Information about Western Hemisphere Hemisferio Occidental
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11 Eastern Caribbean Tourism: Developments and Outlook

Author(s):
David Robinson, Paul Cashin, and Ratna Sahay
Published Date:
September 2006
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Author(s)
Ruby Randall

Tourism contributes significantly to GDP, public finances, and the balance of payments in the countries of the Eastern Caribbean Currency Union (ECCU).1 During 1995—2003, the comovement between real economic growth and the growth in stayover tourist arrivals and tourism receipts in the ECCU was 60 and 87 percent, respectively, reflecting the strength of underlying sectoral linkages.2 In the aftermath of the September 11 terrorist attacks, tourism to the Caribbean contracted sharply, and the ECCU suffered an unprecedented decline in output (a fall of 1.5 percent) in 2001, an increase in unemployment, and a sharp deterioration in its fiscal position, with the central government deficit widening from 5½ percent of GDP in 2000 to around 7 percent in 2001.

There are several channels through which tourism affects real economic activity, public finances, and the balance of payments. The direct effect results from the provision of hotel and restaurant services, recreation and entertainment, transportation, and retail trade. The indirect effect emanates from economic activity related to suppliers’ provision of inputs (including raw materials and energy) to hotels, restaurants, and other retailers. Finally, there are also second-round effects on economic activity from the spending of household disposable income derived from either the direct or indirect effects.3

While detailed studies for all ECCU countries are not available, a study by the Caribbean Tourism Organization (CTO) on St. Lucia in 1998 provides an example of the economic contribution of tourism. According to the study, each Eastern Caribbean (EC) dollar spent on tourism in St. Lucia generated EC$0.65 in income—64 percent through the direct effect, 23 percent through the indirect effect, and 13 percent through second-round effects (Caribbean Tourism Organization, 2000). Tourists’ expenditures accounted for nearly 30 percent of GDP, about 20 percent of all St. Lucian jobs, and 20 percent of total government revenue. Visitor expenditures accounted for more than 70 percent of St. Lucia’s exports of goods and services, suggesting a high level of dependency of foreign exchange earnings on tourism. However, the revenue leakage through tourism-related imports of goods and services was fairly substantial, at more than double the amount of its contribution to government revenue.

Aggregate Tourism Trends in the Caribbean

During the 1990s, there was uninterrupted growth in both Caribbean and world tourism. The Caribbean share of world tourist arrivals and tourism receipts increased during the decade, with average growth in Caribbean stayover arrivals and tourism receipts outpacing worldwide growth in both categories (Figure 11.1 and Table 11.1).

Figure 11.1.Caribbean Share of World Tourism

(In percent)

Sources: World Tourism Organization; and Caribbean Tourism Organization

Table 11.1.International and Caribbean Tourism
WorldCaribbeanCaribbean World

Share
Tourists

(millions)
Percent

Change
Tourists

(millions)
Percent

change
Share

(percent)
Percent

change
Stayover tourist arrivals
1990457.27.212.86.72.8–0.5
1991464.01.513.12.32.80.8
1992503.48.513.96.12.8–2.2
1993519.03.114.97.22.94.0
1994550.56.115.75.42.9–0.7
1995552.30.316.23.12.90.4
1996599.05.916.83.52.8–2.3
1997618.23.217.86.22.92.9
1998636.63.018.32.72.9–0.3
1999652.22.519.14.72.92.5
2000687.45.820.46.63.00.8
2001684.0–0.519.7–3.32.9–2.9
2002702.72.719.0–3.42.7–5.9
2003690.9–1.720.36.82.98.6
1990–99 average556.34.315.94.82.80.5
2000–03 average691.31.619.91.72.90.2
WorldCaribbeanCaribbean World

Share
Receipts

(billions of

U.S. dollars)
Percent

change
Receipts

(billions of

U.S. dollars)
Percent

change
Share

(percent)
Percent

change
Tourism receipts
1990267.821.19.812.63.7–0.3
1991277.63.7102.03.6–1.6
1992313.613.011.919.03.85.3
1993323.13.012.44.23.81.1
1994352.69.113.15.63.7–3.2
1995403.014.314.06.73.5–6.7
1996437.68.615.28.63.50.0
1997438.20.116.27.03.76.9
1998439.40.317.26.03.95.7
1999454.63.518.36.44.02.8
2000476.34.819.88.14.23.1
2001464.4–2.519.5–1.64.20.9
2002482.43.918.9–3.03.9–6.7
2003524.38.720.05.73.8–2.7
1990–99 average370.87.713.87.83.71.0
2000–03 average486.93.719.52.34.0–1.3
Sources: World Tourism Organization; and Caribbean Tourism Organization.
Sources: World Tourism Organization; and Caribbean Tourism Organization.

