Eastern Caribbean Currency Union: Selected Issues
Author:
International Monetary Fund
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Publication Date:
28 Mar 2003
eISBN:
9781451811643
Language:
English
Keywords:
ISCR; CR; OECS country; ECCU country; government; bank; tourism industry; ECCU tourism receipts; ECCU destination; ECCU member country; Competition; Fiscal stance; Foreign direct investment; Caribbean; ECCU member states
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This Selected Issues paper analyzes the competitive threats to the tourism sector in the Eastern Caribbean Currency Union (ECCU). The paper concludes that the ECCU countries have lost competitiveness globally and vis-à-vis newly emergent Caribbean tourist destinations as a result of both price and nonprice factors. The short-term measures implemented by the countries seem to have been insufficient to prevent further declines in 2002. The paper also describes strengthening fiscal discipline through fiscal benchmarks.

Abstract

This Selected Issues paper analyzes the competitive threats to the tourism sector in the Eastern Caribbean Currency Union (ECCU). The paper concludes that the ECCU countries have lost competitiveness globally and vis-à-vis newly emergent Caribbean tourist destinations as a result of both price and nonprice factors. The short-term measures implemented by the countries seem to have been insufficient to prevent further declines in 2002. The paper also describes strengthening fiscal discipline through fiscal benchmarks.

I. Tourism in the Eastern Caribbean: Meeting the Competitive Threat1

A. Introduction

1. Tourism’s contribution to the economies of the Eastern Caribbean Currency Union (ECCU) spans the real, fiscal, and external sectors of each economy. Over 1990–2001, the correlation coefficient between the growth in stay-over tourist arrivals in the ECCU and real economic growth was 0.7, reflecting the strength of the underlying sectoral linkages. In the aftermath of the September 11 terrorists’ attacks, the ECCU suffered an unprecedented decline in output (-1½ percent) in 2001, an increase in unemployment, and a sharp deterioration in its fiscal position (the central government deficit widened from 5½ percent of GDP in 2000 to around 7 percent of GDP in 2001).

2. This chapter analyzes the performance of the tourism industry in the ECCU following the September 11 attacks. While tourism in the Caribbean as a whole has kept pace with world tourism, the ECCU countries and their CARICOM partners have lost ground to newly emergent destinations elsewhere in the Caribbean. Moreover, the September 11 attacks exacerbated a declining trend in competitiveness, which has been apparent since the mid 1990s. Although the data suggest some erosion in the ECCU and CARICOM’s price and non-price competitiveness, the region’s resiliency in the face of significant price differentials vis-à-vis the rest of the Caribbean suggests that its comparative advantage may lie in non-price factors, which are not as easily quantifiable.

3. Although ECCU countries quickly implemented several measures in response to the economic crisis that ensued after September 11, such responses have been short-term in nature and focused primarily at mitigating the effect of the current crisis. However, a medium-term solution would require a strategic restructuring of the industry to deal with the competitive threat from emerging Caribbean destinations. Differences in cost and industry characteristics among Caribbean countries would make broad-based regional cooperation difficult, but strategic alliances of varying scope could better serve the ECCU countries. The paper argues that more effort could be spent on both upgrading and modernizing the facilities and the quality of service in these countries than on marketing in the current situation.

4. This chapter is structured as follows: Section B discusses the nature of tourism’s contribution to the economies of CARICOM, Section C analyzes the recent developments in Caribbean tourism, with particular emphasis on the ECCU, so as to give some context to the effects of September 11; Section D discusses the competitiveness of tourism in the ECCU; and Section E describes the short-term policy responses of ECCU countries, and a proposed medium-term strategy for restructuring the industry. Some concluding comments and recommendations are presented in Section F.

B. Tourism’s Economic Contribution

5. Tourism’s impact can be felt through direct, indirect, and induced channels in the following sectors: (i) the real sector, through the Gross Domestic Product (GDP), employment, and investment, as governments and the private sector invest in infrastructure and facilities needed to support the tourism industry; (ii) the balance of payments (BOP); and (iii) the fiscal sector, through government revenue. In all of these areas the direct effect results from economic activity directly related to tourism (for example, the provision of hotel and restaurant services, recreation and entertainment, transportation, and access to retail trade); the indirect effect results from economic activity related to suppliers’ provision of inputs (including raw materials and energy) to hotels and restaurants, and other retailers; and the induced effect results from economic activity created by the spending of household disposable income derived from either the direct or indirect effects.2

6. The size of the ratio of visitor expenditure to total export of goods and services reveals the extent of dependency of the external sector on tourism and consequently highlights the vulnerability of the economy’s foreign exchange earnings to shocks from the tourism industry. However, the tourism industry also has a high import requirement for goods and services—both through the direct and indirect effect. So the combined direct, indirect, and induced effects of visitor spending on imported goods serve as leakages and represent an outflow of income not available to generate domestic economic activity. Thus, tourism’s net effect on the current account of the balance of payments would be the combined effect of tourism receipts (a credit item) offset in part tourism-related imports.

