Tourism in the Post-Pandemic World: Economic Challenges and Opportunities for Asia-Pacific and the Western Hemisphere

Manuela Goretti; Lamin Y Leigh; Aleksandra Babii; Serhan Cevik; Stella Kaendera; Dirk V Muir; Sanaa Nadeem; Gonzalo Salinas

doi:10.5089/9781513561905.087.A001

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Tourism in the Post-Pandemic World

Economic Challenges and Opportunities for Asia-Pacific and the Western Hemisphere

Author:

Ms. Manuela Goretti

Ms. Manuela Goretti
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Mr. Lamin Y Leigh

Mr. Lamin Y Leigh
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Aleksandra Babii

Aleksandra Babii
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Mr. Serhan Cevik

Mr. Serhan Cevik
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https://orcid.org/0000-0002-2373-2023

Stella Kaendera

Stella Kaendera
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Mr. Dirk V Muir

Mr. Dirk V Muir
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Sanaa Nadeem

Sanaa Nadeemhttps://isni.org/isni/0000000404811396, International Monetary Fund

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Mr. Gonzalo Salinas

Mr. Gonzalo Salinas
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Publication Date:: 19 Feb 2021

ISBN:: 9781513561905

Language:: English

Keywords:: Tourism; Jobs; Diversification; COVID-19; Growth; Spillovers; tourism spending; health tourism; tourism service; viable tourism SME; yellow fever

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This departmental paper analyzes the impact of the COVID-19 pandemic on tourism in the Asia Pacific region, Latin America, and Caribbean countries. Many tourism dependent economies in these regions, including small states in the Pacific and the Caribbean, entered the pandemic with limited fiscal space, inadequate external buffers, and foreign exchange revenues extremely concentrated in tourism. The empirical analysis leverages on an augmented gravity model to draw lessons from past epidemics and finds that the impact of infectious diseases on tourism flows is much greater in developing countries than in advanced economies.

Abstract

Introduction

Tourism has become one of the world’s most important growth engines, accounting for more than 10 percent of global GDP directly and indirectly. Over the last decade, the number of travelers and related spending has increased significantly, bolstered by rising incomes, falling travel-related costs, and an increasing range of available tourist activities. The tourism sector is closely linked to others in the economy, including accommodation and dining, retail and marketing, and transportation and aviation, forming increasingly complex tourism supply chain. This departmental paper focuses on tourism-dependent countries (TDCs), where the contribution of tourism and related sectors was above 10 percent of GDP during 2016–18 and accounting for a large share of export revenues. Tourism also contributes significantly to employment, with above 300 million globally, providing critical jobs to youth and women and, in several higher-income economies, to a significant share of migrant workers. Moreover, considering the high degree of informality in many TDCs, employment in the tourism sector is likely to be even higher than reported.

The COVID-19 pandemic has had an enormous impact worldwide on the travel and tourism industry. The widespread containment and mitigation measures to slow the spread of the virus have severely affected travel and tourism. Although countries are slowly moving toward a phased relaxation of measures, the risk of sudden policy changes around air travel, visas, and quarantine requirements remain elevated, together with long-lasting confidence effects, especially among the older and more affluent travelers. The large economic and social costs of the pandemic will likely result in permanent scarring effects on TDCs—ushering in a post-pandemic “new normal.”

Although most TDCs will depend on global developments to exit the crisis, policy and institutional choices will play a critical role in the economic recovery. Tourist behavior is likely to change, with a shift away from high-density, long-haul, shorter-stay travel, which may raise the costs of travel and change the rate of return of tourism relative to other sectors, prompting a reallocation of capital and human resources to more viable sectors where feasible. This trend will have broader repercussions on other sectors, including accommodation, retail, and transportation. Despite the recent approval of COVID-19 vaccines in major advanced economies, confidence effects, including a looming uncertainty toward the likelihood of future epidemics, might persist. Many countries were already considering a shift toward more sustainable tourism, in view of ecological concerns and climate change risks, as well as a move to higher value-added tourism services. This juncture may present an opportunity to accelerate this shift to adapt to the post-pandemic normal.

A key aim of this paper is to understand the impact of the pandemic on the economy, both during the COVID-19-induced recession and the recovery phase. To that end, after drawing lessons from key stylized facts on the tourism industry and its repercussions for the rest of the economy in Chapter 1, the paper uses an augmented gravity model framework to understand the historical impact of infectious diseases on international tourism flows, in Chapter 2, and the IMF’s Global Integrated Monetary and Fiscal model (GIMF) to conduct forward-looking scenarios to assess the possible impacts on tourism and spillovers to the rest of the economy, in Chapter 3.

The paper also explores policy options to navigate the post-pandemic world, most notably its expected long-lasting scarring effects. Policies are considered during the pandemic shock, as lockdown and containment measures are phased out and tourism reopens, as well as in the long-term to address the long-term scarring faced by the tourism industry. Chapter 4 discusses policy options to rethink the tourism sector, including toward more health-oriented and eco-sustainable solutions for the economy as whole, and strengthen non-tourism sectors to partly offset any long-term decline on tourism. While country-specific initiatives will be critical to mitigate the scarring effects of the pandemic, the paper concludes by highlighting the need for global coordination, given the worldwide role of tourism as well as the inherent complexity of the global tourism supply chain.

Chapter 1 The Tourism Landscape

The Role of Tourism in the Global Economy before COVID -19

Driven by rising income levels and falling costs in aviation and accommodation, the number of international tourists rose to more than 1.5 billion by the end of 2019 from 680 million in 2000 (Figure 1).

Spending by international tourists amounted to nearly US$1.6 trillion as of the end of 2019. By source, most international tourists came from Europe and more recently from Asia, driven by China, which now accounts for a fifth of international tourism spending and tourist arrivals. By destination, Europe remained the most visited region, with Asia catching up as the fastest-growing destination for international tourism, followed by a significant share of regional travel within the Western Hemisphere. About three out of four international trips were taken within the same geographical region, with about half of travel undertaken for leisure, followed by visits with friends and relatives, and business travel (UNWTO 2019).

Domestic tourism comprises an even larger market than the international one globally, with more than 70 percent of total tourism spending in 2019 (Figure 2). Domestic tourism spending, that is, within the country of residence, has nearly doubled in value from US$2.2 trillion in 2005 to US$4.5 trillion by 2019; China is the leading market, accounting for over a fifth of such spending, followed by the United States, Germany, India, and Japan.

Tourism plays a pivotal economic role, particularly in the Asia-Pacific and Western Hemisphere regions. On average, tourism directly accounts for about 3½ percent of global GDP; according to the World Travel and Tourism Council (2020), this direct contribution “includes GDP generated by industries that deal directly with tourists, including hotels, travel agents, airlines and other passenger transport services, as well as the activities of restaurant and leisure industries that deal directly with tourists.” However, given tourism’s significant interlinkages with other sectors and complex supply chain— its indirect contribution, including capital investment, government spending in support of tourism activities, and supply chain effects, and induced contribution, including spending by those directly or indirectly employed by tourism—are sizeable. Thus, the total contribution of tourism accounting for direct, indirect, and induced components is estimated to extend to more than 10 percent of global GDP. For many countries, particularly the smaller island states in the Asia-Pacific and Caribbean regions, tourism represents by a large share the predominant source of growth and export revenues (Figure 3).

