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Productivity Matters Part IV: Tourism

Over the past few installments of this conversation on the role that productivity and efficiency (measured by Total Factor Productivity, TFP) have in the economic growth debate, we’ve done two things. Firstly, by using the work of Abdychev et. al (2015)—entitled “Increasing Productivity Growth In Middle Income Countries”—we’ve established the significance of productivity and efficiency as it pertains to economic growth.

Abdychevet. al had put it this way: “The decline in the contribution of total factor productivity (TFP) to growth is largely responsible for the slowdown in trend growth in many [Small and Middle-Income Countries], which highlights the need for policy actions to reinvigorate productivity growth”.

Abdychev et al’s (2015) findings were not really different from those of Thacker et. al (2012), who focused exclusively on the role that productivity and efficiency (again, measured by TFP in these studies) play in the growth process. Thacker et al stated:
“Without adjusting for the hurricane damages TFP accounted only for 22.7 percent of total Caribbean growth from 1970 to 2007, while the adjustment [for hurricane damage] increases the contribution of TFP to growth by 2.5 percentage points to 25.2 percent.”

Both studies referenced in this conversation rank TFP right up there with other factors such as labor and capital, in terms of its importance to economic growth. Now, this column, Ripple Effect, promotes the Inclusive Growth framework, for which growth is a pivotal component in the efforts to reduce inequality and poverty; therefore, I am a natural proponent of measures to improve Belize’s growth rates.
Continuing on the growth motif, a recently published Inter-American Development Bank (IDB) report by Dougal Martin (June 2015), “Rekindling Economic Growth in Belize”, underscored the fact that if living standards in Belize are going to increase—and not continue decline in respect to the United States’ income per capita levels—we need to double our average growth rate. Martin (2015) put it this way:

“Belize’s economy must grow by at least 5 percent in real terms per annum to stabilize living standards at 8.7 percent of the U.S. level. If economic growth were to continue at a rate of 2.5 [i.e. the average of Belize’s growth between 2007 and 2014], Belize GDP per capita (an indicator often used to measure living standards) would decline to 7.6 percent of the U.S. level by 2020.” We will discuss the Martin (2015) report in later installments of this conversation; but, for now, I will keep the focus specifically on TFP (which Martin also gives some attention to).

The second part of this line of talk has looked at those things that affect TFP growth rates. As used by Abdychevet. al, these are (i) Macroeconomic conditions, (ii) Openness and Technology Creation and Transfer, (iii) Quality of Labor Inputs and Efficient Allocation, (iv) Female Labor Force Participation, (v) Sectoral Composition and Structural Change, (vi) Monetary and Financial development, and (vii) Institution and Regulatory Factors.

In Parts Two and Three of this topic, we’ve looked specifically at Macroeconomic conditions and Quality of Labor Inputs (more specifically, skill mismatch) (see Reporter’s July 19th, 2015 Issue or visit rippleeffectbelize.com).

Tourism and
Productivity
With all the above in tow—including Martin’s (2015) emphasis placed on economic growth—we turn our attention in this Ripple to the role that Tourism plays. To do so, let’s return to the study by Thacker et. al (2012), “Caribbean Growth in an International Perspective: The Role of Tourism and Size”.
They had found that tourism doesn’t only have a significantly positive impact on Caribbean countries’ growth rates; it also affects productivity levels within the region. “The volume of [tourist] arrivals has a more pronounced effect on productivity than the one from high-end tourism (given by receipts per tourist),” they reported. “Although both measures of tourism [i.e. volumeand high-end tourism] have a positive effect on productivity, the one from tourist arrivals is 5 times bigger than the one from receipts per tourist. This suggests that although high-end tourism will bring some productivity improvements, it is through the volume of arrivals that the Caribbean countries will find a much needed boost to productivity” (p. 18).

In Belize’s case, since its original emergence in the mid 1980’s, tourism has grown to become “the largest earner of foreign exchange, with travel earnings accounting for 41 percent of total exports of goods and services from 2008 to 2013” (Martin 2015, p. 12).

Scope for
improvements
Tourism, then, definitely can be seen as the engine of growth, both for its effects on increasing productivity and for its effects on GDP growth itself. It is for this reason that Thacker et. al concluded that priority ought to be given to “enhancing product quality in the tourism sector either through improvements in existing products or developing new product”.
Belize, fortunately, has already bought into the gospel of tourism, and is, therefore, on the right track in this regard. However, as several studies have stated of both the region and of Belize, there is scope for the sector to be expanded. For instance, one area of interest is as it relates to diversifying Belize’s origin markets for tourist arrivals.

With well over two-thirds of our tourists coming from the North American markets, studies have suggested that Belize should actively seek out ways to expand to other markets (for example, see Metzgen, 2012). More precisely, Metzgen’s study, entitled “Belize: 30 Year Retrospect and Challenges Ahead,” stated:
“Specifically, Belize’s overnight arrivals are the lowest among comparators. As a consequence tourism expenditure per capita in Belize is low RELATIVE to these comparators, suggesting that there is scope for expanding the overnight tourism product … [a] potential channel for upgrading the tourism basket, concerns expanding the number of origin markets to target overnight visitors from countries with attributes different than those of Belize’s main origin market—North America. In this regard, consideration might be given to tapping European and Asia markets for overnight visitors.”

Metzgen (2012) distinguished between “short haul visitors” from North America, and “long-haul travelers” from other markets, underscoring the fact that research has indicated that the latter group’s demand for tourism product “is less sensitive to income and price changes”. This speaks to the need to offset the country’s vulnerability to external shocks. Therefore, it is suggested that “diversification into Europe (and Asia) would also reduce Belize’s vulnerability which is currently strongly linked to the US economy” (Metzgen 2012, p. 20).

If we agree with Thacker et. al (2012) regarding the ability of increased tourist arrivals to improve productivity, then Metzgen’s statements carry weight for our discussion on productivity—which by extension still brings us back to the discussion on growth.

Addressing
Volatility
But not only do the two separate researches converge in terms of the need for increasing arrival numbers, they both concurred on tourism’s ability to address volatility.
As Thacker et. al (2012) pointed out, there are risks for having the demand for tourism hinged on the economic realities in “source countries”. It stands to reason that such dependence could increase the region’s and, of course, Belize’s volatility to slumps in our origin markets’ business cycles.
The results from the study by Thacker et. al (2012), however, revealed an opposite effect. “It appears that tourism not only raises per capita GDP growth but may also HELP to REDUCE its volatility. In particular, it seems that specializing in the supply of tourism services has an unambiguously positive effect for the countries that have adopted this strategy for their economic development.”

So while inflation and government spending are found to increase the levels of volatility in growth, the reverse is true for tourism: as the tourism sector grows, Thacker et. al found evidence that economies’ economic growth tend to stabilize.
Natural Gift

Obviously, if we’re going to talk about increasing tourist arrivals, there are several infrastructural and even environmental factors that need to be considered. However, what is most impressive about Belize is her ability to have grown this industry as much as it did with such heavy emphasis on one primary origin market. What happens when the diversification advice is fully materialized?

Nonetheless, for both economic growth purposes as well as increasing productivity levels, tourism deserves its place in the spot light. And considering Martin’s (2015) recommendation for Belize to increase its average growth rate to about 5 percent, if we are going to stabilize the living standards of the Belizean people, the importance of the tourism industry as it pertains to productivity and growth is further augmented.

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