7. In the case of government revenue, tourism generates the payment of direct taxes by individuals and corporations directly involved in the provision of goods and services to tourists, and the payment of indirect taxes—including tourism-related taxes (such as the hotel occupancy tax, the airport departure tax, the cruise ship head tax, related licenses, and environmental levies), valued added tax, and other taxes on goods and services, and taxes on international trade and transactions, including import duties (to the extent that the imports by the tourism industry are not zero-rated). An induced revenue effect results from the payment of taxes on income generated by the spending of disposable income earned from the direct and indirect effects. However, in addition to the revenue effects, on the expenditure side, the nature of the fiscal response to the recent adverse shock to tourism also impacted CARICOM governments’ overall balances. For instance, in the wake of the September 11 crisis, some governments in the region adopted a counter-cyclical stance, and sought both to stimulate economic activity and increase tourism advertising and promotions through additional spending financed by draw-downs in accumulated deposits or through additional borrowing—which further exacerbated an already weakened fiscal position, with the latter adding to countries’ debt burdens.

8. Table 1.1 summarizes the findings of a study of tourism’s contribution to the St. Lucian economy in 1998, and helps to illustrate the potential magnitude of the sectoral linkages discussed above.3 4 According to Table 1.1, EC$ 1 in tourism expenditure generated EC$0.6 in income (ECS$0.4 through the direct effect, EC$0. 1 through the indirect effect, and ECS$0.1 through the induced effect), and tourists’ expenditures collectively accounted for 28 percent of GDP in 1998. Regarding employment, tourism expenditure generated 21 percent of all St. Lucian jobs, and approximately 16 jobs were created per EC$1 million of tourism expenditure. Regarding fiscal revenues, EC$1 of tourism expenditure generated EC$0.1 of government revenue, which accounted for 20 percent of total government revenue in 1998. The largest source of government revenue was the direct effect, which was more than double the magnitude of the indirect and induced effect—suggesting the absence of substantial backward linkages between tourism and the rest of the economy. Visitor expenditures accounted for 72 percent of St. Lucia’s exports of goods and services in 1998, suggesting a high level of dependency of foreign exchange earnings on tourism and a high vulnerability to exogenous external shocks affecting tourism. Finally, Table 1.1 shows that the revenue leakage through the importation of goods and services for use by tourists is fairly substantial—EC$212 million—more than double tourism’s total contribution to government revenue of EC$95 million.

Table 1.1.

St. Lucia: Summary of Impact Estimates

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Source: Caribbean Tourism Organization, Tourism Economic Impact Project, “St. Lucia: Economic Impact of 2000.” Visitor Expenditure—1998,” August 25, 2000.

Multiplier: Value added per $1 of visitor expenditure

Multiplier: No. of jobs per $1m of visitor expenditure.

Multiplier: revenue per $1 of visitor expenditure.

C. Tourism Developments in the 1990s

9. During the first eight months of 2001, world and Caribbean stay-over tourist arrivals grew by 3.0 and 2½ percent, respectively, relative to the same period in 2000, which was followed by a sharp contraction of 11 and 16¾ percent, respectively, during the last four months of the year in the aftermath of the September 11 terrorist attacks.5 For the year as whole, world tourism6 and world tourism receipts7 declined by percent and 2½ percent, respectively (Table 2.1). Although the decline in Caribbean tourist arrivals exceeded the world average, the decline in Caribbean tourism receipts was less than half the world average decline, resulting in an increase in the Caribbean’s world share of tourism receipts.8

Table 2.1.

World Tourism: Tourist Arrivals and Tourism Receipts by Region

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Source: World Tourism Organization.

Data on the Caribbean were provided by the Caribbean Tourism Organization (CTO).

10. The 2001 outcome was a break in the trend observed during the 1990s, when annual growth in world and Caribbean tourist arrivals and receipts were both consistently positive (Tables 2.2a and 2.2b). Caribbean tourism out-performed world tourism over 1990-2000, with an average annual growth rate of stay-over tourist arrivals of almost 5 percent compared to a world average of 4½ percent, while Caribbean tourist receipts grew at an average annual rate of 7 percent, which was roughly in line with the average growth rate of world tourist receipts (7¾ percent). The decline in stay-over visitors observed in 2001 was not uniform across the various sub-regions of the world, and did not generalize to cruise passenger arrivals. In particular, despite a sharp contraction in North American tourism (-6 percent), which was second only to the tourist arrivals decline experienced in South Asia (-6½ percent), the Caribbean region maintained its stay-over arrivals market share of 2.9 percent—and did so consistently since 1997. In addition, cruise passenger arrivals in the Caribbean grew at an average annual rate of close to 7½ percent over 1995-2000, and registered positive growth in 2001 (3 percent) (Appendix Table 3).9

Table 2.2a.

International and Caribbean Stay-Over Tourist Arrivals: 1990-2001

(In thousands)

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Source: World Tourism Organization; Caribbean Tourism Organization.
Table 2.2b.

International and Caribbean Tourist Receipts: 1990-2000

(in billion of US$)

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Source: World Tourism Organization; Caribbean Tourism Organization.

