When President Trump announced last month that he would re-impose strict limitations on Americans’ travel to Cuba, he said the policy would put pressure on the island nation’s communist government. Many critics, however, said the real victims of the policy would be the Cuban people. The logic of this argument is simple: By cutting off the recent influx of American tourists, who had flocked to the island after President Barack Obama eased travel restrictions during his second term, Trump’s policies could harm the many privately owned small businesses that sprung up to serve them. In turn, these small business owners will be less able to purchase from other businesses on the island, further hurting Cuba’s fledgling private enterprises.

But in reality, the cause and effect may not be so simple. Recent research suggests not only that tourism does not necessarily lead to economic growth, but also that it can in some cases make a country worse off. That suggests that restricting the flow of American tourists might not hurt Cuba — and could even help.

Economists broadly agree that in the short term, tourism brings money into a country that would not otherwise be there. But tourism is not a magic bullet. In other Caribbean nations, for example, there is a clear correlation between tourism and economic growth: Countries with more tourism are wealthier, on average, than those with less. But if tourism alone were enough to turn a weak economy into a strong one, the Caribbean would be far wealthier than it is. In reality, roughly a third of the region’s population lives below the poverty line.

Why hasn’t tourism done more to boost the Caribbean economy? One explanation may be the dominance of all-inclusive resorts and other forms of enclave tourism, which concentrates the industry in small areas of a country. Many tourists never leave the resorts, so their money stays there too. And because the resorts are often financed by expatriates, tourism dollars flow to hotel owners abroad rather than filtering out into the local economy.

The results in the Caribbean run counter to the theory that long dominated economic thinking around tourism, the tourism-led growth hypothesis. The hypothesis posits that revenue from tourism leads to economic growth both directly (by providing jobs and income to locals working in tourism) and indirectly (through improved infrastructure, which is often built to serve tourists but benefits the entire population). Ultimately, the entire economy improves as innovation and competition spread from tourism to other sectors. A rising tide lifts all boats — cruise ships and local fishing vessels alike. For years, empirical evidence from both multi-country and single-country studies, including studies of Spain, Turkey, Taiwan and Malaysia, supported this hypothesis.

But recent research has painted a more complicated picture of tourism’s impact. A study of South Korea found that economic growth led to increased tourism, but the relationship didn’t work the other way around, suggesting we have not fully disentangled cause and effect. A study of Mauritius found that tourism led to growth, but in the context of broader diversification of exports, suggesting there may be more to the story than just the increase in tourism. Finally, more sophisticated statistical work is now finding that the relationship between tourism and growth is not linear: In some cases it can contribute to growth, but not always.

When does tourism lead to growth? A parallel, more robust analysis of export-led growth provides some insight into that question. Like the tourism hypothesis, export-led growth posits that by focusing on exports, a country can generate revenue, which, through linkage to other sectors, will spur development in the entire economy. Japan was an early star in this model, inspiring export-focused policies in the rest of Asia and the world. But as with tourism, exports seem to produce uneven effects: In Vietnam, for example, efforts to replicate the Japanese model haven’t been working. And in China, experts are questioning the sustainability of the model.

Why have some countries thrived by focusing on exports while others haven’t? Research suggests that countries that do well under export-led growth, such as Japan, do so because they manage to create links between the export sector and other sectors so the economy doesn’t wind up depending too much on exports. These countries enact policies to support citizens’ education and skill development and build a robust middle class that creates its own domestic demand. Otherwise, their economies can backslide if demand for their exports diminishes (such as during a recession) or if other countries become more competitive (China is losing out to other southeast Asian countries in manufacturing, for example). Experts argue that much of sub-Saharan Africa’s economic problems are the result of focusing on exports at the expense of other sectors, such as agriculture. The parallels to tourism are clear: Countries such as Spain that have incorporated tourism into a diversified economy have done better than those — such as many Caribbean nations — that have grown dependent on tourism alone.

There are also parallels between tourism and what economists call the “resource curse,” the idea that having an abundance of an exported natural resource can actually be bad for an economy. Nigeria’s oil wealth has made it the largest economy in Africa, yet over half the population lives below the poverty line, according to the most recent information available. Experts attribute this to the government neglecting to implement redistribution policies, failing to develop other sectors and refusing to let its currency float freely. Sudan and many other countries are experiencing similar challenges. This isn’t to say that having resources must backfire: Thanks to policies mandating egalitarian profit-sharing and diversification, Norway has no such curse.

Oil reserves and beautiful beaches may not seem like they have much in common, but they introduce many of the same economic challenges. Like oil, tourism is an industry on which a country can become too reliant, at the expense of other areas. Like oil, tourism is sensitive to outside factors like global recessions, weather and armed conflict. Unlike oil, tourism is also sensitive to disease. Tourism can also use up the public goods and energy of the host country, even destroying the very ecosystem to which tourists are attracted (sort of like running out of oil). And in both oil and tourism, the key to avoiding the resource curse is good governance: policies that encourage economic diversification and invest profits in education and infrastructure.

Returning to Cuba: Is tourism likely to be a blessing or a curse? Data on Cuba is limited, making it hard to reach firm conclusions. But much of the available evidence suggests that Cuba was ill-prepared for a tourism boom. Despite the recent rise in American tourism,2 Cuba experienced negative economic growth in 2016. And it’s likely that the government estimates are inaccurate, which suggests that things are worse than reported. But the most telling data on the Cuban economy is the lack of it. The government does not produce poverty statistics, which is a red flag that the numbers probably aren’t that good. Independent research suggests that the country faces a growing racial and income inequality that has been exacerbated by the increase in tourism. The expansion of the private sector has been increasing the gap between the wealthy and the poor, and the country’s celebrated privately owned restaurants are accessible only to the wealthy.

The period between Obama’s and Trump’s announcements also provides a few clues about how growing tourism has affected the Cuban economy. The rapid influx of Americans was already overloading services and infrastructure, and forecasts predicted even further strains. Cuba is showing few signs of economic diversification: It is already suffering a domestic brain drain, where skilled workers, such as doctors, are switching to more lucrative jobs in hospitality. Market analysts have touted Airbnb as a private business success story, but the only Cubans who can avail themselves of this source of income are those who own homes and can afford to pay the flat-rate taxes. The government also still manages most of the economy, and getting permission to start a business remains difficult. Given the lack of diversification, the increasing gap between rich and poor, and the fact that the government will be tempted to capitalize on the growing tourist trade through state-sponsored hotels, all signs point to tourism becoming a curse.

There may, of course, be other reasons to oppose Trump’s policy on Cuba, not least that many experts think it is unlikely to have its intended effect. But by pressing “pause” on American tourism, Trump may have unintentionally given Cuba a rare opportunity. Usually countries that control in-demand natural resources have to figure out how to get the policy right while concurrently managing exports. But the re-imposition of travel limitations means that the Cuban government does not have to respond to growing demand quite yet. This could give the Cuban economy time to adjust and prepare for a day when Americans’ travel restrictions are once again loosened. And in the meantime, the lost revenue may give Cuba an incentive to develop other economic sectors. If Cuba becomes open to American tourists again in the future, perhaps its entire economy, not just its tourism sector, will be more robust than before.

Source: FiveThirtyEight

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