97687 June 2015 · Number 4 THE IMPACT OF EASING THE US TRAVEL RESTRICTIONS AGAINST CUBA ON TOURISM IN THE OECS Calvin Djiofack, Rei Odawara, Maros Ivanic, and second, the team simulated, through a global Julie Lohi1 computable general equilibrium (CGE) model, the impact of the removal of restrictions on The US authorities announced in December Cuban tourism. The results show that all the 2014 an intention to normalize relations with Organization of Eastern Caribbean States (OECS) Cuba, including measures to ease economic countries would experience a reduction in sanctions and the ban on US citizens’ travel to arrivals from the United States, while the overall Cuba. Although the embargo is still in place and effect of the removal of the travel restrictions leisure travel from the United States to Cuba is would not be negative. In fact, those that have still not allowed, the new measures permit many non-US tourists, will see a surge in these, Americans to visit the island for a variety of as they are driven away from Cuba by the rising reasons, including family visits, education, and cost of tourism to Cuba by the rising tide of new religion, without first obtaining a special license American arrivals to that destination. The OECS, from the US government, as was previously considered as a whole, would enjoy a modest required. The normalization of US relations with increase in tourist arrivals following the removal Cuba is expected to have important effects on of the US restrictions. Except for St. Kitts and tourism flows from the United States to the Nevis and Anguilla, the overall effect is either island. Cuban officials estimate that 1.5 million negligible or significantly positive for the OECS Americans would travel to the island annually if countries that depend more on Canadian and all restrictions were removed; an IMF study in other Caribbean countries for their tourism. 2008 projected that 3.0-3.5 million US tourists would enter Cuba if the travel restrictions were Will the Easing of Restrictions on Travel to removed (Romeu 2008). Cuba Matter to the OECS? The impact of the easing of US travel The tourism sector is a major source of growth, restrictions against Cuba on the tourism sector employment, government revenue, and foreign of the OECS countries is potentially positive. exchange for the OECS countries. Of the OECS The analysis was conducted in two steps. The countries with sufficient data available, tourism Bank team first estimated the level of accounts for one to three quarters of total GDP, restrictiveness caused by the US travel and from over 20 percent to just under 70 percent restrictions on Cuban tourism performances; of employment. Tourism also generates more 1 This Knowledge Note was cleared by Miria Pigato, Practice Manager (GMFDR). than 50 percent of total export receipts in five of beneficial for countries in the region that can the seven countries. Anguilla, and Antigua and promote multiple destination travel packages Barbuda are the most dependent on earnings that include Cuba. from tourism, which generates 84 percent and 74 percent of export receipts, respectively. Figure 1. Tourism to the OECS, by country of origin The easing of restriction on US citizens’ travel (Percent of total arrivals) to Cuba by US citizens is likely to reduce their 70 63.3 63.0 arrivals in the Caribbean in general, and the 60 OECS in particular. OECS countries are greatly dependent on tourists from the US and provide 50 42.2 38.2 a tourism product relatively similar to that of 40 Cuba (Figure 1). In 2014, the United States was 26.4 27.7 30 24.7 the largest source of tourist arrivals for most 20 OECS countries; the share of arrivals from the 10 United States varied between 25 percent of the 0 total for Dominica and more than 60 percent for Anguilla Dominica St. Kitts & St. Vincent & Anguilla and St. Kitts and Nevis. St. Lucia, which Nevis the Grenadines receives the largest number of tourists among the United States Canada Europe Other OECS members (around 35 percent of OECS total arrivals), received 42 percent of its tourists from Source: World Bank staff calculations based on data from the Caribbean Tourism Organization.2 the US in 2014. In addition to losing tourists from the United States, the OECS and other Caribbean countries may also lose tourists from other To what Extent does the US Embargo Currently developed countries such as Canada, the United Limit Tourism in Cuba? Kingdom, and Germany, as the cost of travel to Cuba decreases with the easing of the US travel A gravity model can be used to measure the restrictions. impact of the US travel restrictions on tourism. The gravity model predicts the level of tourism The rise in US visitors to Cuba, however, could flows between economies based on size, income also have positive effects on tourism in the level, distance, degree of contiguity of borders, a OECS countries. A sharp rise in tourists from the common language, and whether one was a United States could strain Cuba’s limited colony of the other or were colonies of the same tourism infrastructure and redirect tourists from country (see Romeu 2008 and Laframboise et al. other developed countries to the OECS and other 2014). 