11. Table 2.4 shows selected Caribbean market share indicators for the key sub-groups over the period 1995-2001 (detailed country data are presented in Appendix Tables 1-8). This table reveals erosion in the market shares of CARICOM vis-à-vis other Caribbean destinations for three out of four tourism indicators over the period 1995-2001. In particular, consistent with Table 2.3, CARICOM’s share of Caribbean (stay-over) tourist arrivals declined steadily over the review period; and within CARICOM, non-ECCU countries accounted for the greatest declines in the arrivals’ market share. This suggests, ceteris paribus, a reduction in CARICOM’s tourism competitiveness in the market for stay-over visitors vis-á-vis the rest of the Caribbean. Moreover, given that the average daily expenditures of stay-over tourists typically surpasses that of cruise passengers, the erosion in stay-over tourists’ market share through 2000 was also reflected in an erosion in CARICOM’s market share of visitor expenditures. Once again, the non-ECCU countries accounted for a greater proportion of the decline. Finally, consistent with the rapid expansion in the market share of “other Caribbean” stay-over visitors, this group’s market share of tourist accommodations rose steadily over 1995-2000 before leveling off in 2001.

Table 2.3.

Tourist (Stay over) Arrivals

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Source: World Tourism Organization and the CTO.

Reflects the inclusion of the Dominican Republic and Puerto Rico in 1993, and Cancun and Cozumel in l994.

Table 2.4.

Selected Caribbean Market Share Indicators

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Source: National Tourism and Statistical Offices, and CTO.

12. On the other hand, the data suggest that CARICOM’s competitiveness in cruise ship tourism was improved over 1995-2000, as the region’s market share of cruise passenger arrivals rose from 37 percent in 1995 to 39 percent, although the region lost ground in 2001. Moreover, at 37 percent, CARICOM’s average market share of cruise arrivals over 1995-2000 exceeded that of the other indicators, which were below 30 percent. This outcome is largely attributable to the performance of The Bahamas, which accounted for an average of 15½ percent of total Caribbean cruise ship arrivals over 1995-2000—clearly the cruise ship industry leader Caribbean-wide. These observations suggest that this category of tourism may not be as constrained by the size restrictions and diseconomies of scale that typically constrain performance in the stay-over tourist market, and could offer the potential for future growth, subject to capacity limits imposed by environmental considerations. The experience of The Bahamas is also instructive in this regard since its share of visitor expenditure was the fourth highest in the Caribbean, suggesting a higher weighted average for daily tourist expenditure than its CARICOM counterparts. Thus, to the extent that other CARICOM destinations are able to design ways of enhancing the value added by cruise passengers, there could be untapped potential for growth in this area.

13. During the 1990s, there was also a shift in the market origin of stay-over visitors to the Caribbean. In particular, the percentage share of visitors from the United States declined, from 57 percent in 1990 to 49 percent in 1999, owing to increased competition from various U.S. destinations, such as Florida and Hawaii. However, the percentage share of European visitors increased, from 17 percent in 1990 to 26½ percent in 1999, while the shares of Canadian and Caribbean visitors were roughly unchanged (Table 2.5). The U.S. share then rose again to 50 ½ percent in 2001, owing to strong performance during the first eight months of the year, while the European share decreased to 26 percent.

Table 2.5.

Stay-Over Tourist Arrivals in the Caribbean by Main Market: 1990-2001

(Arrivals data in millions)

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Source: World Tourism Organization; Caribbean Tourism Organization.

Break in the series caused by the addition of Cancun.

The increase in the U.S. ratio in 2001 reflects developments in the first three quarters of 2001 prior to September 11.

14. Finally, Appendix Table 9 shows preliminary data for stay-over tourist and cruise passenger arrivals for 2002. In the case of most of the destinations shown, there has been a significant contraction in the number of stay-over tourist arrivals vis-à-vis the same period in 2001. Although, it is difficult to draw any firm conclusions from this table given the absence of fourth quarter data, the extent of the declines observed throughout the Caribbean region (especially among some of the larger destinations) for the first half of 2002 suggest the possibility of a second consecutive year of decline in Caribbean tourism. The extent to which the ECCU is able to recover some of the recent erosion in market share will depend on its ability to enhance its competitiveness vis-à-vis other Caribbean destinations.

D. Competitiveness of Tourism in the ECCU

15. This section discusses the competitiveness of the ECCU’s tourism in relation to its regional competitors. It notes that these destinations have lost competitiveness in the second half of the 1990s and that this has been exacerbated by the effect of the September 11 terrorist attacks on the U.S.—their major tourism market. This loss of competitiveness is evidenced by the slower rate of growth of tourist arrivals and expenditure, a decline in market share and lower foreign direct investment (FDI) in the sector.

16. Competitiveness has two dimensions: price and non-price.10 Price competitiveness arises from greater efficiency in resource use that lowers production cost. Non-price factors such as product design, packaging, quality service, reliability of supplies, after-sales-service, distribution networks, marketing, and market intelligence are just as important in consumer choice. Non-price factors are even more important for the competitiveness of the tourism industry, which aims to provide a unique experience at a lower cost and a higher level of service to that of similar destinations. Bad experiences, including crime, with any of the contacts during the trip cannot be erased by price or advertising.