The terrorist attacks in the United States in 2001 had a pronounced deleterious effect on both world and Caribbean tourism, causing a contraction for the first time since 1990. During the first eight months of 2001, world and Caribbean stayover tourist arrivals grew by 3 and 2½ percent, respectively, relative to the same period in 2000 (Caribbean Tourism Organization, 2002a, 2002b, 2002c, 2003a). However, there was a sharp contraction of more than 10 percent and nearly 17 percent, respectively, in world and Caribbean tourism arrivals during the last four months of the year. With the decline in global stayover arrivals in 2001, the Caribbean share of world tourist arrivals declined marginally from 3 percent in 2000 to 2.9 percent (still slightly higher than the average over 1990–99), while the Caribbean’s share of world tourism receipts was unchanged (at 4.2 percent), since world tourism receipts declined more sharply than did Caribbean tourism receipts (Table 11.2).

Table 11.2.Tourist Arrivals and Receipts by Region(Percent share of world total)
2000200120022003
ArrivalsReceiptsArrivalsReceiptsArrivalsReceiptsArrivalsReceipts
World100.0100.0100.0100.0100.0100.0100.0100.0
Africa4.02.24.12.54.12.54.52.7
Americas18.627.517.625.816.423.616.421.8
Caribbean3.04.22.94.22.73.92.93.8
Eastern Caribbean
Currency Union0.10.20.10.20.10.20.10.2
Asia and the Pacific16.318.717.719.818.720.817.318.4
Europe57.148.857.149.256.950.457.854.4
Middle East3.52.83.52.73.92.74.22.7
Memorandum items:1
World687.4476.3684.0464.4702.7482.4690.9524.3
Caribbean20.419.819.719.519.018.920.320.0
Sources: World Tourism Organization; and Caribbean Tourism Organization.

Arrivals data in millions and receipts expressed in billions of U.S. dollars.

Sources: World Tourism Organization; and Caribbean Tourism Organization.

Arrivals data in millions and receipts expressed in billions of U.S. dollars.

Although world tourism rebounded in 2002, Caribbean stayover arrivals and tourism receipts did not (Table 11.2). In 2002, world stayover arrivals and receipts grew by 2.7 and 3.9 percent, respectively, while Caribbean tourism arrivals continued to contract (by 3.4 percent), although the decline in tourism receipts was less severe (by 3 percent). As a result, the Caribbean’s share of world tourist arrivals fell from 2.9 to 2.7 percent over 2001–02 (a 12-year low), while the region’s share of world tourism receipts fell from 4.2 to 3.9 percent (the 1998 level).

There was a sharp turnaround in Caribbean stayover arrivals (6.8 percent) in 2003, despite a slight contraction in world tourism (1.7 percent). However, the region’s share of world tourism receipts continued to contract Table 11.1). Although Caribbean stayover arrivals were nearly restored to their 2000 level, the increase in world tourism receipts outpaced that of the Caribbean, suggesting an erosion in the region’s ability to retain its high-end tourism niche. Moreover, the decline in the world share of tourism receipts applied to all categories of Caribbean destinations, including the ECCU.

There was also a shift between 1990 and 2003 in the country origin of stayover visitors to the Caribbean, with a reduced share of visitors from the United States (Table 11.3). The share of visitors from the United States fell from an average of 53.7 percent during 1990–99 to 50.4 percent during 2000–03, owing to increased competition, including from various U.S. destinations such as Florida and Hawaii. European tourists accounted for a growing share of Caribbean tourist arrivals, and constituted the second-largest market of origin. The European share of tourism arrivals rose from 22.5 percent during 1990–99 to 25.5 percent during 2000–03, reflecting in part the strength of the euro. The share of Canadian tourists declined initially, from 6.6 percent in 1990 through 1999, and then increased during the latter part of the period. Stayover tourists originating in other countries (including elsewhere in the Caribbean) averaged roughly 18 percent during 1990–99, and fell slightly to 17.4 percent over 2000–03 (Caribbean Tourism Organization, 2002a, 2002b, 2002c).

Table 11.3.Stayover Tourist Arrivals in the Caribbean by Main Market
Untied StatesCanadaEuropeOther
YearTotal Tourist Arrivals (in millions)Percent changePercent sharePercent changePercent sharePercent changePercent sharePercent changePercent share
1990–99 average15.92.853.72.75.99.822.54.217.9
2003–03 average19.93.150.48.16.72.125.5–0.617.4
Sources: World Tourism Organization; and Caribbean Tourism Organization.
Sources: World Tourism Organization; and Caribbean Tourism Organization.

During 1990–2001, the members of the English-speaking Caribbean Community and Common Market (CARICOM)4 lost world market share to newly emerging, lower-cost tourism destinations elsewhere in the Caribbean (Table 11.4). CARICOM’s world market share of tourist arrivals declined from 1.03 percent in 1990 to 0.72 percent in 2003, while that of “other (non-CARICOM) Caribbean destinations” rose sharply from 0.78 percent in 1990 to 2.22 percent in 2003. Similarly, CARICOM’s share of world tourism receipts declined from 1.29 percent in 1990 to 1.01 percent in 2003, while that of other Caribbean countries’ rose from 1.14 percent in 1990 to 2.79 percent in 2003.

