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I. Tourism and the Economy in General

The most important economic feature of activities related to the tourism sector is that they contribute to three high-priority goals of developing countries: the generation of income, employment, and foreign-exchange earnings. In this respect, the tourism sector can play an important role as a driving force of economic development. The impact this industry can have in the different stages of economic development depends on the specific characteristics of each country. Given the complexity of tourism consumption, its economic impact is felt widely in other production sectors, contributing in each case toward achieving the aims of accelerated development.

A major difficulty in defining the boundaries of the tourism sector is to ascertain what investment costs should be ascribed to the development of tourism. Although heretofore not treated by international agencies as a “sector” in national accounting terms, tourism entails a collection of goods and services that are provided specifically for visitors and would not have been provided otherwise.

Because of its interdependence with other sectors of the economy, it is difficult to analyze and plan for tourism. The lack of reliable statistical data hampers identification of the mechanisms by which tourism generates growth, as well as its potential for development. Yet, in those instances where analysis has been carried out and research has preceded planning, tourism’s priority in competing for scarce investment funds has been established. In these cases, long-term programs for tourism development have been designed.

Nature and heritage tourism development has investment needs that differ, in certain respects, from traditional tourist hotel development. There may be a greater need to improve access to the attraction site or facility, and for a mode of development that does not interfere with a sensitive habitat or historic area.

a. Elements of Supply and Demand

Three primary factors influence the level of nature and heritage tourism demand: overall tourism growth, the growth in specialty travel, and increasing awareness of and concern for the environment. Each of these factors is in turn influenced by a number of elements. Overall tourism, for instance, is expected to continue to grow more rapidly than world economic output as a result of factors such as population growth, rising incomes and employment, shorter work weeks in many parts of the world, and the increasing integration of the world’s economies and societies. The rapid growth of specialty travel is fueled by some of the same factors, but there are a number of additional explanations: the boom in outdoor recreation and the new interest in health and fitness, for example. Environmentalism is another of the elements that have changed people’s attitudes about how they should spend their vacations.

b. Tourism and GDP

The tourism sector in the Latin American and Caribbean countries contributes significantly to GDP earnings, though this contribution is not reflected in the domestic income and product accounts of most countries. In the Bahamas, tourism accounts for about one-third of GDP, and most sectors of economic activity are directly or indirectly linked to it. In Barbados, tourism is the leading economic sector, accounting for 15 percent of the GDP in 1992. In Jamaica, the tourism contribution to GDP was 13.4 percent in 1992, while in Mexico it was only 4 percent.

Not all tourism receipts are retained within the economy. In fact, there is an outflow of foreign exchange for some of the goods and services consumed by visitors, as well as for capital goods invested in tourism and for payments abroad. Import needs depend on the level of development and the degree of diversification of a country’s economy. These needs are also dependent on the availability of substitutes for imported products and on the qualitative level of the tourist supply in each country.

c. Tourist Income Multiplier and Value-Added

The tourist income multiplier (tim) is a coefficient that expresses the amount of income generated by a unit of tourism expenditure.6 In Jamaica, a stopover visitor spending one dollar creates a ripple effect of US$1.60 within the local economy, while a dollar spent by a cruise-ship visitor generates US$1.20. In the Dominican Republic, the tim has been estimated at US$1.70.

6The calculations are based on the familiar Keynesian multiplier K = 1/MPS + MPM, where MPS is the marginal propensity to save and MPM the marginal propensity to import (or to spend on tourism abroad),
The value-added concept is particularly important when considering the impact of tourism in the Caribbean region. Value is added when a product is developed, processed, refined, or marketed in a manner that allows it to be sold at a higher price than the prices of the raw materials, services, and components bought for its production. Countries with large domestic agricultural sectors supplying tourist consumption are well positioned to achieve higher levels of value-added in the tourism sector.

When a country’s natural resources are packaged by foreign tour operators and sold through sophisticated marketing techniques, a substantial portion of the value-added is created and captured by those tour operators and therefore not returned to the country. To increase the value-added of tourism, host-country businesses and residents must offer travel services such as packaged tours (“land services”), offering locally owned accommodations and providing the necessary means to visit natural areas.

d. Income Distribution Effect (IDE) and Employment

The IDE offers one of the strongest socioeconomic arguments in favor of tourism development. It describes how income generated by the sector is distributed. The analysis can be undertaken at a spatial and at a functional level.