17. As noted in Section C, the market share of the Caribbean countries increased initially and stabilized in recent years, however there has been an erosion in the market shares of English-speaking CARICOM countries (including the ECCU) vis-à-vis the rest of the Caribbean since the mid-nineties. The Caribbean’s share of world tourism increased from 2½ percent in 1980 and stabilized at 2.9 percent in 1997, while the market share of the ECCU remain roughly unchanged at 0.12 percent over the same period through 2001.

18. FDI flows to the ECCU countries are mainly for the expansion of tourism facilities, and while still high, they have declined in recent years. These flows are generally lumpy, given the scale of hotel construction. For the ECCU countries, FDI averaged 12 percent of GDP during 1997-99, but has declined to an average of around 9 percent of GDP since 2000 (Table 3.1).

Table 3.1.

Caribbean Region: Foreign Direct Investment

(In percent of GDP)

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Sources: ECCB, IMF staff estimates

19. The recent loss of competitiveness of ECCU destinations is the result of both price and non-price factors. These factors include: high accommodation and food prices—partly resulting from higher labor and utility costs and appreciating exchange rates—a maturing tourism product, insufficient advertising prior to the September 11 crisis, and a low quality of service.11

20. While product differentiation can permit higher prices, ECCU destinations may be pricing themselves out of the market as destinations like Cuba, the Dominican Republic, and Mexico offer lower prices for similar products. ECCU destinations have always argued that they cater for an exclusive clientele and that their product is directed towards the upper-end of the market.12 Although higher prices could be justified by characteristic demand theory (Lancaster, 1971), there is a limit to which prices of one differentiated product can exceed another. ECCU destinations seem to be close to or beyond that margin. Table 3.2 gives a sample of rates for 7-day all-inclusive packages offered by Signature Vacations at four-star plus hotels in the Caribbean and Mexico for the 2002-2003-winter season. The general pattern is that emerging Caribbean destinations like Cuba and the Dominican Republic offer much lower rates for a similar vacation product. Vacation costs in the ECCU sub-region, which average around US$3,500, are almost twice as expensive as the Caribbean coast of Mexico, Cuba and the Dominican Republic. This finding is similar to earlier studies, which show that Caribbean hotel rates are higher, and shows the greatest discount in off-peak periods (cited in Blanchard, 2002).

Table 3.2.

Caribbean Region: Hotel Rates and Other Charges

(Quoted in US dollars unless otherwise stated)

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Sources: Signature Vacations, Caribbean Tourism Organization, Blanchard 2002.

21. Airfares are broadly similar for all destinations, although other vacation-related expenses like departure taxes and hotel room taxes are sometimes higher in the non-English-speaking destinations. Hotel room taxes average 7 percent in the ECCU compared with 12 and 13 percent respectively in Cancun and the Dominican Republic (Table 3.2). However, these vacation-related expenses constitute only a small part of the package, and the differences are insufficient to offset the higher accommodation and food costs in the Eastern Caribbean.

22. Higher labor and utility costs are partly responsible for the higher accommodation and food costs in the Eastern Caribbean.Table 3.3 shows average wage and utility rates in selected Caribbean countries. Average wages are higher in the ECCU (US$170 per week) and are highest in Anguilla (around US$250 per week).13 A similar pattern holds for utility rates as a result of small size and lack of economies of scale. Economic impact studies conducted by the CTO show that labor cost and utility rates account for as much as 20 percent and 8 percent of room revenue, respectively, in St. Lucia. This finding accords with microeconomic data compiled by Price Waterhouse in the now discontinued “Report on the Hospitality Sector in the Eastern Caribbean.”14 ECCU Member countries should pursue efforts to deregulate or privatize utility companies within the context of a regional regulatory framework—with a view to enhancing efficiency and the cost competitiveness of tourism enterprises.

Table 3.3.

Caribbean Region: Wages and Utility Costs (1999)

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Sources: International Labor Organization, World Bank: International Development Indicators, National Authorities.

Average wage for the whole economy for Jamaica, St. Kitts-Nevis and St. Vincent; Hotel and restaurant for Anguilla, D.R. and St. Lucia.

23. Recent appreciation of the real effective exchange rate (REER) has exacerbated the loss of competitiveness of Eastern Caribbean tourism.Table 3.4 and Chart 1 show that the REER of most of the countries appreciated sharply in line with the appreciation of the U.S. dollar since 1995 (although there has been some reversal with the weakness of the U.S. dollar during 2002). The REER appreciated an average of 2 percent per year between 1995 and 2001 with St. Kitts and Nevis recording the highest increase (around 2.5 percent). Appreciating exchange rates combined with inflexible labor markets have increased real labor costs significantly.

Table 3.4.

Caribbean Region: Real Effective Exchange Rates

(1990 = 100)

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Sources: IMF Information Notice System.

Average January-September, 2002.

24. The non-price competitive factors in ECCU tourism have also deteriorated in recent years. Most of the destinations have become mature, the quality of service has not kept pace with market trends, and budgetary constraints have lowered the region’s visibility in the market place.

