Better air and sea transportation connectivity could signficantly boost goods trade and tourism for Caribbean countries, including Barbados, and ultimately facilitate more economic diversification and resilience.
For tourism, a ten per cent increase in passenger seat or flight capacity tends to lead to an increase in tourism arrivals by two per cent in a month, and the effect can rise up to six per cent over time within a year as the adjustments take place, according to a new study.
The research, titled Mind The Mind The Gaps: Caribbean Trade Patterns And The Connectivity Constraint, conducted jointly by the International Monetary Fund (IMF) and Eastern Caribbean Central Bank, also concluded that weak connectivity “helps explain why Caribbean countries remain highly dependent on trade with nearby partner countries”.
The findings were presented by IMF senior economist JaeBin Ahn in an Analytical Corner presentation during the recent IMF-World Bank annual meetings in Bangkok, Thailand.
Ahn, who works in the IMF’s Western Hemisphere Department that covers the Caribbean, first made the observation that “while Caribbean countries import a large share of goods they consume, these imports often come from very narrow set of source countries”.
The researchers utilised the Herfindahl–Hirschman Index, which the economist explained “basically measures how concentrated their import sources are high value means they are importing from fewer countries, and low value means they are pretty much diversified”.
This results showed that there was high import concentration in Caribbean countries, which mattered, he noted, “because that means they are highly exposed to shocks that can hit a few key trading partners”.
“Similarly, while tourism is their major export, over three quarters of total tourists that arrive in the region come from just two countries, [United States] and Canada, making it highly sensitive to economic conditions in these two countries,” he said.
Ahn then pointed out that according to the Liner Shipping Connectivity Index, Caribbean countries tend to rank well below the global average and that “not surprisingly, such low and weak connectivity translates to high shipping cost”.
“For many countries in the region, it’s about twice the global average, and for some countries, it can be almost three times as high, and air connectivity is not too different,” he said.
“Measured by flight capacity, we find that Caribbean destinations are much less connected to the world compared to other destinations in the world, even after taking into account their economic and geographic characteristics.”
The economist then used his presenation to connect the dots between high import concentration and weak connectivity in the region, starting with the purchase of goods.
“For goods import, we apply a standard gravity model, which is based on very simple idea that large countries tend to trade more with each other, whereas countries that are farther apart tends to trade less, and our baseline estimation result confirms this intuition,” Ahn said.
Effects amplified
“But here’s where it gets more interesting: distance penalises Caribbean trade much more than it does elsewhere in the world. In other words, the adverse effect of distance is amplified for Caribbean countries due to their weak connectivity.
“To illustrate the result, we compare actual trade flows with predicted flows from the gravity model. This basically allows us to evaluate whether the region trades more or less than predicted by economic and geographic fundamentals, and the results are striking.”
The economist explained: “It turns out that Caribbean countries tend to trade more with partners in the region than predicted by the model, and the opposite is true for their trade with partners outside the region.
“However, once we take into account their weak connectivity in the region, the picture changes dramatically. The apparent over-trading with partners within the region and under-trading with partners outside the region largely disappear.”
He said the bottom line of this exercise was that “weak connectivity helps explain why Caribbean countries remain highly dependent on trade with nearby partner countries”.
Next in the presentation was the implications this had for tourism, by estimating the effect of air connectivity on the industry’s performance in Caribbean economies.
Ahn noted that “identifying the causality is a little bit more challenging because airlines tend to add passenger seats when they expect strong demand”.
“At the same time, an increase in passenger seats themselves can attract more tourists. That is, the causality is running in both directions. So, to separate the cause from effect, we use a statistical approach that helps us to isolate changes in flight capacity that are unrelated to local tourism demand shocks,” he said.
“So once we address this identification challenge, then results look clear. A ten per cent increase in passenger seat or flight capacity tends to lead to an increase in tourism arrivals by two per cent in a month, and the effect can rise up to six per cent over time within a year as the adjustments take place.”
He added: “So, main takeaway from this exercise is that air connectivity doesn’t just follow tourism demand; it is a key driver of tourism performance.”
The economist said the study suggested for Caribbean economies overall that “improving connectivity will greatly facilitate diversification, and by doing so, eventually they will be able to strengthen their economic resilience”. (SC)