Latin America and the Caribbean will suffer an unprecedented shock from a sharp drop in tourism, according to a new report by the Inter-American Development Bank.
The report – Extreme event: The Shock of the Unprecedented Tourism Pandemic in Latin America and the Caribbean – includes a new Tourism Dependency Index for countries with 35 economies in Latin America and the Caribbean. It calls on governments to take unprecedented action to prevent the spread of the virus, and to support the citizens and economies in a region that is most dependent on tourism in the world.
Based on simulations, the direct impact of the shock on tourism flows in the Bahamas could cause an economic contraction relative to pre-crisis estimates of between 8 percent and 13 percent. Similar exercises incorporating the potential indirect contribution of tourism to economic activity would further increase these estimated losses. While less dependent on tourism than many Caribbean economies, large economies such as Brazil and Mexico could experience sector-linked growth shocks of between 2 and 5 percent, respectively, compared to pre-crisis estimates.
The Americas include countries that are highly dependent on tourism. Aruba – with a Tourism Dependency Index of 84.7 – is the most dependent economy in the world, followed by Antigua and Barbuda (61.4) and the Bahamas (59.4). Venezuela (5.5), Paraguay (3.7) and Suriname (3.2) are the countries least dependent on tourism in the region. Fourteen of the 15 most tourism-dependent economies in the Americas are in the Caribbean.
However, the sector is significant for other economies as well. From 2014 to 2018, tourism contributed an average of almost 16 percent in production and employment in Mexico, and about 10 percent of employment and GDP for Uruguay, Argentina and Chile. In Brazil, tourism was responsible for 8 percent of employment, representing hundreds of thousands of jobs.
“All in all, our Tourism Dependency Index and several related indicators suggest that countries in Latin America and the Caribbean will suffer more than others in terms of shocks from the COVID-19,” said Henry Mooney, economic advisor for the IDB’s Caribbean Department. “Governments can provide focused and tailored support to preserve productive assets, replace lost income for individuals who depend on the sector, and use a transition period to prepare the ground for reviving activities under uncertain circumstances.
The authors compared the COVID-16 shock to six historical episodes, including the attacks of 11 September 2001 and the outbreak of Ebola. None came close to the magnitude of damage caused by the current pandemic. While tourism flows contracted by nearly 4 percent over the previous year during the global financial crisis, the pandemic could cause a negative shock of between 40 percent and 70 percent in a single year – an extreme event.
The report also simulates shocks to employment, exports and the balance of payments. Aruba, where nearly one in three jobs is linked to tourism, could see a disruption to more than 20 percent of its workforce. The report also highlights the extreme magnitude of the impact on external sustainability, forcing many economies in the region to face unprecedented pressures on their current account and exchange rates.
“Even for the largest and most diversified economies, the net impact on economic activity could lead to contractions on a scale we have never witnessed,” said IDB researcher María Alejandra Zegarra. “Countries that enter into crisis without an adequate policy framework or that suffer from external protection mechanisms will be particularly affected.
The report is a joint effort with the Center for Political Economy (CEPR) and is included in the book COVID-19 in Developing Economies .
About the IDB
The mission of the Inter-American Development Bank is to improve lives. Founded in 1959, the IDB is one of the main sources of long-term financing for economic, social and institutional development in Latin America and the Caribbean. The IDB also conducts cutting-edge research projects, and provides policy advice, technical assistance and training to public and private sector clients throughout the region.