At the spatial level, tourists prefer to travel in regions with little industrial development. They also tend toward areas of little agricultural value. For these reasons, tourism can become a dynamic force in regional economies. Within a country, tourism demand originates in urban concentrations where the highest incomes are found. A percentage of such incomes is normally set aside for tourism in areas that are geographically different from the visitors’ home base, reinforcing the process of internal income redistribution. Internationally, a portion of the tourism consumption by developed countries occurs in developing countries, favoring the process of international income redistribution.

At the functional level, the income generated tends to favor employment, which is estimated to contribute more to the total value-added of the industry than other factors do, because so much of tourism involves personal services. It has been estimated that, worldwide, tourism directly or indirectly supports sixty-five million jobs, including hotel managers and staff, taxi drivers, tour operators, and shop attendants, among others. Secondary employment is generated in agriculture, industry, handicrafts, and services.

Tourism compares favorably with other economic activities as a generator of both employment and income, both directly and diffused through the economy. An OAS study on new hotel development in the Caribbean estimates that every investment of US$80,000 in the tourism industry in the region generates forty-one jobs7. The same investment would create only sixteen new jobs in the petroleum industry and fifteen in metallurgy. According to the CTO, the 77,319 hotel rooms in fifteen Caribbean countries equaled 88,697 jobs, or almost 1.15 per room8.

7Organization of American Slates. The Optimum Size and Nature of New Hotel Development in the Caribbean, Washington, D.C., 1987.

8Caribbean Tourism Organization, Caribbean Tourism Statistical Report, 1992.

Hotels account for about 75 percent of tourism employment (distribution, transport, finance and insurance, and entertainment make up the other 25 percent). Every room in a three- or four-star hotel in Venezuela generates one job, according to the IDB; for five-star hotels, each room creates 1.3 jobs. According to the OAS study, one job generated by a hotel generates one more job elsewhere in the tourism trade and two in the rest of the economy; thus one job generates an estimated three others.

The tourism sector, particularly hotels, can play an important role in attracting foreign investment and providing training for nationals. Many tourism ventures include foreign equity participation and technical knowledge about the construction and operation of hotels. The former represents a mobilization of international financial resources, which can be regarded as a desirable substitute for foreign borrowing. Outside management can be used to train large numbers of nationals who would not otherwise have access to training. Furthermore, tourism provides a stimulus for the development of other ancillary businesses catering to tourists.

An illustration of this can be found in Mexico, where foreign companies are seeking investment opportunities in the tourism sector because it is perceived to be less sensitive to trade agreements than, for example, manufacturing. Recent and prospective foreign investors in Mexico include the following:

· Japan’s Aoki Group, a major shareholder in the Westin chain of U.S. hotels, will build a hotel and golf course in Cancún catering to foreign tourist groups, including Japanese vacationers.

· Another Japanese group will invest US$20 million in the Ruinas del Rey tourism project.

· Investors from Germany’s Robinson GmbH have signed an agreement to develop a US$30 million ecologically oriented project south of Cancún, in the midst of Mayan archeological ruins.

· France’s Grupo Dipe is investing in the US$560 million Puerto Loreto project in Baja California.

· Italy’s Società Esercizio Cantieri signed a contract with Fonatur, the national tourism development agency, to jointly develop a US$1.5 billion marina in Cancún.

It is expected that the projects will bring in US$2.2 billion in foreign-exchange revenues annually. The tourism sector in Mexico attracted 40 percent of total foreign investment in 1991 and at least US$3.5 billion, or 14 percent of total foreign direct investment in all sectors, over the last five years.

In Venezuela, six debt-equity swaps totalling nearly US$360 million are benefiting the tourism industry. The funds are being used to develop four resorts on Margarita Island, where approximately 60 percent of all tourism projects under development are located. Spain’s Grupo Once is building a US$50 million resort named Isla Bonita on the island’s northern coast. Posadas de Mexico and Club Aguasal are planning a US$150 million hotel and housing project nearby. Ramada Inn will soon be operating the third project, a US$57.2 million hotel called Complejo Porlamar, owned by Promenade and Nocal N.V. of Curacao. The fourth project, owned by Grupo L’Hermitage, is the US$88 million L’Hermitage Hills, in Pampatar.

e. Tourism and Balance of Payments

Tourism can make an important contribution to a country’s balance of payments. The IDB estimates that in the Latin American and the Caribbean five-star hotels can generate US$5.4 for each dollar spent in their operation. The figure for three- and four-star hotels averages US$4.2.9 From an economic viewpoint, services performed in tourism are classified as exports. Tourism activity in the Caribbean does not usually require sophisticated technology, and can absorb more personnel without skilled training than other industries.