Tourism’s contribution to total employment is also significant, especially considering related sectors, with a high share of youth, women, and migrant workers:

The tourism sector contributes a sizable share to total employment in TDCs, including from related sectors. This contribution is particularly large in small island countries (Figure 3, panel 2). Tourism employs a high share of young workers (aged between 18 and 25) and is estimated to generate 1 out of 10 youth jobs (WTTC, 2019) (Figure 4, panel 1). Moreover, in many TDCs, women tend to comprise the majority of the sector’s workforce, accounting on average for 54 percent of those employed in the sector compared to 39 percent in the broader economy (Figure 4, panel 2). Women also tend to hold lower level or informal positions in the sector (UNWTO 2019).
The tourism sector is also characterized by low-skill intensity and a high degree of informality, which is due in part to its seasonality, combined with weak regulations and enforcement (Figure 4, panel 3). A large number of workers tend to be employed in the sector on a part-time or occasional basis, or as an additional job, and the sector is characterized by high turnover. The high degree of informality also suggests that the actual number of workers employed in the sector may be significantly larger than official figures.
In some countries, there is a significant share of migrant workers in the sector, notably lower-wage workers from neighboring countries or workers from rural areas within the same country. For example, it is estimated that 16 percent of tourism workers in the European Union and 20 percent in the United States are foreigners. In Australia, the tourism and hospitality industry are one of the largest users of temporary work visas. In Thailand, it is estimated that a fifth of workers in the hospitality sector come from lower-wage neighboring countries (Cambodia, Lao PDR and Myanmar). Such workers tend to have limited access to social safety nets. For example, a recent International Labour Organization survey of migrant workers in the Association of Southeast Asian Nations (ASEAN) region reveals that nearly 97 percent of unemployed migrants in the tourism sector have no access to their host country’s social safety nets (ILO 2020).

The confluence of these factors—the prevalence of women, young, and migrant workers, low skill intensity, and informal work arrangements—tend to explain the wage differential that exists in tourism and related sectors relative to other sectors in the economy (Figure 4, panel 4). For many countries where tourism has a high total contribution to employment, there also tends to be higher gender wage gap relative to the broader economy, particularly in lower-income countries (Figure 4, panel 2).

A large share of the tourism sector features limited buffers and access to finance in the face of shocks. Although there are large enterprises in the accommodation and airline sectors, the sector tends to be characterized by a high share of micro, small, and medium enterprises (MSMEs), often individually or family-owned, particularly in emerging and developing economies, notably in the accommodation, restaurant, and tours and services segments (OECD 2008). In Costa Rica, for example, 94 percent of hotel and lodging firms are classified as micro and small enterprises; in Thailand, SMEs comprise more than 90 percent of firms in the hospitality sector. Owing to their size and constrained access to finance—compared, for example, to large multinational groups—these companies have fewer resilience and diversification options to deal with shocks.

Prior to the COVID-19 outbreak, several TDCs were already characterized by macroeconomic and structural vulnerabilities. Although there is significant country diversity, many countries entered the pandemic with limited fiscal space and weak public sector balance sheets, together with inadequate external buffers and foreign exchange revenues highly concentrated in tourism, particularly small states in the Pacific and the Caribbean (Figure 5). Several also face longstanding structural challenges, such as rising inequality, infrastructure gaps (for example, Cambodia, Lao PDR, Myanmar, and Vietnam), high private debt (Thailand) and limited access to financing for SMEs, pervasive informality, and capacity constraints (small island states).

COVID -19: A Shock to Tourism Like No Other

The COVID-19 pandemic has had devastating repercussions on mobility and travel, because it is so contagious. The virus outbreak has prompted extensive containment measures to slow its spread. Long (usually two-week) quarantine requirements and the potential for unexpected health costs also serve to deter travelers by making trips longer and costlier. Although countries have moved toward a gradual sector-based relaxation of measures, depending on the contact intensity, hotels, retail, indoor gatherings (such as restaurants and entertainment) remain with restrictions or carry a high level of risk. Air travel remains constrained (with global fight numbers declining by 46 percent year over year by October 2020), and there remain entry restrictions on countries with high caseloads (Figure 6). The risk of sudden policy changes around visas and quarantine requirements remains elevated.

These measures, together with broader economic uncertainty, have led to a dramatic collapse in international tourist arrivals. According to preliminary data published by the United Nations World Tourism Organization (WTO), strict containment measures imposed to prevent and slow the spread of COVID-19 have already caused a fall of 70 percent in international tourist arrivals in the first eight months of 2020, with an 80 percent drop in August, compared to the same period in 2019 (Figure 7). UNWTO (2020) also suggests that a drop in tourist arrivals of 78 percent in 2020 would translate into a loss in visitor spending of US$1.2 trillion, placing more than 100 million direct tourism jobs at risk, many of them in MSMEs in the sector. By comparison, it is estimated that domestic tourism has recovered somewhat relative to international tourism, mainly because of lower domestic mobility restrictions. For example, as of July 2020 in the European Union, tourist nights by domestic travelers had fallen by about 40 percent compared to 70 percent by nonresidents relative to the previous year.

Community mobility and internet search data highlight the unprecedented impact of COVID-19 on travel and tourism. Considering the unparalleled and fast-evolving nature of this health crisis, big data sources, based on mobile phone usage and internet searches, provide valuable information to estimate the impact of the COVID-19 on international tourism at high frequency. Using community mobility reports released by Apple and Google (as well as other internet service providers like Baidu in China), it is possible to track the severe disruption caused by COVID-19 in mobility across the world in real-time. For example, the average decline in overall mobility relative to the pre-pandemic baseline reached as much as 47 percent in Asia-Pacific and 75 percent in the Western Hemisphere (Figure 8, panel 1). There is also a strong correlation between the spread of COVID-19 and the volume of travel-related internet searches (Figure 8, panel 2). According to the Google Trends data, the emergence of COVID-19 worldwide led to a collapse in internet searches related to travel, after a temporary spike in March, possibly due to re-bookings. Although consumers’ interest in travel started to recover during the summer, the second wave of the pandemic appears to have depressed travel-related internet searches again.

The shock to international travel and tourism is generating significant macroeconomic and social challenges. Small states in the Pacific and the Caribbean regions are expected to be the most severely hit, due to the high share of tourism in their economies in output and employment as well as external and fiscal positions (Figure 5). Given the high rate of informality in many of these economies particularly among women, the youth, and migrant workers, such groups are being more severely impacted from diminishing employment opportunities, especially when combined with lack of access to safety nets. Women may also be more likely to drop out of the labor force given increasing demands on domestic responsibilities related to the pandemic. Because of the contraction in international travel and tourism, migrant workers have been significantly hit, affecting also their families and countries dependent on their remittances—an important outward economic spillover channel to migrant-originating countries. Global remittances fell significantly in the second quarter of 2020, although they recovered in many countries in the third quarter as lockdowns in source and destination economies eased. Accordingly, the World Bank estimates that an additional 100 million people could be pushed into extreme poverty this year due to the impact of COVID-19.