25. After close to thirty years of operation, most ECCU destinations are approaching the mature stage of development, and have not attracted sufficient FDI to rejuvenate the industry. Decline can be avoided by injecting new capital to rejuvenate the destination. However, while the ECCU destinations are still receiving some new investments, they have not been able to attract the levels of FDI required to refurbish older hotels and build new ones at a fast enough rate. Meanwhile, the quality of service in hotels, restaurants and other attractions has not kept pace with market trends. The ECCU lags behind the rest of the world in technological advances to address the needs of customers, such as automated checkout, Internet access, and state-of-the-art websites for information and reservations.15

26. In a market that has become increasingly competitive, the ECCU has fallen behind in expenditure on advertising to improve its visibility in the market place. Moreover, worsening fiscal positions have impaired spending on advertising at a time when it is most critically needed. Traditionally, hotels have spent more on marketing than public tourism organizations, but public interventions are crucial in maintaining the country’s visibility in the market place.16 In the post-September 11 period, advertising in the ECCU territories has been hardest hit by budgetary constraints. On average, the ECCU countries spent around US$14 per stay-over arrival on promotions in 2001 compared to US$36 in the Cayman Islands and US$16 in Jamaica (Blanchard, 2002).

27. Air access has always been a bottleneck for regional tourism during the high season and this has been aggravated by the by recent route cutting by major airlines, which started before September 11 but increased thereafter. Caribbean tourism is seasonal with large swings between the high and low season. Airlines have typically added more flights in the winter season and airlift is usually supplemented by charters organized by tour companies, sometimes in conjunction with national tourism organizations.17 Major airlines like British Airways and American had started cutting back service to the region before September 11 because of low load factors. A number of charter services had also ceased operating in the region (JMC and Condor from the UK and Canada 3000 and Sky Service). With major airlines racking up huge losses especially since September 11, many Caribbean routes were eliminated or service was reduced. In spite of recent efforts to maintain the level of air access to the region (e.g., new services by U.S. Airways), the number of seats to the region is lower than in 2000.

Policy Responses to the Crisis

28. This section reviews the short- and medium-term policy responses to the downward trend in tourism arrivals in the Eastern Caribbean. It comments on the impact of short-term policy responses to the crisis post-September 11, when possible, and discusses a proposed medium-term strategic response.

Short-term responses

29. Governments and the private sector in the ECCU have responded swiftly to the crisis by implementing short-term measures to reduce the impact of September 11 However, these measures were insufficient to prevent a further decline in arrivals in 2002. The responses can be divided into government initiatives, private sector initiatives and joint public-private sector initiatives.

30. Government initiatives included the upgrading of security at ports and airports, to reassure travelers that it is safe to travel to these countries; subsidies to the industry in the form of tax waivers; tax incentives and subsidized credit to refurbish hotels; and efforts to maintain airlift to the region. They moved swiftly to upgrade security at airports and ports. The World Bank assisted by providing technical assistance to assess the security needs and made available US$21 million under a quick-disbursing loan program to five ECCU countries.

31. To prevent massive lay-offs in the industry, most governments waived the payment of some classes of hotel taxes for periods between 6 to 12 months e.g. Antigua and Barbuda and St. Kitts and Nevis. In many cases, this was equivalent to an outright grant, since the waiver was on tax revenues already collected from visitors on behalf of the government that hotels were allowed to keep.18 The estimate of forgone tax revenue is equivalent to around 1 percent of GDP in the ECCU member countries, which further exacerbated the shortfall in government revenue associated with the decline in economic activity.

32. In some instances, tax incentives were provided and credit was granted on concessionary terms to facilitate refurbishment of hotels. Imports of capital goods for hotel expansion and refurbishment were exempted from duties putting further pressure on the fiscal positions. Some ECCU countries provided more funding through their national development banks for improvement of tourism-related facilities.19

33. Post September 11, the CARICOM governments tried to stem the decline in airlift by increasing subsidies to regional airlines and negotiating with foreign airlines to maintain the level of service. For example, BWIA received an injection of US$13 million and LIAT received US$4 million (EC$11) to keep them flying.20 An air access strategy now aims to negotiate air services agreements on a regional basis;21 provide incentives to improve cooperation among regional airlines, support the development of strategically placed hubs to improve air transportation efficiency; provide support to external and regional carriers; and establish a regional aviation oversight authority.

34. In the private sector, hotels and airlines have responded to the September 11 crisis by offering steep discounts and reducing costs through a streamlining of their operations, including layoffs.22 Hotels have been offering discounts of 30-50 percent in an effort to boost occupancy levels. These efforts have been partially successful as the decline in arrivals has not been as steep as expected and occupancy levels have also not declined as much. However, tourist receipts have declined at a faster rate than arrivals. Preliminary data for the first half of 2002 indicate that in the ECCU tourism receipts declined by approximately 6.5 percent, while stay-over arrivals declined by around 5 percent.

35. In the airline industry, similar discounting and cost-reducing restructuring have taken place. While it is difficult to calculate the average airfare because of the complexity of airfare pricing structures, the data suggest that airfares are now lower than they were in 2000. At the same time, the number of routes has been reduced and smaller aircraft’s are now being used on some routes to reduce fuel cost and increase the load factor. Food service has also been scaled back. Recent job losses caused by airline retrenchment and restructuring, have been partially offset by increases in security personnel.