9Inter-American Development Bank, Evaluation Report on IDB Lending for Tourism Projects, Washington, D.C., March 1989.
Tourism offers developing countries the possibility of diversifying their export earnings, particularly given that (i) traditional exports are subject to price fluctuations and (ii) there is a trend toward reducing the administrative, monetary, and border formalities that affect international tourism mobility.

The tourism sector has the capacity to recover foreign-currency investments in a very short period of time. The World Tourism Organization (WTO) estimates, for instance, that a medium-class beach hotel in a developing country will earn back in one year the entire foreign exchange required to build and equip it. In the case of tourist vehicles, such as buses, this period is even shorter.

Import factors vary from 3 to 10 percent of total tourist receipts in Mexico, Venezuela, and Colombia. This jumps to about 30 percent in Jamaica and more than 40 to 50 percent in the smaller Caribbean islands. Where the amount earned exceeds the amount paid to provide the product - a positive net balance of payments - tourism development merits strong consideration.

The OAS estimates that to produce a unit of value of Jamaican currency in the tourism sector, 0.37 units in direct and indirect imports are needed, which means that 37 percent is imported. This figure is smaller than in any other sector except mining. By contrast, the industry sector imports 73 percent of its inputs. Therefore, a unit of investment in tourism would have more than double the impact of an equivalent amount in other industries. In bigger countries, with a better capacity to provide food, transportation, and varied cultural attractions, tourism would presumably involve fewer imported inputs.

With only a few exceptions, the terms of trade for developing countries, i.e., the ratio between the prices that a country receives for its exports and the prices it pays for its imports, have traditionally been unfavorable, because of fluctuations in the prices of raw- material exports. But in the case of international tourism, if the index of average international tourist expenditure is taken as the expression of the price of the international product, the prices received have enjoyed greater stability than the prices of raw materials - in fact, prices have tended to increase in a stable manner, because, among other reasons, of the demand for holidays, the growth of business travel, and the rigidity of destination supply in the short and medium term. Whereas the prices of other products are affected by speculative or strategic offers, this is generally not the case with tourism. It is therefore a sector that tends to improve the terms of trade of an economy in the medium as well as the short term.

II. The Conventional Tourism Industry in the Caribbean

For many Caribbean islands, tourism has become the most important economic activity, especially as the major earner of foreign exchange. This is in part the result of the declining importance of sugar, bananas, bauxite, and oil as engines of growth. But it is also a reflection of the increasing importance given to recreation and leisure as a result of rising world income levels. In addition, unlike many goods and services, tourism has no exact substitutes, meaning that the demand for holidays will grow rather than be traded for something else.

a. Recent Trends

During the period 1985-1992, the Caribbean region registered a 52.1 percent increase in tourist arrivals (6.2 percent in annual terms), compared with only 16 percent for 1980-1985 (3 percent in annual terms)10. In 1992, the Caribbean islands recorded over twelve million tourist arrivals and nearly nine million cruise-passenger visits-an increase of 2.9 percent and 7.7 percent, respectively, over 1991. The main originating areas in 1992 were the United States (52.1 percent), Europe (16.9 percent), and Canada (6.5 percent). Intra-regional tourism represented 8.8%. The remaining 15.7% is mainly composed of visitors from Central and South America11. The revenues generated by visitors were estimated at about US$9.8 billion in 1992, an increase of 8 percent over the previous year.

10 The figure for worldwide tourist arrivals in the same period was 46.4 percent (5.8 percent in annual terms).

11 The source of all figures related to Caribbean tourism is Caribbean Tourism Organization, op. cit.

Although the majority of tourists to the Caribbean are from the United States, the percentage is dwindling as other countries discover the islands. In 1988, 58 percent of visitors to the Caribbean had been from the United States. Between 1988 and 1992, the proportion of European tourists had increased from 13 to 17 percent. Moreover, since Europeans generally stay longer, each arrival from Europe accounts for a higher average number of tourist days.