Economic strains in MSMEs as much as larger-service industry firms, such as airlines, could have spillovers to the financial sector, further hampering the recovery. As the pandemic is protracted, liquidity problems can transform into solvency ones, straining the capacity of the tourism sector to repay its debts, further endangering the economic outlook. While MSMEs, as noted earlier, tend to be less resilient to shocks, the severity of this pandemic is also impacting large players (international hotel and restaurant chains, global and low-cost airlines, packaged tour operators). Monitoring and dealing with stressed or nonperforming loans in a timely manner will be critical to the recovery for all countries, but especially for those banking systems that entered the crisis with already weak balance sheets.

TDCs also vary greatly by tourism model and health capacity. Conceptually, countries can be positioned across a scale of the cost and density of tourism, such as low-cost mass tourism versus full-service (including niche) tourism (y axis in Figure 9). They can also be compared across the quality of their healthcare systems, including their responsiveness to health emergencies (x axis). The classification of tourist-dependent economies across these two dimensions provides a helpful framing device to analyze how international tourists may weigh their decision where to travel and the likely policy options countries can feasibly pursue. For example, between 2010 and 2015, out of a sample of 15 lower- and middle-income countries from the Asia-Pacific and the Western Hemisphere, countries have tended to improve their healthcare quality (three countries shifted to the right). However, it has been difficult for these countries to shift toward the more full-service model of tourism (one country), with more moving toward mass tourism (three countries).

As they are trying to mitigate the impact of the pandemic, many TDCs face an added threat from climate change (Figure 10). With the global average surface temperature rising by 1.1 degrees Celsius since 1880, risks of extreme weather events and large-scale disasters have increased across the world. TDCs are especially vulnerable given their reliance on vulnerable natural resources such as beaches and coral reefs, or particular weather patterns (beach and ski resorts). For example, Cevik and Ghazanchyan (2020) find that a one standard deviation increase in climate change vulnerability is associated with a decline of 9.2 percentage points in international tourism earnings (or a loss of 1.5 percent of GDP) in the Caribbean.

Chapter 2 Lessons from Past Epidemics

Analyzing the evolution of international tourism flows during past epidemics can help better understand the impact of COVID-19. Other infectious diseases have had significant economic effects across the world, including several pandemics in the 20th and 21st centuries caused by an influenza virus or a coronavirus. However, although the mortality rate for COVID-19 is found to be lower than past epidemics, it is having unprecedented health, social, and economic consequences, given its high contagion rate—as shown by the R₀ or reproduction number (Figure 11)—and global spread. Although past pandemics have generally been short-lived, how each country comes out of the current crisis will depend on policy choices made during the pandemic, the required adjustment, and the economic and institutional strength prior to COVID-19. Therefore, analyzing the evolution of international tourism flows following previous epidemics can shed light on the country-specific impact of the COVID-19 pandemic and improve its recovery trajectories.

An augmented gravity framework and data on previous infectious-disease episodes are used to predict international tourism flows, building on Cevik (2020). The standard gravity equation states that bilateral flows between two countries are proportionate to economic size and inversely proportionate to geographic distance (see Annex 2). Since the objective is to understand the effect of infectious diseases on international tourism, we augment the parsimonious gravity model with the number of confirmed infectious-disease cases scaled by population and additional control variables and use a large data set of 38,184 pairs of countries during 1995–2017.

Past infectious-disease episodes are found to have a significant negative effect on bilateral tourism flows across the world. A specification including only macroeconomic and demographic variables and standard gravity factors is presented in column (1) of Annex Table 2.1 as a point of baseline reference. The number of infectious diseases is then introduced into the regression in column (2) for Ebola, column (3) for malaria, column (4) for SARS, and column (5) for yellow fever.

Standard gravity indicators. The results demonstrate a consistent picture with the signs of all estimated parameters corresponding to their expected values across different specifications. The level of income and proximity between countries or geographical contiguity are positively associated with tourist flows. Cultural similarities and historical ties, proxied by common official language and colonial relations, as well as demographic factors, such population and life expectancy, also contribute to stronger tourism flows.
Role of infectious diseases. With regards to the main explanatory variable of interest, estimation results establish a significant effect of infectious-disease episodes on international tourism flows, but with variation in magnitude and statistical significance depending on the nature of the disease. The estimated coefficients on malaria and yellow fewer are considerably smaller in magnitude, whereas the coefficients on Ebola and SARS are found to be both statistically and economically significant. These results are robust to alternative estimations and specifications, including after controlling for health infrastructure (Annex Table 2.2–3). In the case of SARS, for example, a 10 percent increase in the number of confirmed cases leads, on average, to a reduction of 4.7 percent in international tourist arrivals (Table 1). There is, however, significant heterogeneity across country groups in the impact of pandemics on tourism, depending on the level of income and health infrastructure.

The estimated differences in how infectious diseases affect international tourism flows likely reflect disease-specific characteristics.

^{Table 1.}

Infectious Diseases and International Tourism: 2SLS-IV Estimations

Source: IMF staff estimates.

Vector of transmission. While malaria and yellow fever are transmitted by mosquitoes, Ebola and SARS—similarly to COVID-19—are spread from human to human. Accordingly, while malaria and yellow fever may be endemic in rural areas, Ebola and SARS could spread more easily in densely populated cities and airports.
Existence of treatment or vaccine. Although a vaccine for yellow fever and treatments for malaria exist, to the authors’ knowledge there is no such treatment or vaccine against Ebola or SARS. Consequently, infection risks of these diseases have a greater effect on international tourism flows, especially to countries with weak health infrastructure.
Temporary outbreak vs. endemic presence. When a disease is endemic like malaria and yellow fever, there is no point in delaying travel as long as precautions can be taken. Outbreaks of Ebola and SARS, on the other hand, are temporary in nature and, without any treatment or vaccine, incentivize tourists to delay visiting a particular country until the outbreak is over.

The impact of infectious disease is significantly higher in developing countries, notably in Asia, Latin America, and the Caribbean. Partitioning the sample into income groups and geographical regions highlights heterogeneity on how the risk of infectious diseases affects international tourism flows. These estimation results, presented in Annex Table 2.4, show a substantial contrast between advanced economies and developing countries. Although infectious diseases appear to have statistically insignificant effect on tourism flows to advanced economies, the magnitude and statistical significance of the impact of infectious diseases are much greater in developing countries, where such diseases tend to be more prevalent and health infrastructure lags behind (Figure 12).¹ For example, in the case of SARS, a 10 percent increase in the number of confirmed infections led to a decline of about 8 percent in international tourist arrivals to developing countries—almost twice as much as the average impact on all countries (Annex Table 2.4). These findings show systemic differences among geographical regions: the disease impact on international tourism flows is significantly greater in Asia, Latin America, and the Caribbean than the rest of the world.

