Tourism in the Caribbean Before and
Department of Business Management
College of Management
Box 7229, 1334
NC State University
Raleigh, NC 27695-7229
Jerome L. McElroy
Department of Business Administration and Economics
Center for Women’s Intercultural Leadership
Saint Mary's College
Notre Dame, IN 46556
Tourism in the Caribbean Before and
Tourism in the Caribbean Before and After
has again become a major force in Caribbean tourism. If
and when U.S.
trade and travel restrictions are lifted, either as a result of a Cuban regime
change or a change in U.S.
could become the dominant player siphoning off a sizeable number of tourists
from neighboring competitors. This paper
first presents an historical overview of tourism in Cuba
and the Caribbean before, during, and after Castro. The second section discusses the likely
factors that might condition the transition after the Castro regime and reviews
the products that Cuba
will “introduce.” The third projects
both the growth of tourism in Cuba
after a five-year transition and the quantitative diversion of U.S.
tourists from specific competing destinations. Concern among Caribbean
neighbors about negative impacts to their own tourism activities appears
justified. Keywords: Caribbean,
The Caribbean Sea
is home to the world’s largest assemblage of small and large islands with a
wide fusion of languages, religions, ethnic groups, and customs (Thomas 1988).
This pattern of development reflects the influences of colonization and
settlement: four major European empires, as well as the United
States and the former Soviet
Union, historically have operated in the region. Within this
sociological and political context, tourism has grown rapidly but unevenly over
the last three decades. The Caribbean has become the
most tourist-penetrated region in the world and according to Tourism Satellite
Account estimates, tourism across the Caribbean accounts
for roughly 20 percent of all exports and capital formation, and 15 percent of
regional employment and GDP, respectively (WTTC 2004). Between 1970 and 2000,
fueled in the main by North American and European travelers, Caribbean
stayover tourist arrivals increased nearly five times, from 4 to 19 million
annually, and the region’s share of the world total rose from 2.2 to 2.5
percent (CTO 1991, 2001; U.S. Department of Commerce 1993). Tourism is now the
major engine of growth for most of the 30 or so countries and destinations in
At the same time, the Caribbean
region is one of the world’s most peculiar tourist areas because its largest
nation and fastest growing tourist destination, Cuba, remains an international
enigma, a sort of Jurassic Park of communism at the doorstep of the United
States. The trade and travel embargo imposed by the United
States, along with Castro’s isolated
socialist regime and the lack of modern infrastructure in Cuba,
effectively prevent or seriously discourage the travel of U.S.
residents and others (US International Trade Commission 2001).
For the first two decades of
Castro’s rule (during the 1960s and 1970s), tourism was essentially
non-existent, viewed by the Cuban regime as a western vice inconsistent with
socialist goals (Thomas 1998; Schwartz 1997; Espino 1991 and 1995). During this
period other destinations in the region initiated tourism expansion, taking
advantage not only of the void left by Cuba but also of rising North American
and European affluence, the advent of cheap jet travel, the influx of foreign
hotel investment encouraged by tax concessions, and the large-scale expansion
of aid-financed transport infrastructure (McElroy and de Albuquerque 1998).
However, the collapse of the Soviet Union and the loss
of over $6 billion in annual Russian support forced Cuba
to turn to tourism as a replacement industry (Espino 2001; Gordon 1997). The
allure of its natural charms (Linden 2003) and its status as a curiosity turned
Cuba into one
of the fastest growing tourist destinations in the world, expanding from an
estimated 300,000 tourists in 1989, the year of the Soviet collapse, to
2 million visitors today arriving annually from Europe, Canada,
and other regions. But with Castro in his late 70s, and with notable—if
inconsistent—sentiment in the U.S. Congress to eliminate the trade and travel
embargo, many destinations as far away from Cuba as Bermuda, and as close as
Key West, Florida, are expressing increasing concern about the impact of the
opening of Cuba to tourism and travel in a new, fundamentally different social
and economic context (Ausenda 2002; “Tarnished” 2000).
The purpose of this paper is to
explore the likely impact given the opening up of Cuba
to full-blown tourism. It approaches the problem by: (1) analyzing the
historical record of tourism in Cuba
and the Caribbean before and during Castro; (2)
discussing the character of the transition and the variety of tourism products Cuba
offers; and (3) projecting the post-embargo impact both on Cuba’s
tourism growth and the related quantitative diversion of U.S.
visitors away from neighboring destinations. The impact estimates are based on
evidence from historical trends, suggestions from recent research, and
qualitative evidence from detailed interviews with CEOs and managers of
the largest hotel and resort chains doing business in Cuba
and in the Caribbean.