Table 11.4.Tourist Stayover Arrivals
1990199519992000200120022003
(In millions)
World tourist arrivals457.30552.30652.20687.40684.00702.70690.90
Of which
English-speaking CARICOM4.694.724.865.024.864.854.98
Of which
ECCU0.690.820.910.910.860.880.94
Other Caribbean countries 13.5711.6914.2615.3714.8514.1915.35
(In billions of U.S.dollars)
World tourism receipts267.80403.00454.60476.30464.40482.40524.30
Of which
English-speaking CARICOM3.454.044.365.164.894.985.31
Of which
ECCU0.670.790.950.960.900.900.95
Other Caribbean countries3.059.9313.4614.6314.5913.9014.65
(As a percent of world total)
Total Caribbean arrivals1.812.972.932.972.882.712.94
English-speaking CARICOM1.030.850.750.730.710.690.72
ECCU0.150.150.140.130.130.130.14
Other Caribbean countries10.782.122.192.242.172.022.22
Total Caribbean tourism receipts2.433.474.034.224.263.983.81
English-speaking CARICOM1.291.001.071.101.071.051.01
ECCU0.250.200.210.200.200.190.18
Other Caribbean countries’1.142.462.963.123.192.932.79
Sources: World Tourism Organization; and Caribbean Tourism Organization.Notes: ECCU denotes Eastern Caribbean Currency Union. CARICOM denotes the Caribbean Community and Common Market.

Reflects the inclusion of the Dominican Republic and Puerto Rico in 1993, and Cancún and Cozumel in 1994.

Sources: World Tourism Organization; and Caribbean Tourism Organization.Notes: ECCU denotes Eastern Caribbean Currency Union. CARICOM denotes the Caribbean Community and Common Market.

Reflects the inclusion of the Dominican Republic and Puerto Rico in 1993, and Cancún and Cozumel in 1994.

Tourism Trends in the ECCU

The ECCU represents less than 5 percent of total Caribbean stayover arrivals, while CARICOM’s share is about 26 percent and “other Caribbean countries/destinations” account for the rest. During 1995–2001, average annual stayover arrivals to the ECCU ranged from a high of 250,000 in St. Lucia to just 9,900 in Montserrat. By contrast, non-ECCU CARICOM and other Caribbean destinations received an average of 3.9 million stay-over visitors (21 percent of Caribbean stayover arrivals) and 13.6 million visitors (74 percent of the Caribbean stayover arrivals), respectively, during this period (Figure 11.2). Among the various destinations included in the sample, Puerto Rico was clearly the industry leader, with an annual average of 3.2 million stayover visitors.

Figure 11.2.Average Percentage Share of Caribbean Tourist Arrivals, 1995–2001

Sources: World Tourism Organization; and Caribbean Tourism Organization.

Notes: CARICOM denotes Caribbean Community and Common Market; ECCU denotes Eastern Caribbean Currency Union

During 1995–2001, the ECCU and the rest of CARICOM had a much larger share of the cruise passenger tourist market in the Caribbean than the stayover market. On average, ECCU’s average annual market share over the same period was 10½ percent, while non-ECCU CARICOM’s share was nearly 27 percent.

ECCU and other CARICOM countries catered to the high-end of the tourism market, and as such, during 1995–2001 the ECCU’s share of visitor expenditures exceeded its share of tourist arrivals. The ECCU received over 5 percent of average total receipts to the Caribbean (US$900 million), while CARICOM as a whole received nearly 27 percent (US$5.6 billion).

There was a noticeable decline in the relative shares of CARICOM vis-à-vis other Caribbean destinations in key tourism performance indicators between 1990 and 2001 (Table 11.5). In particular, the decline in CARICOM’s Caribbean share of stayover arrivals, visitor expenditures,5 and rooms in tourist accommodations suggests a reduction in CARICOM’s competitiveness vis-à-vis the rest of the Caribbean. Moreover, in each case, the ECCU’s shares exhibited a steady decline. CARICOM’s share of Caribbean (stayover) tourist arrivals declined from about 31 percent in 1990 to less than 25 percent in 2001, and ECCU’s share also fell over the same period from 5.4 to 4.4 percent. Moreover, given that the average daily expenditure of stayover tourists typically surpasses that of cruise passengers, the erosion of CARICOM’s stayover market share was also reflected in an erosion in CARICOM’s market share of visitor expenditures, which declined from 35 percent in 1990 to 25 percent in 2001. Finally, consistent with its rapid expansion in the market share of stayover visitors, the “other Caribbean” group’s market share of tourist accommodations also rose rapidly, from 42 percent in 1990 to 73 percent in 2001.

Table 11.5.Selected Caribbean Market Share Indicators
Destination19901199520002001200220031995–97

Average
1998–2003

Average
Change from

1995–97
Change from

1998–2003
Stayover tourist arrivals
CARICOM31.327.824.624.625.524.527.125.1–1.4–1.3
ECCU5.45.04.44.44.64.64.94.6–0.2–0.2
Other68.772.275.475.474.575.572.974.91.41.3
Cruise passenger arrivals
CARICOM50.737.339.138.035.937.136.137.2–2.41.9
ECCU9.810.110.710.77.57.49.99.7–0.1–4.0
Other49.362.760.962.064.162.963.962.82.4–1.9
Estimates of visitor expenditure
CARICOM35.228.926.125.126.426.628.126.2–1.70.2
ECCU6.85.64.94.64.84.85.54.9–0.3–0.6
Other64.871.173.974.973.673.471.973.81.7–0.2
Rooms in tourist accomodations
CARICOM58.130.627.427.227.1. . .28.827.5–1.8. . .
ECCU8.77.06.05.85.4. . .6.25.8–0.9. . .
Other41.969.472.672.872.9. . .71.272.51.8. . .
Source: Caribbean Tourism Organization.Notes: CARICOM refers to English-speaking, traditional Caribbean Community and Common Market members, as defined in Randall (2004). The data in this table are expressed as ratios to the respective Caribbean totals.