With respect to the United States market, about 6.3 million tourists visited the Caribbean in 1992. Over one-third (35.6 percent) went to U.S. territories (Puerto Rico and the U.S. Virgin Islands); another third (35 percent) visited the Bahamas, Jamaica, and the Dominican Republic. The dependence of Caribbean destinations on the U.S. market is most noticeable in the Bahamas, Bermuda, and the U.S. Virgin Islands, where it represents nearly 80 percent of all U.S. travel to the Caribbean. In 1991, 20 percent of all U.S. overseas travelers went to the Caribbean.

b. Accommodations

It is estimated that the Caribbean has approximately 145,800 hotel rooms, distributed among 32 countries and territories (end 1992). The Bahamas, Cuba, Jamaica, and the Dominican Republic accounted for about 50 percent of the total and were the only destinations with more than 10,000 rooms.

The number of hotel rooms in the Caribbean has increased by 74 percent since 1980. During the last decade, the hotel capacity of the region increased by nearly 62,000 rooms (about 6 percent a year). However, the growth has been concentrated geographically: 77 percent of the new rooms were constructed in the Dominican Republic, Jamaica, Cuba, Guadeloupe, Aruba, and Martinique. In some countries the total number of rooms has remained unchanged or even declined.

With regard to establishment size, over 50 percent of the hotel rooms are in hotels of 100 or more rooms. However, this proportion varies from country to country. In Aruba, Puerto Rico, and Cuba, over 70 percent of the rooms are in establishments of more than 100 rooms. By contrast, seven Caribbean destinations have no hotels of this size.

The Dominican Republic is the largest destination in terms of room capacity, with 24,410 in 1992. There has been a rapid increase in capacity in Aruba and Puerto Rico in recent years. Also, a high level of hotel construction is under way in Cuba, mostly in association with Western European consortia.

c. Cruise Ships

The number of cruise tourists has increased vigorously in the last ten years. Total cruise-passenger visits to the Caribbean have increased by nearly 40 percent since 1988, equivalent to an annual growth rate of 8.5 percent. During 1992, 8.9 million cruise-ship passenger arrivals were registered at Caribbean ports - a 7.7 percent increase over the 8.2 million of just a year before. In 1992, about 53 percent of total North American berths were allocated to the Caribbean.

The three largest cruise destinations in the region are The Bahamas, the U.S. Virgin Islands, and Puerto Rico, which recorded growth rates averaging 4.2 percent. On the other hand, very large increases were registered in Aruba, Bonaire, The Cayman Islands, Dominica, Jamaica, and St. Kitts and Nevis. The individual performance of these destinations in terms of cruise-passenger visits was impressive, recording rises of over 25 percent.

The cruise-ship sector is expected to continue growing rapidly during the remainder of the decade. Much of this growth is likely to take place in the Caribbean, increasing its share of a growing market that could represent 15 million visits to the region by the end of the 1990s.

d. Visitor Expenditures

It is estimated that visitors to the Caribbean spent US$9.8 billion in 1992. This represents an 8 percent increase over the previous year and reflects a continuing rise in average expenditure per visitor (although this is partly due to inflation). Gross tourism receipts represented some 25 percent of all export receipts. For many countries, it is the dominant productive sector and generates the most foreign exchange. Over the same period, the value of the region’s main commodity exports (sugar, petroleum, bauxite, and manufactured goods) declined sharply.

In 1992, Caribbean tourists spent the most in the Dominican Republic, The Bahamas, and Puerto Rico, over US$1 billion in each. Together, these countries accounted for nearly 40 percent of the region’s total receipts in 1992. The other major beneficiaries of tourist expenditures during that year were Jamaica (US$850 million), the U.S. Virgin Islands (US$790 million), Barbados (US$460 million), Aruba (US$450 million), and Bermuda (US$440 million). Stayover visitors accounted for almost 95 percent of total spending by visitors to the region in 1992.

