WHY AND HOW TO SPECIALISE
IN TOURISM:
AN AGENDA FOR JAMAICA
Wolfgang Grassl
“The Role of Government in Tourism –
Enhancing Human and Economic
Development”
September 25-28, 2002
University of the West Indies
Mona, Jamaica
Preview
1. Introduction
2. Tourism Services and Economic Growth
3. Specialisation, Growth, and Country Size
4. Empirical Model Estimation
5. Policy and Strategy Implications for Jamaica
6. The Role of Government in Tourism
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1. Introduction /1
 specialisation vs. diversification
 W.A. Lewis: The Theory of Economic Growth
(1955)
 “traditional” vs. “progressive” sectors
 smaller countries tend to be more specialised
 confronted with two facts about Caribbean:
 countries are, on average, very small
 countries increasingly specialise in tourism
• lower productivity gains  part of low-growth
traditional sector
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1. Introduction /2
 worldwide empirical evidence:
 small states have comparatively higher GDP p.c.
 country size decreases monotonically with rising
income levels
 predominant sector in small and fast-growing
economies is service sector
 two stylised facts:
 specialisation in services (particularly in personal
services) is compatible with fast growth
 fast-growing specialised countries tend to be small
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1. Introduction /3
 theoretical issue: Baumol’s “cost disease”
 comparatively lover productivity of services leads
to rising price level
 answer: endogenous growth theory
 theses:
 tourism as an engine of growth for small
countries
 country size effects benefit small countries
• “Growth requires specialization, specialization
requires co-ordination by a price mechanism, and this
co-ordination is effective only in proportion to the
response of individuals to changes in prices.”
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2. Tourism Services and Econ. Growth /1
 incongruity: higher-income countries tend to
have larger service sectors
 personal services:
• production = consumption
• “embodied” in consumers (= tourists)
 assumption: admit only of little productivity growth
 does growth of service sector (particularly of
tourism) crowd out higher-productivity sectors
(agriculture and manufacturing)?
 can tourism maximise economic growth at all?
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20 Top Countries
20 Bottom Countries
Country size
(population)
Number of
countries
(Atlas method)
Number of
countries
(PPP)
Number of
countries
(Atlas method)
Number of
countries
(PPP)
< 50,000
50,000 - 1M
1M - 5M
5M - 10M
4
3
2
6
5
4
2
3
0
0
3
4
0
0
3
5
Total
15
14
7
8
Source: World Bank
Share of countries by size in top 20 and bottom 20
countries by GNI per capita, 2000
Worldbank classification
Countries Small countries
(popul. < 3M)
% of small
countries
Low income
Lower middle income
Upper middle income
High income
63
54
38
52
11
21
18
26
17.5%
38.9%
47.4%
50.0%
Total
207
76
36.7%
Source: World Bank
Share of small countries by World Bank income categories
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2. Tourism Services and Econ. Growth /2
 empirical evidence (first stylised fact):
 significant overlap of countries with strongest
growth of GDP p.c. and countries with strongest
share of tourism in GDP
 Caribbean countries with strongest tourism
specialisation grow fastest
 allegedly negative impacts of specialisation:
 high leakages for imports
 sectoral displacement effects (“Dutch disease”)
 deleterious implications for culture and
environment
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100%
90%
Tourism
80%
70%
Agriculture
60%
50%
Manufacturing
40%
30%
20%
Services
10%
0%
1980
1985
1990
1995
Development of sectoral shares in GDP in the
Caribbean (C-29)
2000
9
100%
90%
80%
Tourism
Agriculture
70%
Manufacturing
60%
50%
40%
30%
Services
20%
10%
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
0%
Development of sectoral shares in GDP in Jamaica
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3. Specialisation, Growth & Country Size/1
 endogenous growth theory: growth driven by
 returns to increasing specialisation
 returns to increasing stock of human capital
 returns to knowledge accumulation by “learningby-doing”
 returns to knowledge accumulation by R&D and
innovation
 growth due to increasing specialisation
 economic conditions in tourism-generating
countries for tourism-receiving countries to
warrant specialisation?