The magnitude of these effects is likely to be much greater in the case of the highly contagious COVID-19. Every infectious disease is different in important ways, but there are significant similarities between COVID-19 and SARS, which belong to the same family of coronavirus. Scaling the estimated coefficient of SARS to the prevalence of COVID-19 as measured by the number of confirmed cases in population would yield an approximate decline of 82.5 percent in international tourism flows across the world (Figure 13). This is broadly consistent with the actual impact of –65 percent registered in the first half of 2020. These estimates for the impact of the COVID-19 pandemic on tourism, especially in developing countries, should be considered an upper bound. First, the COVID-19 pandemic is a global phenomenon, causing widespread infections and casualties across the world. Second, economic growth—a key determinant of international travel and tourism—is projected to decline by 7 percentage points in 2020 relative to 2019, while past epidemics lowered growth by 0.6 percentage points on average.

The pace and scope of recovery in tourism will depend on the evolution of the pandemic and cross-country policy response. The epidemiological path, duration, and magnitude of the COVID-19 pandemic remains extremely uncertain, making it far more challenging than any other crisis to estimate the recovery trajectory of international travel and tourism. In the case of SARS, for example, the outbreak disappeared within a year and tourism flows recovered quickly (Figure 14). In the case of COVID-19, however, bringing the pandemic under control and restoring the normal functioning of economic activity will depend on global efforts to ensure the swift deployment of vaccines and treatments and policy interventions that can help cushion income losses and address long-term scarring effects. Therefore, it is reasonable to assume that ascending back to pre-pandemic level will take multiple years and remain subject to greater uncertainty and setbacks.

Chapter 3 Analyzing Macroeconomic Scenarios Under the New Post-Pandemic World

A theoretical model can help identify potential macroeconomic scenarios and in turn draw policy implications. Using a large-scale macroeconomic model helps to better understand the impact of COVID-19 on the tourism sector and the broader economy relative to benchmark scenarios. Such a theoretical model is also not as bound by historical estimates of parameters like the gravity model, and can accommodate a unique shock like the pandemic, as well as provide some insights about the nature of long-term economic scarring. To that end, this paper uses a customized version of the IMF’s large-scale dynamic stochastic general equilibrium model, the Global Integrated Monetary and Fiscal model (GIMF). The customized framework includes a module for tourism, although without a direct epidemiological dimension.¹ First, a benchmark scenario is built broadly consistent with the assumptions and forecasts of the October 2020 World Economic Outlook (WEO) related to tourism to outline the collapse and one possible recovery path for global tourism, focusing on emerging markets and small developing states in the Asia-Pacific and Western Hemisphere regions. Second, a pair of alternative scenarios on the downside and the upside are used to highlight uncertainty about the COVID-19 shock and the post-pandemic recovery. Two policy scenarios presented in Chapter 4 demonstrate how governments could help shape the recovery.

The benchmark scenario assumes a near-total shutdown of tourism followed by an illustrative gradual recovery, hampered by permanent economic scarring. The sudden stop in tourism is caused by a shift in households’ preferences, deciding not to travel either domestically or abroad. The scenario does not combine the halt in travel and tourism with other pandemic-related shocks such as lockdowns that hamper manufacturing and the trade in goods (to use but one example). International tourism begins to resume in the second year, but the recovery is only gradual and limited in scope. The baseline assumption on the speed of recovery relies on a relatively equitable and consistent distribution of a COVID-19 vaccine that restores tourist confidence over several years. As a result of economic scarring, international tourism is expected to return near the pre-pandemic level after three years and reach its previous growth path a few years later in line with the IMF’s global projections presented in the October 2020 WEO.

The assumption as to long-term economic scarring is still difficult to assess at this stage of the pandemic, although there is support in recent literature. In this paper, economic scarring from tourism is presented as a reduction in productivity in the sector itself arising from additional costs to tourism operators and firms. These costs can include health and cleaning protocols, social distancing measures, and contactless measures for accommodation and food services. This is consistent with the emerging literature on economic scarring from the pandemic. Research by the World Bank (Dieppe, Kilik Celik, and Okou 2020) suggests that productivity after epidemics has declined in the past anywhere from 6 to 15 percent and could be worse after the COVID-19 pandemic owing to its global reach, the role of social distancing, and the compounding effects of financial stresses. There is also the theoretical model of Kozlowski, Veldkamp, and Venkateswaran (2020) that can endogenously produce a long-term, persistent, productivity decline based on a pandemic of the magnitude of the COVID-19 shock, which supports the assumptions here.² Absent a large body of reliable estimates for the magnitude of economic scarring within the tourism sector, the assumption is that, for a given allocation of capital and labor, the amount of tourism services produced would be 10 percent lower than before.

Regions with larger tourism sectors experience the largest losses while source countries have mixed results (Figure 15).³ The magnitudes of the losses are linked to the share of tourism, with the Pacific Islands and the Caribbean the hardest hit, although the impact in the other major tourism regions is still notable. This is even the case for advanced economies with significant tourism sectors, such as Australia and New Zealand and Europe. Some regions (Latin America and China in particular) are net importers of tourism services, so they actually experience increases in real GDP. However, their tourism sectors still strongly contract because of the cessation of tourist flows domestically and from abroad.

What drives the losses in tourism-dependent regions can vary between the domestic and external sectors, as best illustrated by the Caribbean and Pacific Island regions (Figure 16).⁴ Both regions’ real GDP falls by more than 20 percent. The fall in tourism leads to large falls in employment, which reduces household income and hence consumption, as most households are not able to smooth consumption (unlike in advanced economies). Investment is mainly related to tourism, so it also contracts. Since the tourism sector is relatively larger in the Pacific Islands, there is a larger wealth shock, leading to a significantly larger depreciation in the real effective exchange rate (REER). This is analogous to when oil exporters face a large fall in global oil demand. The Pacific Islands are expected to have a stronger net export response, with lower imports and higher exports from the shift in the REER. Comparing only real GDP for economies such as the Pacific Islands and the Caribbean masks the different impacts between the domestic and external sectors.

Many governments in the Pacific and Caribbean have also accumulated significant debt, whose burden is exacerbated by the COVID-19 shock and weighing on the recovery. The benchmark scenario assumes a deterioration in countries’ fiscal positions and a sharp increase in debt, due to the growth and exchange rate shocks. It is assumed that government’s discretionary spending is unchanged from pre-pandemic budget plans. On the other hand, both regions’ governments provide small automatic stabilizers. The share of government spending as a percent of GDP is higher in the Pacific Islands than in the Caribbean, so as real GDP recovers, the debt-to-GDP ratio returns faster to its pre-pandemic values in the Caribbean than in the Pacific Islands. However, while the benchmark scenario assumes that all the debt can be financed easily, at the (low) global interest rate, a mix of financing, including at better terms from development partners, and policy adjustment is more likely in many of regions’ countries, also given limited market access. If affordable financing were to be replaced by cuts in government consumption or social transfers, the fiscal position would not improve, while private consumption would be substantially weaker, in turn having negative impacts on real GDP and increasing the debt-to-GDP ratio.