3 The analysis covers bilateral tourism Caribbean countries (IMF 2008). Furthermore, receipts (or arrivals) among 194 countries during the prestige of the Cuban destination is likely to 2000-10, using data from the United Nations strengthen the position of the Caribbean World Tourism Organization.4 The level of destinations as a whole, which could be 2 4 Although the team followed previous studies http://www.onecaribbean.org/content/files/T using a gravity model, our approach includes AcbbnMainmarket1980to2004.pdf several improvements that generate an estimate 3 Beside these standard indicators, the team also that is more rigorous and better grounded in integrated some specific determinants of modern trade theory. First, we control for zero tourism, including external shocks (September trade flows with the Heckman sample selection 11 2011); security (number of homicides); correction method. Second, a measure of existing trade and investment agreements remoteness is computed by summing distances (NAFTA, CARICOM, US Caribbean Basin weighted by the share of the GDP of the initiative), trade openness, and infrastructure destination in world GDP. This variable captures (telecommunication penetration). the effect of relative distance on trade, which matters greatly, in addition to the absolute June 2015 · Number 4 · 2 restriction caused by the US travel restrictions on US tourism to Cuba (78 percent) can be Cuba is captured by comparing the gap between attributed to the US travel restrictions. actual tourist arrivals from the United States and the performance predicted by the gravity model. The travel restrictions significantly reduce US Figure 2. US and Canadian tourist arrivals, tourism flows to Cuba (Figure 2). The results 2010 show that Cuba provides far less tourism (Percent of predicted arrivals) services to the United States than expected, given Cuba OECS All Caribbean each country’s economic size, bilateral distance, and the other determinants. In fact, the number 306 290 of arrivals of US tourists in Cuba represents just 251 22 percent of the expected level. By contrast, the number of arrivals of US tourists in the 164 Caribbean is around 164 percent of the level predicted by the gravity model. Although the 91 OECS also seems to be exporting less tourism 22 services than expected to the United States, the performance gap (10 percent below the predicted US CANADA level) is far lower than that of Cuba. An analysis of Canadian tourism in Caribbean countries also Source: World Bank staff calculations using Gravity provides some insight into the impact of the US Model Estimates. travel restrictions on tourism in Cuba. Contrary Note: This figure shows the observed bilateral to the analysis of US tourism, the number of tourism arrivals in 2010 as a ratio of their expected value predicted by the gravity model. Bars under Canadian tourist arrivals in Cuba is about 251 (above) 100 indicate that the observed value is percent of the predicted level. And Canadian smaller (larger) than what is predicted by the tourist arrivals in the OECS and other Caribbean econometric model. countries are 290 percent and 300 percent, respectively, of the predicted level. These findings provide further evidence that the gap in Table 1. Impact of Easing Ban on US travel to Cuba on Caribbean Countries (CGE results) Baseline Effects Initial Total US share in Change in US Change in Total Countries Arrivals total Arrivals Arrivals (% US arrivals (% total (2014) (in %) Arrivals) arrivals) Anguilla 62,353 63 -18.2 -3.6 Antigua and 249,316 38 -13.4 1.21 Barbuda Dominica 68,791 25 -8.35 8.7 OECS Grenada 133,520 26 -9.3 6.8 Countries St. Kitts and 74,317 63 -11 -2.2 Nevis St. Lucia 338,158 42 -9.9 -0.4 St. Vincent and 61,684 28 -12.5 -0.4 the Grenadines Cuba 3,000,000 20 350 54.2 Totals All OECS 988,139 40 -11.7 1.35 Source: Authors’ Calculation using CGE estimates. June 2015 · Number 4 · 3 What would be the Likely Impact on the OECS estimates show that the unskilled labor wage and Countries of a Full Removal of the US CPI would increase by 22 percent, and 14 percent restrictions on Cuban Tourism? respectively in Cuba, while remaining relatively unchanged in most OECS and Caribbean The easing of the US sanctions would have countries. As a result, the OECS as a whole important economic implications for the OECS would enjoy an increase in tourist arrivals by tourism (Table 1). Allowing Cuba to export 1.35 percent following the removal of the US tourism services to the US without the restrictions. While the overall effect is negative restrictions of the US embargo (the level for St. Kitts and Nevis, and Anguilla that rely on predicted by gravity model) would lead to an the United States for 63 percent of their tourism, around 350 percent increase in American it is either negligible or significantly positive for arrivals, from around 600,000 (in 2014) to 2.7 the other OECS countries that depend more on million per year, with important implications for Canadian and other Caribbean countries for their OECS tourism sectors.5 All of the OECS members tourism. would experience a reduction in arrivals from the US, the effects ranging from (-18) percent for About the authors: Anguilla, to (- 8) percent for Dominica. However, the overall effect of the removal of the travel Calvin Djiofack, Economist, World restrictions (taking into account other sources of Bank’s Macroeconomics & Fiscal Management Global Practice tourism) would not be negative for all OECS (GMFDR) countries. Those that have many non-US tourists, email: cdjiofack@worldbank.org will see a surge of these as they are driven away Rei Odawara, Economist, World from Cuba by rising costs caused by the tide of Bank’s Macroeconomics & Fiscal newly arriving Americans to that country. The Management Global Practice (GMFDR) email: rodawara@worldbank.org Maros Ivanic, Research Officer, World Bank’s Development Impact Unit (CGEDI) email: mivanic@worldbank.org Julie Lohi, Consultant, World Bank’s Macroeconomics & Fiscal Management Global Practice (GMFDR) email: jlohi@worldbank.org _______________________________________________________________________________________________ This note series is intended to summarize good practices and key policy findings on MFM-related topics. The view expressed in the notes are those of the authors and do not necessarily reflect those of the World Bank, its board or its member countries. Copies of these notes series are available on the MFM Web site (http://worldbank.org/macroeconomics) 5 The impact of the US travel restrictions is Trade Analysis project (GTAP) framework measured by a global computable general (Hertel 1997) and social accounting matrices of equilibrium (CGE) model. The analysis relies on 2011, including separately most Caribbean a multi-country static model using the Global countries, the US, and the rest of the world. June 2015 · Number 4 · 4