The 1990 column is only indicative, since data for key “Other Caribbean countries” (e.g., Cancún, Cozumel, the Dominican Republic, and Puerto Rico) are not available.

Source: Caribbean Tourism Organization.Notes: CARICOM refers to English-speaking, traditional Caribbean Community and Common Market members, as defined in Randall (2004). The data in this table are expressed as ratios to the respective Caribbean totals.

The 1990 column is only indicative, since data for key “Other Caribbean countries” (e.g., Cancún, Cozumel, the Dominican Republic, and Puerto Rico) are not available.

Tourist arrivals to ECCU countries increased in 2002 despite a contraction in total Caribbean tourist arrivals, although the ECCU’s share of world tourist arrivals remained unchanged (Table 11.4). The decline in the Caribbean aggregate was primarily due to a general (and in some cases fairly significant) decline in arrivals to “other Caribbean countries.” As a result, ECCU and CARICOM as a whole regained some lost ground vis-à-vis these other Caribbean destinations in terms of regional shares of stayover arrivals and tourism receipts in 2002 (Table 11.5). Arrivals to non-ECCU CARICOM countries also declined, but to a lesser extent.6 ECCU arrivals increased again in 2003 and gained as a percentage of world tourist arrivals; however ECCU’s share of world tourism receipts continued to decline (Table 11.4).

Caribbean Tourism: Trends in Competitiveness

The loss in CARICOM and ECCU market share to other Caribbean destinations during 1995–2001 can be associated with a decline in either price or nonprice competitiveness. Nonprice factors include product design, packaging, quality of service, reliability of supplies, after-sales service, distribution networks, marketing and market intelligence, and air access.

Movements in customer-based and competitor-based real effective exchange rates (REER) are key indicators of the ECCU region’s price competitiveness—reflecting demand and supply-side factors, respectively (Figure 11.3).7 The competitor-based REER index helps explain the loss of market shares since the late 1990s. It shows a sharp improvement in the ECCU’s competitive position vis-à-vis other Caribbean competitors through much of 1997, followed by an appreciation that became quite pronounced from the second half of 2002 onward. On the other h and, the customer-based REER is not useful in explaining the declining share of ECCU in world tourism since the latter half of the 1990s.

Figure 11.3.Eastern Caribbean Currency Union (ECCU): Real Effective Exchange Rates1

(1990 = 100)

Sources: IMF, International Financial Statistics database; and author’s calculations.

Note: CPI denotes consumer price index.

1 For real effective exchange rate indices. An increase (decrease) indicates an appreciation (depreciation). Excludes Anguilla and Montserrat in calculation of the ECCU average.

2 Weighted average of consumer price index in a common currency. Customers: Antigua (Canada, U.K., U.S.); Dominica (France, U.K., U.S.); Grenada (Trinidad and Tobago, U.K., U.S.); St Kitts and Nevis (Canada, U.K., U.S.); St. Lucia (Canada, U.K., U.S.); St. Vincent and the Grenadines - (Trinidad and Tobago, U.K., U.S.). Weights are based on proportion of tourists arriving from each country in 2001.

3 Weighted average of consumer price index in a common currency. Competitors: The Bahamas (23.4 percent), Barbados (8 percent), Dominican Republic (43.5 percent), Jamaica (19.4 percent), Trinidad and Tobago (5.7 percent). Weights are based on the share of tourism arrivals to the Caribbean in 2000.

Table 11.6.Rank Correlation Coefficients Between Tourism Demand and Price Factors1
Vacation

Package

(European package)
Telephone

Calls

(3 minutes to U.S.)
Cruise

Passenger

Tax
Demand-side factors:
Average stayover arrivals, 1995–2001–0.46**–0.82***
Number of observations1916
Average cruise passenger arrivals, 1995–20010.83***
Number of observations9
Sources: Caribbean Tourism Organization; Showker (2003); World Bank, World Development Indicators and Telecoms and Electricity databases; and national authorities.

Denotes a significant relationship between bivariate pairs at * for the 10 percent level; ** for the 5 percent level; and *** for the 1 percent level (Zar, 1972).

Sources: Caribbean Tourism Organization; Showker (2003); World Bank, World Development Indicators and Telecoms and Electricity databases; and national authorities.

Denotes a significant relationship between bivariate pairs at * for the 10 percent level; ** for the 5 percent level; and *** for the 1 percent level (Zar, 1972).