III. Factors Affecting the Caribbean Tourism Industry

Global tourism has become the largest industry in the world, with nearly 500 million consumers of tourism services per year spending hundreds of billions of dollars. The industry provides employment to over 100 million people worldwide. The 1986 total of US$2 trillion in world tourism receipts is expected to grow by 4 percent annually to nearly US$3 trillion by 1996.12 The WTO reported that 364 million international tourists spent US$150 billion (excluding airfare) in 1987.

12Travel Industry World Yearbook, 1989.
International Tourist Arrivals 1984-1989 (‘000s)









































Source: World Tourism Organization.

In view of tourism’s increasing role in economic activity, the factors affecting its performance should be analyzed. An understanding of these factors is crucial to determine the ways in which national and international financial institutions, NGOs, and other entities can play the most value-adding role.

a. Demand FACTORS

The Importance of Location. People with incomes high enough for foreign travel are concentrated in a few countries. Most developing countries are far from key points of origin. In this regard, countries like Mexico and some Caribbean islands that are close to the United States and Canada benefit from a comparative advantage. These tourist destinations reaped early success in promoting their attractions. In 1989, for example, the Caribbean region captured 2.58 percent of the world’s 450 million tourist arrivals, with gross expenditures estimated at more than US$3 billion. Tourists have since ventured to further Caribbean islands and coasts such as those of Venezuela and Costa Rica. Travel between neighboring regional countries is also expanding. Foreign-exchange receipts in Paraguay, which receives over 85 percent of its visitors from Argentina and Brazil, increased eightfold between 1976 and 1986.

Income Elasticity. In several countries, travel receipts have been the fastest-growing export item. The tourism sector represents over two thirds of the value of total exports of goods and services from the Bahamas, three fifths of those from Barbados, and over one third from the Dominican Republic and Jamaica. As national incomes increase, expenditure on travel increases even faster.13 As a result of this trend, international receipts from foreign travel have been increasing by nearly 11 percent a year (over 8 percent in constant prices) or at more than twice the rates of national incomes.

13 A model developed by the IDB for seventeen major source countries gave a weighted average of 1.7 for the income elasticity of tourism demand.
Decreasing Travel Costs. There is evidence that tourism demand is also price-elastic, particularly below certain price levels. The two major costs of a trip abroad are transport charges and expenditures in the destination country. For short-distance traffic, such as from the eastern United States to the Bahamas, the Dominican Republic, or Jamaica, destination expenditures have the greater weight in the total cost of a trip. In these particular countries, however, they are generally lower than in other, competing Caribbean destination areas; the present study found empirically that their cost structure in general also tended to be lower, probably because of the larger scale of their tourist industries and the greater self-sufficiency of their economies. For long-distance traffic, air transport is predominant, and average air transport costs have been declining. Where such transport costs constitute a high proportion of the total cost of a trip, this decline is of great significance for the potential for long-distance travel growth.

b. Supply Factors

Public and Private Sector Involvement. Tourism is mainly a private-sector enterprise, but the timely provision of hotel and other visitor services, such as entertainment, food, and sport facilities, requires public-sector participation in the form of infrastructure, promotional support, and fiscal and financial incentives, so as to attract private investment to the sector.

Another important factor directly related to tourism facilities is the availability of credit. As in any commercial activity, the availability of credit on suitable terms is an essential catalyst for sound tourism investment. In a number of countries, when the private financial system does not provide it, the public sector has established credit lines for tourism investment.

Tourist Destination Attributes. Tourist demand is spurred by innovation in the type of holidays offered (new commodities) and by improvements in transport, accommodations, and attractions (quality changes). The tourism sector offers a multidimensional product that, if vigorously promoted, is likely to lead to changes in the pattern of demand and generate new demand for services. Yet, as in any other sector of economic activity, a minimum set of parameters needs to be in place in order to make an investment viable. In this sense, it is important to identify those attributes of a destination area that are necessary to attract tourism projects and make them viable. Such attributes relate to at least six different categories: climate, natural resources, infrastructure, amenities, culture, and socioeconomic and political factors. The table below presents these categories with their related attributes.

An ideal combination of these attributes should result in forms of tourism development that maximize returns to the economy, to the investors, and to the consumers of tourism services.

Tourist Destination Attributes









Water/energy supply
Waste removal

Sports facilities
Recreational parks

Historic features
Concert halls
Art galleries

Industrial structure
Government structure
Planning system

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