36. Governments and the private sector are cooperating to jointly market Caribbean tourism at both regional and national levels. The most significant marketing initiative is an ambitious US$16 million joint advertisement program entitled “The World needs the Caribbean.”23 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 pulled out, citing the need to use scarce promotional resources more effectively. However, the remaining countries are pressing ahead with the program, some with loans from the CDB to pay their share of the budget.24 CTO officials said that the marketing program is paying some dividends, judging by the number of hits to the website and the amount of bookings, which cite the ad campaign.

37. Several countries also have joint public and private sector promotions that supplement the regional marketing program. In addition to increased advertisement budgets, many countries are offering special promotions on hotels and other attractions. The ECCU countries have been modest in their promotional activities, restricting their promotions to discounts offered by the hotels and specials on side attractions.

38. All of these promotional activities impact on the fragile fiscal position of the ECCU countries, either through direct expenditure or through reduced tax revenues from lower receipts for hotel rooms and other services. Such expenditures may be inescapable if the countries are to successfully weather the present crisis and maintain their market profile, however they should ensure that these resources are efficiently spent to re-position themselves to benefit from a recovery in world tourism. However, over the medium term, the ECCU’s tourism industry needs to be radically restructured to ensure its survival in an increasingly competitive industry.

Proposed Medium-Term Strategic Response

39. More important than the short-term policy responses to the September 11 crisis, is an appropriate medium-term strategy, which would encompass a restructuring of the industry to deal with the competitive threat from emerging Caribbean destinations. In the current situation, more effort could be spent on upgrading and modernizing the facilities and improving the quality of service in these countries than on marketing In particular, over the medium term, ECCU countries should aim to address issues of price competitiveness—through wage restraint and productivity increases; attract significant amounts of FDI to refurbish hotels and build new ones and raise the quality of service to international standards; while also addressing environmental concerns. In the cruise ship industry, many ports have been upgraded to accommodate mega-ships, but these countries need to provide attractions to improve the value added by cruise passengers.

40. Although the price competitiveness of the industry was helped somewhat by the weakness of the U.S. dollar in 2002, over the medium term, overall wage restraint and the adoption of wage policies that tie wage awards to productivity increases would be essential in the face of fixed and heavily managed exchange rates. The ECCU countries are initiating programs to address these issues, similar to the framework for productivity and wage negotiations already in use in Barbados. Moreover, it is essential that timely productivity indices be produced, and that there is strict adherence to adopted wage protocols.

41. To remain competitive, many of the ageing hotels would need to be refurbished. However, the bulk of the investment resources would need to be sourced from outside of the region, given the small capital market. In addition, to encourage greater investment (by both domestic and foreign companies), ECCU countries would need to improve the business environment and overall competitiveness of their economies, including the regulatory framework and the level of taxation of the tourism industry.25 A modified value added tax that zero-rates tourism could increase the profitability of the industry and encourage greater investment.

42. However, capital improvements to hotel facilities must also be complemented by improvements in the quality of service. To address quality concerns, the CTO has proposed the development of a quality assurance framework for use in hospitality institutions along with increased training in the industry. The CTO also recommends the passage of legislation to achieve the free movement of skills across the region.

43. Countries are becoming more aware that the industry needs to develop in harmony with the environment and many have passed legislation requiring environmental impact assessments for major projects. However, much needs to be done to enforce the environmental laws and to provide incentives for sustainable use of the natural resources of these countries.

44. Most ECCU countries have invested heavily in port facilities to handle mega cruise ships; however, the investment does not seem to be paying off since the value-added by cruise tourism is diminishing with the enhancement of on-board cruise facilities. Nevertheless, these countries would need to try to recoup some of their investment by strengthening the links between cruise tourism and the domestic economy. This could be achieved by increasing the services and attractions offered to cruise passengers and negotiating provisioning contracts with cruise ships.

45. The CTO conference held in the Bahamas in November 2002 proposed a continuation of regional marketing on a permanent basis, and a broad program of cooperation spanning all aspects of the industry. The regional marketing program would be financed through a Sustainable Tourism Development Fund, with the proceeds of a mandatory US$5 tax on all tourist arrivals. The fund would be used partly to finance the region’s marketing efforts and partly for investment in regional projects. Given the competitiveness of the industry and the track record with the implementation of such head taxes, consensus on the fund could be difficult to achieve.

46. Broad-based cooperation could be difficult to achieve, but in its absence, strategic alliances could be a viable option for the ECCU. The broad cooperation envisaged under the CTO strategic objectives does not take account of the differences in cost structures, market segments targeted and the prospects for expansion across its diverse membership. Under these circumstances, there may not be a stable cooperative solution for the regional tourism industry. While a cooperative solution in which all countries participate could bring benefits to the region as a whole, the ECCU may find it difficult to make common ground with the emerging tourist destinations and may be better served by addressing the issues of modernization and quality as a priority, and pursue strategic alliances of differing scope to deal with other aspects of the industry. For example, Grenada and St. Vincent and the Grenadines may want to market the Grenadines jointly with Barbados and Martinique, but they may want to address air access on a broader regional basis. Similarly, the ECCU could jointly promote packages that provide chartered yacht services to cruise the islands at one end of the chain, and drop off services at the other.