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3. Specialisation, Growth & Country Size/2
 pivot in explanation: terms-of-trade (TOT)
 under complete specialisation of all countries
in either tourism or non-tourism goods, TOT:
( y N / y N )  ( y T / yT )
s
p / p
where s = elasticity of substitution
 consequently,

y N / y N  yT / yT

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3. Specialisation, Growth & Country Size/3
 what happens to TOT over time depends
upon the extent to which non-tourism goods
are substitutes for tourism
 if s > 1, TOT will be muted: specialisation in
tourism harmful for growth
 if s < 1, specialisation not harmful for
growth: TOT move fast enough to more than
offset difference in sectoral productivity
growth
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3. Specialisation, Growth & Country Size/4
 statistical evidence for OECD countries:
 s < 1 fulfilled
 countries with a higher degree of specialisation in
tourism tend to have lower values for s
• tourism services are characterised by a particularly low
degree of substitutability for non-tourism goods
• reasons:
 tourism goods are luxury goods (= take up less elastic shares
in household budgets)
 offered in bundles and in a great variety of quality levels
• resource-based tourism has particularly low s
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3. Specialisation, Growth & Country Size/5
 country size (second stylised fact):
 smaller countries have less intensive linkages
 but: smaller countries face lower opportunity costs
of specialisation
• issue: how to measure country size
• absolute vs. relative (= resource-dependent) measures
 smaller countries tend to have larger amounts per capita of
resources that attract tourists
• larger relative resource endowment explains specialisation
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3. Specialisation, Growth & Country Size/6
 conclusions:
 as long as the elasticity of substitution in the
consumer preferences of tourism-generating
countries is low enough, two conditions will
hold:
 countries with endowments of suitable resources
large relative to the size of their labour force are
likely to develop a comparative advantage in
tourism
 these countries grow faster than those specialising
in other sectors
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4. Empirical Model Estimation /1
 aggregate
growth equation
(Y / Y )t  α 0  α1 ( y A / y A )t n  α 2 ( y M / yM )t n  α 3 ( y S / yS )t n  α 4 ( yT / yT )t n  
 ai = coefficients expressing contributions
of sectors to aggregate growth of GDP
 n = time period over which independent
variables are defined
 lagged by one year
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4. Empirical Model Estimation /2
 three data sets:
 C-29: 29 Caribbean countries (islands)
• pooled cross-sectional aggregates
• 1980-2000 (1986-1998 for H1)
 C-5: Barbados, Dominican Republic, Haiti,
Jamaica, Trinidad
 Jamaica
• 1980-2001
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4. Empirical Model Estimation /3
 hypotheses:
 H1: There is a significantly positive relationship
between growth in tourism output and growth in
real GDP.
 H2: There is no significantly negative relationship
between growth in the share of services in real
GDP and growth in the shares of agriculture and
manufacturing, respectively, at higher levels of
specialisation in services.
 H3: In small countries, the share of services in
GDP will grow with country size.
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4. Empirical Model Estimation /4
 H1: supported
 H2: supported
 results somewhat less conclusive
• no statistically significant displacement of agriculture
or manufacturing by expansion of service sector
• decline of agriculture correlates rather with slight
increase in manufacturing and not in tourism
• effect strongest for Haiti and Trinidad
• at lower specialisation levels, crowding-out effects are
stronger
 H3: supported
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5. Policy & Strategy Implications for JA/1
 Jamaica lacks comparative advantage in
agriculture
 manufacturing competitive only in labourintensive and low-skill industries
 specialisation in export of services
 which services?
 ICT vs. tourism
 tourism specialisation: resource-based tourism
 low degree of substitutability
 product differentiation
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5. Policy & Strategy Implications for JA/2
 diversification a macro-strategy of larger countries
 specialisation a winning strategy for smaller
countries
 Lewis:
• “It is not true that the individual firm must be large in scale if
there is to be efficiency or economic growth; but it is true that the
advantages of specialization cannot be secured unless the
economies of scale are available either within the firm or within
the framework of well organized markets. All the same, the
degree to which the well organized market can substitute for the
large firm varies very much from industry to industry.”
 compensation for lacking economies of scale at industry
level  cooperation
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Role of Government in Tourism
 shift from concentration on demand-side to
supply-side policies
 in small states, macroeconomic policy instruments
very limited in scope
 trade protectionism forbids itself in open economies
 government policies:
 stimuli for private sector to invest in education,
R&D, training, and marketing
 provision of public goods: safety, clean beaches,
efficient roads and airports, etc.
 coordinate strategic repositioning of country
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