Given the highly uncertain nature of the pandemic, both alternative upside and downside scenarios are considered.⁵ Most of the uncertainty stems from the length of the pandemic, and how the economy will recover. The global trough for the tourism sector is still in 2020, but the two alternative scenarios diverge from the benchmark as the recovery begins in 2021, due to the path of pandemic. There are clear upsides, from a large pent-up demand for tourism following the lockdowns across many countries, if the vaccine can be smoothly rolled out globally. If enough herd immunity is achieved by the second half of 2021, an earlier-than-expected return of mobility and travel to pre-pandemic levels is a distinct possibility. Nevertheless, there are still important downside risks, with greater long-term scarring effects, despite the positive news on vaccines, given the many outstanding unknowns about their effectiveness, as well as expected storage and distribution challenges in many developing economies.

The downside scenario sees a worse outcome from the pandemic. It features a slower recovery for tourism demand, coupled with differentiation by tourists between those regions that are perceived to have stronger healthcare systems, which leads to greater costs to firms in the tourism sector and reduces sectoral productivity by 20 percent, instead of only 10 percent in the benchmark. There is a larger permanent loss of GDP (Figure 17, solid lines). Those countries that tourists perceive as having weaker healthcare systems suffer even greater GDP losses. Because the tourism sector is permanently less productive even after a slow recovery, the recovery in employment slows considerably although it does return to its former levels eventually (Figure 17, dashed lines). Employment will overshoot in the short term even in the downside scenario, as firms try to move to profitability as quickly as possible by hiring more labor as investment takes time to increase the capital stock needed to produce more output.⁶

Conversely, the upside scenario considers a faster recovery for tourism demand and supply. There is a temporary surge in international tourism in 2021 because of pent-up consumer demand from the pandemic period. Moreover, economic scarring does not materialize in the upside scenario, with no productivity shock to the tourism sector. Real GDP and employment recover more rapidly, and to a higher level than in the benchmark (Figure 17), because of the surge in tourist demand, with no productivity constraints. For regions such as the Pacific Islands and the Caribbean, measured real GDP will not recover as much as other countries, although all of the components of real GDP (consumption, investment and exports) and real income do fully recover.⁷

Chapter 4 Policy Options Toward a New Normal

The Tourism Sector Challenge Post -COVID -19

While most TDCs will depend on global developments to exit the crisis, policy and institutional choices will also play a critical role in the economic recovery. Given the high degree of uncertainty surrounding the post-pandemic world and the expected deep and long-lasting economic scarring, TDCs will need to proactively identify and calibrate a well-sequenced and comprehensive set of policy solutions, in coordination with the private sector to establish and comply with health and safety protocols, while communicating those with clarity and consistency to potential travelers to rebuild their trust and confidence. Close coordination among sectors such as aviation, hospitality, and insurance will be also needed to adapt to the evolving health situations in specific countries. This section discusses a range of immediate and medium-term policy priorities, by both public and private sector, first to underpin support from financial sector, and then sequenced in three main phases (mitigation, reopening, and recovery), drawing early lessons and policy implications from selected case studies in the Asia-Pacific region (Fiji, Thailand, and Vanuatu) and Western Hemisphere (Costa Rica, Jamaica), as detailed in Annex 1.

Monitoring and supporting stressed firms early on will be critical to set the stage for a smooth recovery. As mentioned in Chapter 1, a protracted pandemic can turn firms’ liquidity stress into bankruptcies, if unaddressed, with important macro-financial spillovers. Supportive monetary and financial policies, aimed at creating a favorable environment for borrowers, can help support affected firms. Central banks can help through cuts in the policy rate, while financial authorities can use the flexibility embedded in existing regulations or providing temporary regulatory and supervisory measures, including using capital and liquidity buffers. However, the domestic financial sector may remain unable able to provide the entire support needed. Even with the tourism sector in financial distress, banks might be forced to cut back on lending and tighten lending standards, to protect and repair their balance sheets. If so, the recovery would likely have to depend even more than the usual on projects from development partners in small TDCs and tourism-specific fiscal support in those TDCs with sufficient fiscal space. Moreover, caution should be exercised not to relax loan classification (and definitions of nonperforming loans), provisioning rules, or debt restructuring processes (Awad and others 2020; Harjes and others 2020; Liu, Garrido, and DeLong 2020). Banks could provide firms with the opportunity to restructure debt, possibly facilitated through central bank funding support (Awad and others 2020, Bauer and others 2021, Muir and Nadeem forthcoming). Stronger and enhanced legal frameworks, including to allow for out-of-court procedures, can allow less-burdensome and more-expeditious restructuring of viable firms. Such measures are especially relevant to encourage viable tourism SMEs to determine ways of repositioning themselves in either the tourism or the broader corporate sector, preempting bankruptcies and liquidation (Bauer and others 2021, Garrido and others 2020).

In Phase 1, the crisis-mitigation phase, countries have introduced tourism-specific measures to benefit businesses and workers that help offset the immediate impact of the COVID-19 shock but may need to provide further support. Some countries have proactively provided fiscal stimulus and financial support for tourism and related sectors, including for workers, businesses, and national airlines—through either direct support to SMEs in the industry or through loans and guarantees for the industry. However, countries with more diversified economies and adequate fiscal space can consider more broad-based stimulus to activate the economy, even as the tourism sector is in recovery, as is analyzed in Box 1 for the ASEAN-5 countries.

Governments and the industry can consider launching initiatives to reignite the tourism sector prior to a reopening to regular tourism. In China, the nascent post-COVID-19 recovery in tourism is being led by domestic demand. Thailand has allocated US$700 million to spur domestic tourism, while Jamaica has been promoting discounted domestic travel and Fiji has introduced a subsidy of US$400 for the first 150,000 tourists. In Costa Rica, Congress approved a law that will move several national holidays to Mondays to extend weekends in 2020 and 2021 to boost domestic tourism. Barbados’ Welcome Stamp visa—a one-year residency permit that allows remote employees to live and work from the country—has generated significant demand and could potentially endure as the pandemic may have permanently boosted remote working across the world. While these efforts can help smooth the shock, they are unlikely to compensate for the decline of international tourism flows in smaller states and need to be phased in carefully, based on COVID-19 developments, to preempt second waves of infections.

^{Box 1.}

Illustrative Fiscal Stimulus Scenario to Offset the Impact of the Tourism Collapse

Fiscal support can help offset some of the losses in the economy. ASEAN-5 (Indonesia, Malaysia, Philippines, Thailand, and Vietnam, in this application) is an instructive case, as countries in the region are somewhat diversified and some fiscal space is available. Therefore, fiscal stimulus can at least temporarily shift employment and spending into other segments of the economy, as well as support the tourism sector. This option is not as accessible to less economically diversified regions or regions with tight fiscal space such as many Caribbean and Pacific island countries. The member countries of the ASEAN-5 have differing amounts of fiscal space (some much more limited than others) but could still consider this sort of stimulus because of the extraordinary circumstances of the pandemic.