Since the customer-based REER does not account for it, the underperformance of the ECCU from 1995–99 suggests the possible dominance of nonprice factors or the rigidity of tourism-related products priced in U.S. dollars. In fact, the depreciation of the Eastern Caribbean dollar vis-à-vis its competitors did not translate into a decline in several key factors such as the cost of vacation packages, car rental prices, or long distance telecommunication charges. The role of industry-specific price and nonprice factors is further explored in the sections that follow.

Industry-Specific Price Competitiveness: Demand-Side Factors

The ECCU and other CARICOM destinations are characterized by higher tourism-related prices, reflecting their appeal to the high end of the tourism market. 8Figure 11.4 provides a comparison of various competitiveness indicators for different Caribbean destinations (using 2003 data). These include average European vacation package prices for four- and five-star resorts (panel 1); average all-inclusive vacation package prices for four- and five-star resorts (panel 2); mid-size car weekly rentals (panel 3); and nightly hotel room rates at the top Caribbean resorts (panel 4). The data confirm that, for these indicators, prices in ECCU countries tend to be among the highest in the Caribbean. For instance, six of eight of the costliest European vacation packages were found in ECCU countries, and the most costly European vacation packages were found in Anguilla (also an ECCU member state). The ECCU median price for European vacation packages was US$2,170, while the non-ECCU median was US$1,623. In addition, ECCU member states accounted for four of the seven costliest all-inclusive four- and five-star resorts; the ECCU median price was US$2,282, while the non-ECCU median was US$2,069. Similar conclusions can also be reached regarding the ECCU and non-ECCU weekly rental prices of mid-size cars (a median of US$330 versus US$302) and for nightly hotel rates at the top Caribbean resorts (a median of US$615 versus US$525).

Figure 11.4.Tourism Competitiveness Indicators in the Caribbean, 2003

Sources: Showker (2003) Data gathered by Abdul Abiad.

Note: ECCU denotes Eastern Caribbean Currency Union.

Despite the appeal of the ECCU and CARICOM to the high end of the tourism market, there is evidence suggesting that tourists responded favorably to lower prices.9Table 11.6 explores the relationship between tourism demand and prices of European vacation packages, hotel taxes, and the cost of a three-minute international call using Spearman’s rank correlation coefficient.10Table 11.7 provides a summary of average ranks of each of the significant paired variables discussed in this and subsequent sections discussing supply-side factors and nonprice factors.11 The fact that the rank correlation coefficient between average stayover arrivals and average European vacation package prices at four- and five-star resorts was negative and statistically significant means that lower stayover arrivals tend to be associated with higher vacation package prices (Table 11.6). The underlying data, summarized in Table 11.7, confirm that during 1995–2001, ECCU countries had higher average European vacation prices and lower average stayover arrivals, while “other Caribbean destinations” had lower average European vacation package prices and a higher average number of stayover arrivals.

Table 11.7.Summary of Average Ranks of Paired Variables for Significant Spearman Correlations 1(Rank correlations)
AverageAverage

Rank
Rank
Demand-side factors Tourism-specific price factors
Vacation package(European package)Average stayover arrivals, 1995–2001
CARICOM11.2CARICOM8.4
ECCU8.9ECCU11.4
Other12.8Other.3.3
Telephone calls(3 minutes to U.S.)Tourist stayover arrivals (thousands)
CARICOM6.5CARICOM10.4
ECCU4.0ECCU12.7
Other14.5Other2.8
Supply-side factors: Tourism-specific price factors
Electricity (U.S.dollars/kWh)Rooms in tourist accommodations
CARICOM5.8CARICOM8.5
ECCU4.2ECCU9.2
Other11.0Other2.0
Telephone subscriptionRooms in tourist accoromdations
CARICOM8.3CARICOM9.4
ECCU103ECCU7.7
Other10.8Other8.0
Nonprice factors as a percentage of GDP
2001 tourism budget 2,3Average stayover arrivals. 1995–2001
CARICOM9.8CARICOM10.9
ECCU7.9ECCU13.9
Other8.6Other4.5
Average cruise passenger arrivals
(thousands) 1995–2001Average stayover arrivals, 1995–2001
CARICOM15.0CARICOM15.4
ECCU17.0ECCU20.3
Other11.4Other11.1
Distance from Miami (miles)Average stayover arrivals, 1995–2001
CARICOM10.8CARICOM20.5
ECCU9.6ECCU24.4
Other18.6Other14.2
Number of flights from the U.S. in 2003Average stayover arrivals, 1995–2001
CARICOM19.0CARICOM20.5
ECCU22.1ECCU24.4
Other14.6Other14.2
Number of flights from Miami in 2003Average stayover arrivals. 1995–2001
CARICOM19.3CARICOM20.5
ECCU23.7ECCU24.4
Other14.7Other14.2
Sources: As cited in Table 11.6 and Table 11.8.Notes: ECCU denotes the Eastern Caribbean Currency Union. CARICOM denotes the Caribbean Community and Common Market.

Each row represents a ranked pair. The number of bivariate pairs differ based on data availability. A low rank indicates a higher underlying value since the data are sorted in a descending order.

This rank correlation coefficient was positive as expected, but not statistically significant.

This is a proxy for adequate marketing/advertising.

