD	3	AIA	AIA	AIA	AIA	CYM	AIA
4	CYM	CYM	CYM	CYM	CYM	CYM	4	KNA	KNA	KNA	CYM	ABW	KNA
5	CAN	AIA	AIA	KNA	KNA	AIA	5	CYM	CYM	CYM	ATG	BHS	CYM
6	AIA	CAN	CAN	AIA	CAN	CAN	6	CAN	CAN	CAN	GRD	AIA	CAN
7	KNA	KNA	KNA	ATG	AIA	KNA	7	ABW	ABW	ABW	ABW	CAN	ABW
8	BRB	BRB	BRB	BRB	BRB	BRB	8	DMA	DMA	DMA	DMA	ATG	DMA
9	ATG	ATG	ATG	CAN	ATG	ATG	9	ATG	ATG	ATG	BHS	GRD	ATG
10	LCA	LCA	LCA	LCA	LCA	LCA	10	JAM	JAM	JAM	LCA	DMA	JAM
11	BHS	BHS	BHS	DMA	BHS	BHS	11	BLZ	BLZ	BLZ	BLZ	LCA	BLZ
12	JAM	JAM	JAM	BHS	JAM	JAM	12	BRB	BRB	BRB	CAN	BLZ	BRB
13	DMA	DMA	DMA	JAM	DMA	DMA	13	LCA	LCA	LCA	BRB	BRB	LCA
14	DOM	DOM	DOM	DOM	DOM	DOM	14	GRD	GRD	GRD	JAM	JAM	GRD
15	BLZ	BLZ	BLZ	BLZ	BLZ	BLZ	15	DOM	DOM	DOM	DOM	DOM	DOM

Annex Table 3.2.2.

Rankings of U.S. Airlift Availability in the Caribbean Controlling by Size (1990–21

Ranking of Airlift Availability per Land Area (km²)							Ranking of Airlift Availability per Hotel Room
Ranking	Flights	Seats	Passengers	Airlines	Cities	Combined	Ranking	Flights	Seats	Passengers	Airlines	Cities	Combined
1	BMU	BMU	BMU	BMU	BMU	BMU	1	BHS	BHS	BHS	KNA	KNA	BHS
2	ABW	ABW	ABW	GRD	ABW	ABW	2	BMU	BMU	BMU	BMU	BMU	BMU
3	GRD	GRD	GRD	ABW	GRD	GRD	3	AIA	AIA	AIA	AIA	CYM	AIA
4	CYM	CYM	CYM	CYM	CYM	CYM	4	KNA	KNA	KNA	CYM	ABW	KNA
5	CAN	AIA	AIA	KNA	KNA	AIA	5	CYM	CYM	CYM	ATG	BHS	CYM
6	AIA	CAN	CAN	AIA	CAN	CAN	6	CAN	CAN	CAN	GRD	AIA	CAN
7	KNA	KNA	KNA	ATG	AIA	KNA	7	ABW	ABW	ABW	ABW	CAN	ABW
8	BRB	BRB	BRB	BRB	BRB	BRB	8	DMA	DMA	DMA	DMA	ATG	DMA
9	ATG	ATG	ATG	CAN	ATG	ATG	9	ATG	ATG	ATG	BHS	GRD	ATG
10	LCA	LCA	LCA	LCA	LCA	LCA	10	JAM	JAM	JAM	LCA	DMA	JAM
11	BHS	BHS	BHS	DMA	BHS	BHS	11	BLZ	BLZ	BLZ	BLZ	LCA	BLZ
12	JAM	JAM	JAM	BHS	JAM	JAM	12	BRB	BRB	BRB	CAN	BLZ	BRB
13	DMA	DMA	DMA	JAM	DMA	DMA	13	LCA	LCA	LCA	BRB	BRB	LCA
14	DOM	DOM	DOM	DOM	DOM	DOM	14	GRD	GRD	GRD	JAM	JAM	GRD
15	BLZ	BLZ	BLZ	BLZ	BLZ	BLZ	15	DOM	DOM	DOM	DOM	DOM	DOM

References

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Cancun is a large enough destination within Mexico that it competes directly with the Caribbean, particularly in the U.S. market, and thus is considered a separate market.

LaFramboise and others (2014) and LaFramboise (2016) construct an index using online data from travel search engines such as Expedia. The index was inspired by the Economist’s “Big Mac Index,” but instead of measuring hamburger prices, it compiles the prices of a basket of typical expenditures consumed during a beach holiday: hotel rates, taxi fares, beverages, and meals, excluding air travel. The sample includes many beach destinations in the Caribbean, Latin America, Asia, and Europe, and is constructed for three-star hotels and for a larger sample of three- to five-star hotel averages. Different indices were constructed for robustness, all of which showed consistency and fairly strong correlation.

The index controls for “all-inclusive” hotels by ensuring a comparable share across markets.

These estimates update those presented in LaFramboise and others (2014). The panel data in the original working paper covered the period to the end of 2013 but have been updated with data to the end of 2015. Compared with the 2014 estimates, elasticities are similar, with a marginal increase in price sensitivity in aggregate, and a marginal decrease in income sensitivity. This outcome appears to be consistent with the rebound in tourism flows those years and with improved economic conditions in some key source markets.

Two criteria are used to classify the higher-end destinations: (1) the number of four- and five-star hotels as a share of the total (Anguilla, The Bahamas, Barbados, St. Kitts and Nevis), and (2) GDP per capita above US$15,000 (same group plus Trinidad and Tobago). The remainder in the sample of 16 countries are classified as lower cost.

Endogeneity issues arising from the reverse causality between tourist arrivals and some of the explanatory variables were addressed using the Arellano-Bond estimation.

The analysis presented in this section is based on Acevedo and others (2016).

The intraregional airline transportation market is also of great regional importance, particularly for tourism destinations that would like to promote more intraregional tourism. It is also important for developing multicountry destinations that require well-functioning regional air connectivity. A detailed analysis of this topic can be found in CDB (2015).

The countries with the highest market concentration are Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, St. Kitts and Nevis, and St. Lucia.

A full description of the identification strategy is in Acevedo and others (2016). The results presented are robust to different ordering of the variables and do not depend on the identification strategy. While tourist arrivals are assumed to be contemporaneously affected by all airlift supply variables (number of fights, seats, airlines, and departure cities to the Caribbean), changes in tourist arrivals will only affect airlift factors with a lag because short-term decisions to change fight schedules, airplane size, or departure cities are costly for airlines. Therefore, it is assumed that airlines adjust their supply to a destination to changes in demand only with a lag. As a first response, airlines will fly with more empty seats or will fill them to adjust to unexpected changes in demand, rather than changing airplanes or routes to maintain market share and retain customers. The model also controls for demand determinants (that is, U.S. unemployment), natural disasters, and the September 11, 2001, attacks that are exogenous to the model and are treated as such. The data on U.S. tourists are from the Caribbean Tourism Organization, and the airlift data are from the Air Carrier Financial Reports from the U.S. Department of Transportation. Unfortunately, the data from the U.S. Department of Transportation do not include information on airfares, an important factor in consumers’ tourism decisions.

The information on natural disasters comes from the International Disaster Database. For a disaster to be included in the database, at least one of the following criteria must be met: (1) at least 10 people were killed, (2) at least 100 people were affected, or (3) a state of emergency was declared or a call for international assistance was made.