E. Conclusion

47. The September 11 terrorists’ attacks caused the ECCU to suffer an unprecedented decline in output, increased unemployment, and a sharp deterioration in its fiscal position. This brought into clearer focus the underlying weaknesses in the tourism sector in these economies. It could also serve as a wake-up call to modernize the hotel industry and improve the quality of services to meet the competitive threat from newly emergent Caribbean destinations. The main conclusions and recommendations are the following:

  • Tourism is an important source of income, employment, government revenue, and serves as a major source of foreign exchange earnings in the ECCU and the rest of CARICOM. The September 11 crisis resulted in an unprecedented contraction in ECCU output, and contributed to a significant deterioration in its fiscal position.

  • Nevertheless, despite a significant decline in tourist arrivals and the economic crisis in its tow, the Caribbean region as whole maintained its market share of world tourist arrivals (namely, 2.9 percent), and its share of world tourist receipts increased, albeit marginally.

  • Despite the robustness of the Caribbean’s share of world tourism in the period post-September 11, the ECCU and its CARICOM partners have lost competitiveness in a global sense, as demonstrated by the reduction in the region’s world tourist arrivals share, and vis-à-vis newly emergent Caribbean destinations.

  • In order to enhance its external competitiveness and regain some of its lost ground, ECCU member states should adopt policies to address both price and non-price competitiveness.

Measures to address price competitiveness:

  • Given the prevailing fixed exchange rate regimes, the ECCU should seek to enhance wage competitiveness through wage restraint and strict adherence to wage protocols that tie wage awards directly to demonstrable gains in productivity.

  • The ECCU member states should pursue efforts to deregulate or privatize utility companies within the context of a regional regulatory framework—with a view to enhancing productive efficiency and cost competitiveness of tourism enterprises.

Measures to address non-price competitiveness include:

  • Enhancing the business climate, with a view to attracting more foreign direct investment to the region.

  • Continuing efforts to enhance the quality of service—including strengthening crime prevention and the establishment of an appropriate quality assurance framework.

  • Continuing participation in regional joint advertising/promotion campaigns—including the promotion of multiple island package bundles, designed to enhance the attractiveness and widen the appeal of Caribbean vacations.

  • Developing better tourist facilities and attractions designed to enhance the value added of cruise passengers.

References

  • Blanchard, M., 2002, “An Assessment of Competitiveness of the ECCU’s Tourism Industry,” Mimeo.

  • Hassan, S.S., 2000, “Determinants of Market Competitiveness in an Environmentally Sustainable Tourism Industry,” Journal of Travel Research, Vol. 38, No. 3. pp. 239–245.

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  • Helleiner, G.K., 1991, “Increasing International Competitiveness: A Conceptual Framework,” in Increasing the International Competitiveness of Exports from Caribbean Countries, ed. by Y. Wen and J. Sengupta (Washington, DC.: Economic Institute of the World Bank), pp. 17–26.

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    • Export Citation

  • Lancaster, K., 1971, Consumer Demand: A New Approach, (Columbia University Press: New York).

  • Porter, M.E., 1985, Competitive Advantage: Creating and Sustaining Superior Performance. (New York: The Free Press).

  • Vernon R., 1966, “International Investment and International Trade in the Product Cycle,” Quarterly Journal of Economics, Vol. 80, pp. 190–207.

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uA01app01fig01

Evolution of Real Effective Exchange Rates in the ECCU

Citation: IMF Staff Country Reports 2003, 088; 10.5089/9781451811643.002.A001

Apendix Table 1.

Tourist (Stay-Over) Arrivals (Thousands)

article image
Source Caribbean Tourism Organization.

Change calculated as a percentage of beginning of period “total Caribbean” cruise arrivals.

Anguilla is an Associate Merita of CARICOM

British Virgin Islands, Cayman Islands, and Turks and Caicos Islands are Asscoiate Members of CARICOM.

Haiti and Surjname are non-English Speaking Members of CARICOM.

Appendix Table 2.

Tourist (Stay-Over) Arrivals

(Percentage shares)

article image
Source Caribbean Tourism Organization.

Change calculated as a percentage of beginning of period “total Caribbean” cruise arrivals.

Anguilla is an Associate Member of CARICOM.

British Virgin Islands, Cayman Islands, and Turks and Caicos Islands are Associate Members of CARICOM.

Haiti and Suriname are non-English Speaking Members of CARICOM.

Appendix Table 3.

Cruise Passenger Arrivals (thousands)

article image
Source: Caribbean Tourism Organization.

Change calculated as a percentage of beginning of period “total Caribbean” cruise arrivals.

Total excludes Montsenat and Cuba, for which there was insufficient data.

British Virgin Island! and Caymen Islands are Associate Members of CARICOM.

Haiti is a non-English Speaking Members of CARICOM.

Appendix Table 4.

Cruise Passenger Arrivals 1/

(Percentage shares)

article image
Source: Caribbean Tourism Organization.

Total excludes Montserrat and Cuba, for which there was insufficient data.

British Virgin Islands and Cayman Islands are Associate Members of CARICOM.

Haiti is a non-English Speaking Members of CARICOM.

Appendix Table 5.

Estimates of Visitor Expenditure (US$ millions)

article image
Source Caribbean Tourism Organization.

Anguilla is an Associate Member of CARICOM.