Sources: As cited in Table 11.6 and Table 11.8.Notes: ECCU denotes the Eastern Caribbean Currency Union. CARICOM denotes the Caribbean Community and Common Market.

Each row represents a ranked pair. The number of bivariate pairs differ based on data availability. A low rank indicates a higher underlying value since the data are sorted in a descending order.

This rank correlation coefficient was positive as expected, but not statistically significant.

This is a proxy for adequate marketing/advertising.

Table 11.8.Rank Correlation Coefficients Between Supply Conditions and Production Costs 1
Electricity CostTelephone Subscription
Supply-side factors:
Rooms in tourist accommodations–0.64**–0.86***
Number of observations1317
Sources: Caribbean Tourism Organization; World Bank Electricity and Telecommunications database; and national authorities.

Denotes a significant relationship between bivariate pairs at * for the 10 percent level; ** for the 5 percent level; and *** for the 1 percent level (Zar, 1972).

Sources: Caribbean Tourism Organization; World Bank Electricity and Telecommunications database; and national authorities.

Denotes a significant relationship between bivariate pairs at * for the 10 percent level; ** for the 5 percent level; and *** for the 1 percent level (Zar, 1972).

There was also evidence of demand sensitivity to telecommunication costs (Table 11.6). The rank correlation between calls to the United States (a proxy for the cost of international calls for tourists) and average stayover arrivals was negative and highly significant (at the 1 percent level). Table 11.7 confirms that the average cost of three-minute telephone calls to the United States was higher in ECCU countries and lower in other Caribbean countries, while average stayover arrivals were higher in other Caribbean countries and lower in ECCU countries.12

Industry-Specific Price Competitiveness: Supply-Side Factors

In CARICOM, there was a statistically significant negative relationship between hotel accommodations and both electricity and nonresidential telephone subscription costs, indicating a negative association between operating costs and tourist arrivals (Table 11.8). Table 11.7 confirms that electricity unit costs were higher in the ECCU, which in turn had a lower average number of rooms in tourist accommodation. By contrast, average electricity unit costs were lower in “other Caribbean countries,” which in turn had a higher average number of rooms in accommodations. In addition, monthly nonresidential telephone subscription costs were higher in CARICOM as a whole, while average accommodations were lower.13

Nonprice Competitiveness

The evidence pointing to a deterioration in the nonprice competitiveness of ECCU and the rest of CARICOM vis-à-vis other Caribbean countries is mostly circumstantial, as these data are more difficult to obtain. For instance, after 30 years of operation, significant investment (mainly foreign direct investment) is most likely needed to refurbish old hotels, build new ones and rejuvenate the industry. In addition, there are concerns that the quality of service in hotels, restaurants, and other attractions has not kept pace with market trends.14 There is also the perception that the ECCU lags behind the rest of the world in technological advances to address the needs of customers, such as access to automated checkouts, internet access, and state-of-the-art websites for information and reservations.

The ECCU and CARICOM also have fallen behind in expenditure on advertising to improve their visibility in the market place. Moreover, in the immediate aftermath of the events of September 11, worsening fiscal positions constrained spending on advertising.

Traditionally, hotels have spent more on marketing than have public tourism organizations, but public promotion in the form of “destination advertising” is crucial in maintaining the industry’s visibility in the marketplace.15Table 11.7 confirms that CARICOM as a group had a lower average ratio of tourism budgets to GDP. For instance, on average, ECCU countries were reported to have spent around US$14 per stayover visitor on promotions in 2001, compared with US$36 spent by the Cayman Islands. However, the rank correlation coefficient of average tourist arrivals and the ratio of tourism budgets was positive yet not statistically significant (Table 11.9).

Table 11.9.Rank Correlation Coefficients Between Nonprice Factors and Tourist Arrivals 1
2001

Toursim

Budget
Distance

from Miami

(miles)
Number of

Flights from

the U.S in 2003
Number of

Flights from

Miami in 2003
Nonprice factors:
Average stayover arrivals, 1995–20010.03–0.47***0.72***0.62***
Number of observations18313131
Source: Caribbean Tourism Organization (http://www.indo.com/distance/index.html).

Denotes a significant relationship between bivariate pairs at * for the 10 percent level; ** for the 5 percent level; and *** for the 1 percent level (Zar, 1972).

Source: Caribbean Tourism Organization (http://www.indo.com/distance/index.html).

Denotes a significant relationship between bivariate pairs at * for the 10 percent level; ** for the 5 percent level; and *** for the 1 percent level (Zar, 1972).

Air access and distance from major customer countries appear to be important bottlenecks in expanding tourism in the region. Limits on air access are particularly acute during the high season, and have been aggravated by recent route cutting by major airlines. Regarding distance, Table 11.7 shows that on average, ECCU countries are furthest from Miami and also received fewer stayover visitors and had fewer flight arrivals from Miami and from the United States as a whole in 2003.16Table 11.9 confirms a highly significant negative rank correlation between distance from the United States and average stayover arrivals, and a highly significant positive rank correlation between average stayover arrivals and the number of flights from the United States and Miami.