TOURISM IN THE CARIBBEAN
Historical data for world or Caribbean
tourism are difficult to obtain, anecdotal, and usually not particularly
accurate. Notable exceptions to the last two characteristics are two books by
Armando Maribona (1943, 1959), a prolific and widely traveled Cuban author. While
Maribona’s books are indeed difficult to obtain, both contain rich historical
information about the travel industry and provide contemporaneous insights
about the early days of tourism in Cuba,
the Caribbean, and other parts of the world.
As the largest island in
the region containing nearly 50 percent of the total land area and 30 percent
of total population (CIA 2003), Maribona illustrates how Cuba
has always been a tourism leader in the region.
industry has undergone three cycles: one in1920s; a second
in the 1950s; and the current one that began in 1989. This last period has
already lasted longer that either of the two previous ones, reflecting the
current importance of tourism to the Cuban economy. During the “Roaring 20s,” Cuba’s
image as a destination underwent major transformation. Articles of that time in
travel magazines described Havana
in lyrical terms, referring to its climate and its Afro-Cuban music in
provocatively sensual ways (Schwartz 1997; Williams 1925; Frank 1926). In a
crescendo of spectacle and promotion, all in close association with U.S.
promoters and investors, each event outdid the previous one: the visit of the U.S. President Calvin
Coolidge (January 1928) to open the 6th Pan American Conference;
Charles Lindbergh’s arrival (February 1928) in the “Spirit of St. Louis” (the
same airplane he used to fly from Long Island, New York to Paris eight months
earlier) to promote flights between Florida and Cuba; Amelia Earhart’s opening
(1929) the new Havana Airport terminal; and the conversion of Varadero Beach
into an exclusive resort by the CEO of DuPont.
The first cycle ended, however, with the Great Depression. Between 1928 and 1933, tourism revenues fell
80 percent (Swartz 1997); yet tourism in Cuba
continued to be touted, even receiving the endorsement of U.S. President
Franklin Roosevelt in 1935
In the second tourism
cycle , Cuba initially lost market share
to neighboring destinations because of limited hotel capacity. However by the 1950s,
according to Maribona’s (1959) figures, Cuba
was the dominant island destination in the Caribbean
region (and second in arrivals in all of South and Central
America only to Mexico). Between 1950-56, arrivals grew 12.5 percent
annually, and in 1957 estimated visitor expenditure was roughly double that of
its rivals: Bermuda,
and Puerto Rico.
This performance was particularly notable considering the escalating
revolutionary turmoil in and around Havana and the negative publicity
associated with the killing of two American tourists in 1957 (caught between
police-guerilla crossfire), and the infamous 1958 kidnapping of Juan Manuel
Fangio, a world champion Argentinean race car driver (Swartz 1997).
1 about here)
Around the region in the mid-1950s,
Pan American Airways was the primary air carrier (Van Doren 1993). Already hotels in St. George, Bermuda,
were experimenting with “all inclusive” concepts, offering rooms and food for
$6 per person per room, and Cuba
was offering packages that included airfare, ground transportation, food,
drinks, and overnight hotel stay. Nassau
had 4,000 rooms and its government pledged that it would not permit high-rise
buildings above a 45-foot height limit. Most of Jamaica’s
3,500 hotel and guest house rooms were located in Montego Bay.
Puerto Rico’s tourist arrivals came mostly from New
York and New England, and in
1958 there were some 2,800 hotel rooms there, mostly in the San
Juan area. Unlike the tourists going to Cuba
(who were mainly U.S.
citizens who stayed in hotels), many of the visitors to Puerto Rico
were returning Puerto Rican-Americans staying in private residences with
relatives or friends (Maribona 1959).
Curiously, after adjusting for inflation, visitor spending in the late
1950s was comparable to present levels, ranging between $110 (Trinidad/Tobago)
and $225 (Bermuda) and averaging $130-150 per capita
(see Table 1). In 2000 dollars, this
overall per capita average would amount to approximately $975 and the range
would be between $400 and $2,200, numbers quite similar to the actual values
for the year 2000.
Nearly all hotel rooms in Cuba
during the 1950s were concentrated in Havana
and very few were found at beaches like Varadero to the east of Havana.