British Virgin Islands, Cayman Islands, and Turks and Caicos Islands are Associate Members of CARICOM.

Haiti and Suriname are non-English Speaking Members of CARICOM.

Appendix Table 6.

Estimates of Visitor Expenditure (US$ millions)

(Percentage shares)

article image
Source: Caribbean Tourism Organization.

Anguilla is an Associate Member of CARICOM.

British Virgin Islands, Cayman Islands, and Turks and Caicos Islands are Associate Members of CARICOM.

Haiti and Suriname are non-English Speaking Members of CARICOM.

Appendix Table 7.

Rooms in Tourist Accommodation

article image
Source Caribbean Tourism Organization.

Anguilla is an Associate Member of CARICOM.

British Virgin Islands, Cayman Islands, and Turkis and Caicos Islands are Associate Members of CARICOM.

Haiti and Suriname are non-English Speaking Members of CAKJCOM.

Appendix Table 8.

Rooms in Tourist Accommodation

(Percentage shares)

article image
Source: Caribbean Tourism Organization.

Anguilla is an Associate Member of CARICOM.

British Virgin Islands, Cayman Islands, and Turks and Caicos Islands are Associate Members of CARICOM.

Haiti and Suriname are non-English Speaking Members of CARICOM.

Appendix Table 9.

Tourist (stop-over) and Cruise Arrivals in 2002 3/

article image
Source: Caribbean Tourism Organization. No cruise figures are reported

Non-resident air arrivals

Non-resident hotel registrations only

Figures are subject to revision by reporting countries

Preliminary data for the Bahamas
1

Prepared by Ruby Randall and Wendell Samuel (both WHD). This chapter is part of a longer working paper to be published later this year.

2

A thorough analysis of tourism’s impact on ECCU region would require an input/output analysis that assesses, first at the country level, the direct, indirect and induced effects on the real (output and investment), fiscal, and external sectors, and then aggregates the individual country outcomes by netting out intra-regional linkages. This would be a major undertaking, and is not the objective of the current study.

3

Information obtained from the CTO’s Tourism Economic Impact Analysis Project Draft Report, entitled “St. Lucia: Economic Impact of Visitor Expenditure—1998,” August 25, 2000.

4

It should be noted, that in the wake of the September 11 crisis, many hotels resorted to shortening the workweek of their staff in lieu of lay-offs, and that there has been heavy discounting of hotel room rates. These behaviors would be expected to alter the multipliers reported above.

5

The source for this data is the Caribbean Tourism Organization. Data refers specifically to stay-over tourist arrivals.

6

Measured as stay-over arrivals.

7

Data based on tourism receipts as recorded in the balance of payments.

8

This outcome is due in part to an increase in cruise passenger arrivals in 2001 and to the fact that the English-speaking Caribbean countries are traditionally high-end destinations.

9

Comparable world statistics for cruise passenger arrivals were not available.

10

The unavailability of data restricted the analysis of competitiveness to a few readily available indicators including relative growth rates of tourist arrivals and expenditure, market share and FDI flows into the sector

11

The increased frequency of hurricanes (5 during 1995-2000) and an emerging problem of crime and violence have also affected the performance of the sector.

12

Countries as small as these cannot afford to cater to mass tourism without destroying the environmental characteristics—quiet, pristine surroundings, uncluttered beaches, etc.—on which the industry is based.

13

Data for Antigua and Barbuda, Montserrat and Grenada are not available.

14

The Hospitality Report was compiled on a quarterly basis by Price Waterhouse for Antigua and Barbuda, Barbados, and St. Lucia but was discontinued in 1995.

15

The Sandals chain is an exception: they are on the cutting edge of quality service in the industry.

16

This type of advertising provides an externality and the level of expenditure would not be optimally provided by the private sector.

17

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

18

It is notable that while this provided some financial assistance to hotels, this measure did not serve as an additional financial incentive to visitors.

19

In Jamaica the subsidized credit scheme was funded by part of the funds returned to commercial banks when the reserve requirement was reduced.

20

Although BWIA is a Trinidadian airline, many ECCU countries depend on it to provide airlift, particularly from Canada and Europe, and have designated BWIA as their national carrier in air services agreements with third countries.

21

A high-level meeting of airline executives was convened to discuss cooperation between regional airlines.

22

Although some hotel associations have given rough estimates of job losses, there are no hard data on the extent of layoffs.

23

The marketing program plays on the words of a David Rudder calypso, which suggests that the world no longer needs islands. It is patterned on a similar program in the earlier 1990s, which coincided with a period of faster growth in Caribbean tourism.

24

The Caribbean Development Bank (CDB) made available US$8 million to borrowing members under a special window to offset the effects of 9/11.

25

There are several taxes on the same base, which often prove difficult to collect. For example, in Antigua and Barbuda there are three different hotel room taxes.

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Cover IMF Staff Country Reports
Eastern Caribbean Currency Union: Selected Issues
Author:
International Monetary Fund
Volume/Issue:
Volume 2003: Issue 088
Publisher:
International Monetary Fund
ISBN:
9781451811643
ISSN:
1934-7685
Pages:
130
DOI:
https://doi.org/10.5089/9781451811643.002

Evolution of Real Effective Exchange Rates in the ECCU