The September 11 attacks prompted the adoption by Caribbean countries of a host of emergency remedial measures in the short term designed to mitigate the depressive effect of the shock. However, the shock also helped to foster a growing awareness of an underlying erosion in the ECCU’s competitiveness, and of the need to adopt a medium-term response to restructure the industry to better ensure its long-term survivability The region’s medium-term strategic response is summarized in Box 11.1.

The short-term strategic response to the events of September 11, 2001 included the following:

  • Subsidies to the tourism industry in the form of tax waivers and incentives, subsidized credit to refurbish hotels, and subsidies to regional airlines so as to maintain air access to the region;
  • Upgrading security at airports and ports to reassure travelers, with technical assistance and a US$21 million loan from the World Bank extended to five ECCU countries; and
  • Offers of deep discounts by hotels and airlines (as much as 30 to 50 percent), cost reductions by private sector firms to streamline their operations, including layoffs, and cost-cutting measures by airlines such as reducing the number of routes, flying smaller aircraft, and limiting the quality of in-flight food service

The CTO also launched a US$16 million joint public/private sector promotional television campaign to market the region. The program was to be funded by the governments and private sector tourism interests in all of the CTO member countries, and markets the whole region as a destination, providing an umbrella under which national marketing programs could be developed. The share of the budget for each country is based on the number of hotel rooms. A number of high-profile destinations including Cancun, Cozumel, Dominican Republic, Puerto Rico, and the Cayman Islands have since pulled out, citing the need to use scarce promotional resources more effectively. The remaining countries continue to be committed to the campaign, however, with some borrowing from the Caribbean Development Bank (CDB) to finance their share of the budget.

Many of these promotions adversely affected the fiscal situation of the ECCU and CARICOM countries, either through direct expenditure or through reduced tax revenues from lower hotel receipts. Nevertheless, this was seen as unavoidable under then-prevailing conditions. However, in light of the deteriorating fiscal stance of the ECCU, individual governments may need to reexamine the cost effectiveness of such policies.

Policy Implications and Conclusions

Tourism is an important source of income and foreign exchange earnings, employment, and government revenue in the ECCU. During the period under review, the ECCU countries experienced a modest erosion in their price and nonprice competitiveness in comparison with other Caribbean countries. CARICOM’s loss of tourism shares to “other Caribbean” markets is partly attributable to the recent appreciation of the competitor-based REER and to tourism-specific price and nonprice factors, including low quality of service. Ensuring the long-term survival of the industry will require implementing measures to enhance price and nonprice competitiveness and reduce U.S. dollar price rigidity in the tourism industry.

Regarding industry-specific supply-side factors, electricity and telecommunications rates appear to be quite high in CARICOM. This suggests the need for ECCU and other CARICOM countries to try to pursue common regional arrangements to regulate utilities and reduce market prices. Thus, the establishment of regional regulatory frameworks would help to enhance the productive efficiency and cost competitiveness of tourism enterprises.

Box 11.1.Proposed Medium-Term Strategic Response by the Caribbean to 9/11

A Regional Tourism Strategic Plan formulated through the auspices of the Caribbean Tourism Organization (CTO) in the aftermath of the terrorist attacks of September 11, 2001 aims to achieve the following objectives by 2012:

  • Grow visitor arrivals, increase tourism’s economic impact, and achieve a more equitable distribution of its benefits;
  • Create a product that is sustainable, competitive, and profitable;
  • Modernize the industry to face a rapidly changing global environment;
  • Fund tourism development on a sustainable basis; and
  • Achieve synergies and economies of scale through greater cooperation. To achieve these objectives, the medium-term strategic plan aims to:
  • Promote regional marketing financed by establishing a Sustainable Tourism Development Fund via a mandatory US$5 tax on air and sea visitors.
  • Further develop cruise tourism by bringing land-based and cruise entities together to create joint programs, and by adopting measures to increase the sourcing of supplies for the cruise sector from within the Caribbean.
  • Promote better air access for travellers by negotiating air services agreements on a regional basis, providing incentives to improve functional cooperation among regional carriers, supporting the development of strategically placed hubs to improve air transportation efficiency, providing marketing support to external and regional carriers, establishing a regional aviation oversight authority, and commercializing the operations of airport authorities.
  • Enhance competitiveness and productivity by researching the impact of taxes on tourism development, adopting strategic measures to accelerate the flow of investment into the sector, investigating the feasibility of a Caribbean Tourism Investment Fund and a Credit Guarantee Scheme, encouraging private sector investment in infrastructural improvements, improving access for small hotels to both equity and loan capital, and providing 100 percent loan guarantees for prestige developments.
  • Safeguard the environment and safety and security by publishing guidelines for the development of sustainable tourism, legislating Environmental Impact Analyses as preconditions to new tourism development, requiring concessions for capital investments that impact on water and energy consumption, providing lines of credit to help small businesses invest in environmental improvements, creating Tourism Police Task Forces, and outlawing all solicitation on beaches.
  • Promote community tourism by providing concessions and establishing a revolving microcredit line for community-based projects, developing a national strategy to strengthen linkages, treating designated suppliers to the tourism sector as exporters, and helping develop and market the region’s cultural products as part of economic development.
  • Promote human resource development by developing a quality assurance framework for use within hospitality institutions, introducing tourism education at all levels of the formal education system, providing tertiary institutions with resources to develop world-class tourism education, reviewing the role of regional and national tourism operations and modernizing their systems and equipping them with the skills needed to manage a modern tourism industry, and legislating to achieve freedom of movement of skills and labor across the region.
  • Foster information and technology by supporting the further development of regional and national internet sites, improving the timeliness and coverage of existing tourism information systems, implementing tourism satellite account systems, establishing a Regional Hotel Performance Monitoring System, and developing tourism research capability and programs by the CTO and tertiary institutions.
Source: Caribbean Tourism Organization (2002c).