Fiscal stimulus will be more beneficial when directed toward aiding the recovery and transition of the tourism sector. This concept can be illustrated in GIMF using two versions of a three-year fiscal stimulus package (3 percent of GDP for two years and 1.5 percent of GDP in the third year; Box Figure 1.1). A lower multiplier package (blue lines) focuses on public consumption, transfers to all households, and cuts in labor income taxes. A higher multiplier package (red lines) focuses on infrastructure investment, transfers targeted to poorer, liquidity-constrained households, and a cut in the value-added consumption tax (VAT). The higher multiplier package is more effective at addressing concerns in the tourism sector. Infrastructure investment directed at regions more dependent on tourism can help update facilities or shift the local economy into new areas and, unlike other subsidies through public consumption, provide a longer-term increase in economywide productivity. Transfers targeted to poorer households that are most likely unemployed (including those in tourism) can support their consumption now, and therefore with more spillovers to the economy as a whole. Households that are wealthier and employed are more likely to save instead to smooth consumption. A VAT cut has the same motivation—in the ASEAN-5, only wealthier households pay labor income taxes as a rule, so the multiplier will be more limited than reducing the VAT for all households. Moreover, a VAT cut could be targeted to support demand for tourism-related industries such as accommodation and restaurants.

Under both packages, the first-year real GDP loss is less severe than under the benchmark scenario 1.6 percent under the lower multiplier package, but only 0.8 percent under the higher multiplier package. The impact of the lower multiplier package is mostly from public consumption, but household consumption, the key driver of domestic tourism, plays a greater role under the higher multiplier package because of the targeted transfers and VAT cut. In the medium term, the higher multiplier package continues to have an impact from the infrastructure increase.

Gains come with the cost from higher public debt. But with the extra growth from the stimulus, the debt-to-GDP ratio increases by less than the cumulative deficit of 7.5 percent of GDP—6.6 percent of GDP under the lower multiplier package, and only 6.1 percent of GDP under the higher multiplier package.

As cases drop and economies gradually reopen in Phase 2, or the reopening phase, special attention should be devoted to health and hygiene protocols to facilitate social distancing norms. Stringent health protocols and certified hygiene standards can restore traveler confidence and ensure the safety of tourists and workers in the industry. Costa Rica and Jamaica introduced strict health and hygiene protocols for tourism-related activities earning them the World Travel and Tourism Council’s Safe Travels Seal. Thailand has strict quarantine requirements in place and programs with limited travel in the country for tourists. Costa Rica and Thailand appear to be well-positioned to accommodate new travel habits and protocols with high-quality healthcare systems, which can cater to visitors in need of medical assistance and thereby partly mitigate health concerns. However, capacity constraints, especially in healthcare systems, in many small states might complicate adoption of safety protocols, in turn delaying the reopening of their economies.

Travel bubbles could also facilitate a gradual reopening of tourism in regions with a low incidence of COVID-19 cases, despite some implementation challenges. Box 2 presents a potential application to Australia and New Zealand and the Pacific Islands, showing the role a travel bubble could have in speeding economic recovery for its members, with a reduced risk of a resurgence of COVID-19 cases. Nevertheless, travel bubbles also face several operational issues, for example, related to travel insurance policy and care responsibility. Collaboration among governments, airports, and airlines is vital for travel corridors to work effectively. Standards are important to ensure all stakeholders are following the same protocols, and real-time data are required to respond to issues with speed.

Once countries are in Phase 3, the recovery from the crisis, they will need to craft sustainable, long-term, durable policy solutions to the expected permanent scarring of the tourism industry. Once a safe reopening strategy has been successfully implemented, governments should transition from providing exceptional liquidity support to affected firms to promote and support corporate restructuring of viable ones. Given the heterogeneity of countries reliant on tourism, one policy will not be relevant for all at the same time; policies will need to be calibrated to each countries’ situation. Subject to available fiscal space, targeted fiscal interventions could be considered to support laid of workers moving from shrinking parts of the tourism sector to new and expanding sectors, such as digital services, including through job training. A policy taxonomy for long-term sustainability could embrace the granular elements discussed in the following paragraphs.

^{Box 2.}

Implementing a Travel Bubble

The recovery of tourism during the pandemic may involve the use of a “travel bubble.” A travel bubble is an arrangement in which regions with low (or no) incidence of COVID-19 allow the free flow of people (and thereby tourists) between their regions to the exclusion of the rest of the world. The travel bubble discussion has been prominent for Australia, New Zealand, and the Pacific Islands, because of their strong tourism links and their (relatively) low incidence of COVID-19. This box starts with a scenario worse than the benchmark, when tourism is shut down for the first two years, instead of only the first year, as the pandemic persists (Box Figure 2.1, purple lines). The alternative is for the two regions to pursue a travel bubble in the second year, before the general reopening of tourism begins in the third (Box Figure 2.1, orange lines). Both regions reopen their tourism sectors, internally and to each other. Given the outsize role of tourism in the Pacific Islands, they have very large GDP gains, while those in Australia and New Zealand are more modest, mostly from reviving investment. The Pacific Islands benefit more in terms of tourism exports as demand from Australia and New Zealand is greater than pre-COVID-19, as they lack choices to go elsewhere. Tourism exports by Australia and New Zealand barely move, as the Pacific Islands send relatively few tourists due to their income levels and small size, as was the case before the pandemic. However, tourism still recovers as the Australia–New Zealand linkages drive the overall rise (in GIMF, modelled as “domestic tourism” as both countries are treated as a single region) under the travel bubble. The change in tourism patterns between the two regions begin to revert to their pre-COVID-19 levels with the gradual global reopening beginning in Year 3, in which they participate as well. Another benefit that cannot be quantified here: the elimination of the risk of COVID-19 cases caused by tourists from outside the bubble.

Strengthening TDCs’ health systems can enhance their attractiveness in a post-COVID-19 era, while promoting a health tourism industry in some. Early detection, treatments, and social distancing should continue to improve COVID-19 health outcomes. A global solution would help facilitate and accelerate the production and distribution of a vaccine as a global public good and would facilitate the complementary macro and financial policies discussed in this paper. It would also minimize the risks of crowding out many small and highly-tourism based economies with weak healthcare systems who could face delayed vaccine access with limited storage capabilities. In countries with relatively weak healthcare infrastructure, governments should support the building, upgrading and accreditation of healthcare facilities, capacity building of medical personnel and support staff, and promotion of measures to ensure the availability and access to quality medicines and diagnostic equipment. These upgrades could send a strong signal to tourists that they would be taken care of in the event of health emergencies (moving their economies to the right quadrants in Figure 9). Countries with relatively strong health systems and important tourist attractions such as Costa Rica or Thailand are well placed to develop and enhance health tourism potential. Accreditation of health facilities by reputable institutions is important to lure visitors for a variety of medical treatments. Political stability and general efforts to enhance infrastructure and education, especially medical education, are similarly important.

Greater focus on low-density and eco-sustainable tourism services can help reduce health risks. Adjusting to a new business model will require a coherent, multi-sectoral strategy involving the industry, the private sector, government, and civil society to find the right balance for countries and embed those plans in national development frameworks. A focus on eco-tourism where possible, is warranted because it is a fast-growing and higher value-added industry, with significant demand by high-income foreigners in advanced economies who will likely receive a vaccine early and return to travel more quickly. This is already a key element of Costa Rica’s tourism strategy, which has been focusing on eco-sustainability and reforestation underpinned by extensive marketing campaigns to enhance the country’s potential ecotourism locations and ensure their sustainability including cooperation with international researchers to understand and ensure sustainability of its biology and natural assets. The Costa Rican government has also been attentive to developing needed infrastructure to access ecotourism sites and provided business development advisory to enhance the quality of services supporting ecotourism and enhancing its social impact. In Thailand, ongoing development plans embed a shift from mass tourism to a more niche and higher-value added tourism to move up the value chain and also to reduce the carbon footprint and the damage to natural resources. This does not mean that mass tourism will have to stop altogether, however, all countries will have to explore ways to manage tourism in a more sustainable manner, promoting social distancing. Political stability and overall efforts to enhance the country’s infrastructure and human capital will help countries stand out relative to other destinations with similarly attractive natural assets.