There is an ongoing need to attract additional foreign direct investment to the region in order to refurbish old hotels and construct new ones. This calls for reducing the cost of doing business within ECCU. As this chapter has shown, high operating costs have deterred investment in new facilities. However, in addition to investment in physical capital, there is also a need for investment in human capital, especially in the hotel and hospitality industries, with a view to enhancing ECCU’s nonprice competitiveness.

Further intensification of efforts is needed to stem the decline in air access. This will necessitate better monitoring of air access to the region. In this regard, a user-friendly database could be developed that provides current and timely information on available flights to different Caribbean destinations.

The persistent decline in the Caribbean share of world tourism receipts, despite the recent recovery in the region’s world market share of tourism arrivals, points to an erosion in the region’s ability to preserve its high-end tourism niche. This suggests the need to intensify efforts to increase the value added by tourism through product development and diversification, and the forging of better forward and backward linkages with tourism. The potential for expanding tourism and tourism services in the ECCU remains vast. For instance, there is scope for further development of niches, merchandise, and product services related to the yachting market, ecotourism, the honeymoon market, sports tourism, and location filming of TV episodes and movies. The region might also want to capitalize on several other positive factors, including the perception of the Caribbean as a relatively safe and stable region, the relatively weak U.S. dollar versus the euro, Canadian dollar and British pound, and recent improvements in economic conditions in major markets, especially the United States.

References

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1

This chapter builds on an earlier paper prepared by Samuel and Randall (2003).

2

As measured by the correlation coefficient.

3

A thorough analysis of tourism’s direct, indirect, and second-round effects on the ECCU region would constitute a major undertaking that is outside the scope of this study.

4

CARICOM is comprised of Antigua and Barbuda, The Bahamas (a member of the Community but not the Common Market), Barbados, Belize, Dominica, Grenada, Guyana, Haiti, Jamaica, Montserrat, St. Lucia, St. Kitts and Nevis, St. Vincent and the Grenadines, Suriname, and Trinidad and Tobago. CARICOM’s associate members include Anguilla, Bermuda, British Virgin Islands, Cayman Islands, and the Turks and Caicos Islands.

5

Used interchangeably with tourism receipts.

6

For additional data on Caribbean tourism since 1990, see Randall (2004).

7

The customer-based REER uses the weighted average of the consumer price indexes of the ECCU countries. Customers are the top three originating markets for each country, and weights are based on the proportion of tourists arriving from each country in 2001. The competitor-based REER is a similar concept, where weights are the shares of tourist arrivals in the competitor Caribbean countries in 2000.

8

Earlier studies have shown that the ECCU sub-region generally has higher hotel rates than elsewhere in Caribbean region (Blanchard, 2002).

9

This suggests that there is a limit to which prices of one differentiated product can exceed another (Lancaster, 1971).

10

If data are presented in the form of ranks rather than actual values, then the technique of rank correlation can be used. Unlike standard correlation measures (such as Pearson’s measure), rank correlations can be used when the underlying distribution of the actual data are unknown or are non-normal. Spearman’s coefficient of rank correlation (rs) is defined as follows: rs=16Σd2n(n21),

where d = the difference in ranks between two variables; n = the sample size; and –1 ≤ rs ≤ 1. To test the statistical significance of any relationship, a hypothesis test can be performed on ρs, the corresponding population parameter: H0: ρs = 0 and H1: ρs > 0.

11

The data were ranked in descending order, so the lowest average rank corresponds to the highest average price or value.

12

The relationship between average stayover arrivals and hotel taxes was examined, but it was not statistically significant, suggesting that relatively affluent tourists may be indifferent to relatively small variations in hotel taxes across the different islands (Table 11.6). A perverse statistically significant relationship was found between cruise passenger taxes and cruise passenger arrivals. This relationship could be spurious (particularly since there were only nine observations, comprised mostly of ECCU countries) or could be suggestive of visitor indifference to relatively small fixed travel costs.

13

Other supply-side factors—such as wage rates and water costs—were not found to have a statistically significant association with tourist arrivals. In the case of the wage bill, the data set was too small to obtain meaningful results.

14

It was not possible to formalize this analysis, however, owing to a dearth of comparative information on foreign direct investment across the set of tourism destinations included here.

15

This type of advertising is an externality, as it would not be optimally provided by the private sector.

16

Tourism organizations often guarantee a percentage of the seats on major airlines and charters so as to ensure the continuity of service.

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