Technological innovation would ensure the safety and protection of tourists and workers in the industry and enhance access to information to stay on top of disruptions and rapid changes. This requires that industry, governments, and tourists work together to create transparency and enable seamless data flow. Countries are already leveraging digital resources to share relevant information, enhance contact tracing, and support touchless service delivery (for example, digital concierge) that can be especially valuable for large resorts and mass-tourism destinations. Technology can also facilitate a shift toward digitally self-guided tourism, that does not require group travel and is therefore consistent with social distancing norms that are likely to persist for a long period. As more tourism-related transactions go digital, it will be vital that SMEs accelerate integrating digital capabilities into their businesses, bridging the digital divide. Automation will likely make obsolete a number of jobs in the sector, change the tasks and the nature of work for others, but also create new job opportunities. As Ivanov (2020) points out, the impact of automation on jobs will depend on the balance of substitution and enhancement effects in the tourism industry. As a result, reskilling and training tourism employees to interact with the digital resources and adapt to different customer service requirements will be critical to adjust to the new normal, mitigating labor market dislocations. Digitalization can also help facilitate greater access to opportunities to women, for example, through telework, broadening inclusion.

What Is the Scope for Strengthening Other Sectors of the Economy?¹

Aside from diversifying within the tourism sector, TDCs could offset the impact of a permanent decline in arrivals by strengthening other sectors. Many TDCs, including some small countries, have already significant non-tourism exports per capita relative to other countries (Figure 18). Natural resources are abundant in some of them (Chile, Mexico) and, if reserves allow, they could further expand these exports to offset any long-term tourism decline (Annex Figure 4.1). Many others, including few micro-states, have significant non-commodity goods (for example, agriculture, fisheries, and manufacturing products) and non-tourism service exports. On the latter, however, small TDCs tend to rely on passport sales and financial services benefiting from low taxation, which are subject to risks. Further diversification could help strengthen resilience to tourism volatility.

However, while some small states have significant non-tourism exports per capita, their size and high tourism dominance limit their potential for a substantial diversification. Tourism exports per capita in most small TDCs are so high that they are multiple times higher than manufacturing exports in successful East Asian exporters like Malaysia and Thailand. As a result, rebalancing their export baskets would require a significant structural adjustment.² Moreover, some microstates have labor forces in the tens of thousands, which are already directly or indirectly employed in the tourism cluster. Even in small and microstates with substantial non-tourism exports, such as Mauritius, Seychelles, or St. Kitts and Nevis, tourism dominates their export baskets. That said, despite these challenges, partly strengthening other export sectors can still help offset to some extent a potential long-term decline in tourist arrivals.³

A natural option to foster export diversification would be to enhance tourism linkages to other sectors and thus increase domestic value added. Stronger links between tourism demand and locally produced agriculture, manufacturing, and entertainment could increase domestic production.⁴ This requires understanding local supply chains and identifying constraints on tourism linkages with the local economy. For example, one obstacle for Caribbean farmers to supply agricultural products to the hotels is their limited capacity to consistently produce high-quality products in large quantity (JSIF 2015; Ford and Dorodnykh 2016; Hans, Stern, and Weiss 2016). Poor market information and a rudimentary market structure reduce buyers’ incentives to purchase locally. To strengthen the connection between tourism and agriculture, the Jamaican authorities launched the Agri-linkages Exchange (ALEX) online platform that allows buyers within the hotel industry to directly purchase goods from local farmers. Such information and communication technologies can be used to match hotels’ demand for fresh food with local suppliers. Although such policies would not reduce a country’s dependency on the tourism sector, they would promote an increase in GDP for a given level of tourist arrivals, especially for small states with limited resources to develop new products or upgrade existing sectors.

When feasible, TDCs can also enhance exports through quality upgrades or expansion of existing products. The quality of the goods produced by a country is linked to its level of economic development (IMF 2014, Henn and others 2020). Many TDCs have significant scope for quality upgrade across several export sectors, including food and live animals, crude materials, machinery, and manufacturing goods (Figure 19 and Annex Figure 4.4). Upgrading the quality of agricultural and manufacturing products might also enhance the tourism-sector linkages with the rest of the economy—it could make local supplies more attractive for hotels and resorts. At the same time, countries that have capacity to produce goods already close to the world quality frontier might have scope to further expand production and market shares in these sectors. For example, some micro-states in the Caribbean produce high-quality machinery and manufactured goods, including ships and boats and measuring instruments.

Development of new products in many TDCs can foster innovations and human capital, but can prove more challenging, especially for small states. Hausmann and others (2014) argue that countries would normally tend to move from existing products to new products that require similar know-how, as this demands a smaller amount of additional production knowledge. Accordingly, they find that existing production capabilities, as reflected in the diversity and complexity of a country’s existing export basket, determine its ease of developing new products, with the greater gains arising from a move toward more complex products. As presented in Annex Figure 4.2, several TDCs, such as Cambodia, Dominican Republic, Honduras, Jamaica, Nicaragua, Mongolia, and Panama do not have very complex export baskets and have limited options to move to more complex products. For example, Jamaica is connected to a few production opportunities, with industrial machinery products and plastics having the highest potential (Annex Figure 4.3). Agricultural products have smaller product complexity and opportunity gains for Jamaica, but smaller distance to existing know-how.

Although it is difficult to determine in advance whether TDCs should specifically nurture non-tourism rather than tourism exports, they can seek to foster overall exports development. TDCs can increase their exports levels, as well as their quality and complexity, by strengthening export diversification determinants identified in the literature (see Annex Figure 4.5). Export development is expected to be easier for Central American and Caribbean countries because of their proximity to the US market, whereas Pacific islands and

Southern Cone countries (for example, Chile and Uruguay) may need to rely more on exports of services, which are less penalized by distance. Regardless of their geographical location, all TDCs could enhance exports and sectoral allocation flexibility by:

Strengthening education, in general by expanding educational attainment but also paying attention to retraining programs that allow for swifter sector reallocation especially in a scenario of declining tourism. Greater opportunities for vocational training can especially benefit women and strengthen female labor force participation.
Upgrading ports and telecommunications infrastructure, the latter being key to nurture the digital economy. Building infrastructure resilient to natural disasters is particularly important for many TDCs, for both their tourism and non-tourism activities, as they are highly vulnerable to these events.⁵
Eliminating policy bias unduly favoring tourism relative to other sectors. Most TDCs have scope to lower their relatively high average tariffs (about 10 percent), while others could reduce existing bias on imports tariffs and overall taxation that favors tourism, leveling the playing field.
Reducing labor market rigidities, which are particularly high in Latin America and the Caribbean, not only to strengthen competitiveness but also to allow for any needed sector reallocation. Flexible labor policy arrangements can help ensure competitive unit labor costs, especially in Caribbean countries with strong unionization.

Implementing these and other export promotion policies can be particularly challenging for small TDCs, given their more limited capacity to provide the public services that are key to support export industries. Cooperation among regional peers can help address the constraints imposed by low economies of scale on export competitiveness. It has been also observed that small states strongly compete among themselves to attract foreign direct investment through tax incentives or to sell citizenships by lowering fees and other requirements, which entails large fiscal costs while economic benefits are marginal (IMF 2019). Regional agreements on harmonization of fiscal incentives and overall coordination can help overcome their collective action problem. Caribbean countries have been working toward further integration including through the establishment of CARICOM’s Single Market and Economy in 2001. The Pacific Agreement on Closer Economic Relations (PACER Plus) is establishing a comprehensive free trade agreement covering goods, services, and investment that intends to deepen regional economic integration for Pacific Island countries. The PACER Plus opened for signatures in June 2017, and entered into force in December 2020 with Australia, Cook Islands, Kiribati, New Zealand, Niue, Samoa, Solomon Islands, and Tonga.

Because broad policies and institutional choices are rather horizontal, they do not require the government to target specific non-tourism sectors, and they can foster tourism exports. Since strengthening some of these areas would require public investments, support from larger countries as well as development partners is critical in many countries facing limited fiscal space. Specific policies would need to be multifaceted, and could involve developing new capabilities, leapfrogging to higher-quality export ladders, using new digital economy tools. In many TDCs, this could also be more effectively done with support from development partners.

Conclusion

The recovery in international travel and tourism will be protracted and subject to a high degree of uncertainty. The analysis presented in this paper shows that past infectious diseases had a significant negative effect on international tourism flows worldwide, varying according to disease-specific characteristics such as vector of transmission, existence of treatment or vaccine, and the nature of the pandemic. The magnitude of this effect is much greater in the case of COVID-19, given its highly contagious spread throughout populations across the world. Furthermore, the empirical evidence from past epidemics is also in line with the model-based scenario analysis that shows a gradual recovery, hampered by permanent economic scarring, after a near-total shutdown of the tourism industry. There are also important upsides to the outlook, with the confluence of a large pent-up demand on tourism and rapid advancements on vaccine rollout across many countries leading to a faster return of mobility and travel to pre-pandemic levels, minimizing risks of long-term economic scarring.

Fiscal and macro-financial policies can play a critical role in mitigating the deep and long-lasting economic scarring in many tourism-dependent economies. Carefully designed fiscal stimulus targeted to help the ailing tourism sector would be needed in many such economies, while being mindful of available fiscal policy space and debt sustainability concerns. Targeted policies to address the pandemic impact on the youth and women, including through digitalization, can broaden inclusion and help the recovery. Monetary and financial policies can also play a critical role in providing credit relief to borrowers. However, the key for policymakers is to monitor closely the health of the corporate and financial sector, with early interventions and restructuring of distressed but viable firms, before they approach insolvency, to mitigate macro-financial spillovers. Given the limited fiscal resources in many countries and the need to avoid hindering resource allocation, governments’ interventions should be aimed at solvent strategic firms facing pandemic-related difficulties. There might also be a need explore opportunities for regulatory reforms to mitigate the economic scarring effect of the COVID-19 pandemic.

Countries will need to rethink the tourism model, while creating opportunities for diversification within and beyond the industry, through policy support and structural reforms. No one-size-fits-all solution can rejuvenate the tourism sector in every country. The new normal for international tourism will certainly differ from country to country—and even within a country. Thus, this paper has crafted a policy taxonomy for long-term sustainability to embrace the granular and idiosyncratic elements of the transition. The pace and scope of recovery in most tourism-dependent economies will of course depend on global developments, but policy and institutional choices will also play a critical role in shaping and driving the post-pandemic economic recovery. Beyond the initial response designed to mitigate the immediate impact of the pandemic, the focus needs to be on developing long-term policy solutions to heal the scars of COVID-19 and create the new normal for the tourism industry by strengthening healthcare systems, shifting to sustainable tourism models, investing in new technologies, and diversifying within and away from the tourism industry to avoid dependence on a single sector of the economy.

Sustainable and broad-based recovery in international travel and tourism requires global cooperation. Although the immediate priority at the global level is to produce, purchase, and distribute medical treatments and vaccines to halt the COVID-19, the pandemic offers an opportunity to explore long-term solutions to the pandemic and to restructure and rebuild tourism to suit the needs of more-resilient and environment-friendly economies. Global cooperation and guidelines on health and safety protocols, and secure platforms that unify a consortium of individuals, governments, and the travel industry in sharing information would provide tourists with good practice guides and information on travel requirements—such as a negative viral test and health insurance coverage.

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Tourism in the Post-Pandemic World: Economic Challenges and Opportunities for Asia-Pacific and the Western Hemisphere

Author:

Ms. Manuela Goretti

Mr. Lamin Y Leigh

Aleksandra Babii

Mr. Serhan Cevik

Stella Kaendera

Mr. Dirk V Muir

Sanaa Nadeem

, and

Mr. Gonzalo Salinas

Volume/Issue:: Volume 2021: Issue 002

Publisher:: International Monetary Fund

ISBN:: 9781513561905

ISSN:: 2616-5333

Pages:: 115

DOI:: https://doi.org/10.5089/9781513561905.087

Keywords
Introduction
Chapter 1 The Tourism Landscape
- The Role of Tourism in the Global Economy before COVID -19
- COVID -19: A Shock to Tourism Like No Other
Chapter 2 Lessons from Past Epidemics
Chapter 3 Analyzing Macroeconomic Scenarios Under the New Post-Pandemic World
Chapter 4 Policy Options Toward a New Normal

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^{Figure 1.}

International Tourism by Source and Destination

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^{Figure 2.}

Domestic Tourism Spending by Country

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^{Figure 3.}

Tourism in Selected Asia-Pacific and Western Hemisphere Countries, 2018

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^{Figure 4.}

Tourism and Employment in Selected Countries

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^{Figure 5.}

Macroeconomic Initial Conditions in Tourism-Dependent Economies

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^{Figure 6.}

Global Scheduled Flights, Major Airline Hubs

(Percentage change, year-over-year)

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^{Figure 7.}

International Tourism Flows as of August 2020

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^{Figure 8.}

COVID-19, Mobility, and Internet Searches on Travel

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^{Figure 9.}

Tourism Differentiation and Healthcare

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^{Figure 10.}

Vulnerability to Climate-Related Risks in Tourism-Dependent Economies

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^{Figure 11.}

Past Epidemics: Total Deaths and Contagiousness

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^{Figure 12.}

Impact of SARS on Tourism Flows¹

(Coefficient)

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^{Figure 13.}

Potential Impact of COVID-19 on International Tourism Flows

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^{Figure 14.}

SARS and International Tourism

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^{Figure 15.}

Benchmark Scenario—Impact on Real GDP, Globally