Tourists thus tended to stay in the capital and showed little interest in “sand
and surf.” To expand capacity in Havana,
President Batista backed legislation that passed in 1955 allowing casinos in
any hotel with a minimum $1 million investment (Swartz 1997). Within a few short months, four new
hotel/casinos were built—the Sevilla-Biltmore, Riviera,
Capri, and Havana Hilton. Casinos were also added to
four older properties: the Tropicana,
Sans Souci, Montmartre, and Hilton Nacional (Crespo
1999). These new casinos, in spite of
attracting international stars like Nat “King” Cole, Maurice Chevalier, Edith
Piaf, and Jimmy Durante, were rather small gambling operations in comparison
with contemporary Las Vegas casinos and
certainly miniscule by today’s standards in Las Vegas, Atlantic City, and Monte
Carlo (Mallin 1956). For example, the casino at the Hotel Nacional had just
seven roulette wheels, one crap (dice) game, and 21 slot machines (“one armed
bandits”). And as an industry, tourism remained a small segment of the Cuban
economy far behind sugar and tobacco (Thomas 1998). “mecca” greatlyof surprisingly
Tourism was already in decline by
1958, and declined even further in 1959 with the arrival of Castro. In the eyes of the new regime, tourism was
viewed as a dispensable capitalistic “vice” that brought dependency and
cultural pollution (Askari and others 2003; Espino 2000; Schwartz 1997). The continuing turmoil in Cuba —including the
Bahía de Cochinos invasion and the
international missile crises 1961 and 1962—was also damaging
the rest of the region (Interview with former Minister of Tourism, Dominican
Republic, June 2001). Nonetheless, nearby destinations slowly began to take
advantage of the void left by Cuba
and to build the business alliances and infrastructure that would fuel future
growth. Investments and tourist arrivals grew first in Puerto Rico
and also in the “Mayan Riviera” of Cancún and Cozumel,
Mexico, the Virgin
Islands (USVI), and Jamaica.
The Dominican Republic,
on the other hand, was also experiencing turmoil after the assassination of its
long-time dictator Rafael L. Trujillo in May 1961. As a
result, Dominican development was severely delayed. In 1970, around 4 million tourists traveled
to the Caribbean. By 1975, this total had grown to 5.5
million and then to just under 7 million 1980. Puerto
Rico (1.6 million), the Bahamas
(1.2 million), USVI (692,000) and Bermuda (492,000) were
the leading destinations at the beginning of the 1980s. Current leader Dominican
Republic was behind the rest of the group
with 301,000 annual arrivals, a tenth of its present levels.
During the early 1960s, the Cuban
casinos were closed and hotels were generally used as vacation retreats for
loyal workers. Many of the visitors were either journalists or Eastern Bloc
communists on government-paid Cuban vacations who were invited to visit “model”
communities, schools, hospitals, or other places where socialist achievements
could be displayed. Between the mid-1960s and mid-1970s, only about 3,000
foreign visitors traveled to Cuba
each year But the disintegration of the Soviet
Union during the late 1980s and early 1990s was a monumental shock
to the Cuban economy. It was, in
Castro’s words, like “the sun not rising.”
Similar to the collapse induced by the Great Depression, the already
fragile Cuban economy contracted by one third in a few months (Gonzalez 2002;
Perez-Lopez 2001). In a search for a
replacement industry, Castro turned reluctantly to the foreign exchange promise
of tourism (Aeberhard 2002). This
transition had actually begun earlier, if very modestly, with the creation of
INTUR (National Institute of Tourism) in 1976, run by the Cuban military, and
with the 1982 Law Decree No. 50 authorizing foreign investments through joint
ventures. In May of 1990, the first joint-venture hotel opened in Varadero
Beach: the Cubanacán/Sol Melía,
with an initial investment of US$87 million by Spain’s
Melía chain. This was followed shortly thereafter by German, Jamaican, and
Canadian joint ventures.
Trends Since the
Truly dramatic changes in Caribbean
tourism market shares have occurred over the last two decades. As shown in
Table 2, while Cuban and Dominican shares of the total Caribbean market have
tripled in importance from three to 10 percent and six to 17 percent,
respectively, the Bahamian and Mexican shares have declined and Jamaica and
Puerto Rico have retained or modestly improved their positions. To simplify the exposition, the Rest of the
Caribbean (ROC) destinations were grouped into three categories defined by a
five-year (1996-2000) average level of per tourist spending: Upscale (over
$1,300), Middle ($900-$1,250), and Low ($350-$850). According to Table 2, there has been a drop
in the ROC-Upscale share since 1985 while the other two groups maintained
position. The ROC-Upscale destinations in fact are relatively small and they
had either some decline (Bermuda, for example) or actual increases (e.g., USVI,
Turks and Caicos) in total annual visitors, but their percentage market share
declined as the rest of the Caribbean grew more rapidly in absolute terms.
(Table 2 about here)
results of natural
logarithm of arrivals (the dependent variable) as a function of time (year was
the independent variable) in Table 3 For the region
as a whole, arrivals increased 5.4 percent per year over the 1985-2002 period
but 7.1 percent per year for the1985-1993 period and only 2.9 percent for the
1994-2002 period. This growth
deceleration partly reflects the influence of the September 11, 2001, terrorist
attacks (Crespo and Suddaby 2002), but also stems from changes in the global
tourism industry, which include the rising tourism resurgence in East Asia,
Pacific, and African markets and in the transitional economies of Eastern
Europe. Even accounting for these
factors, notable differences among the various destinations remain.
The three fastest growing destinations have been
Republic, and Puerto Rico. All but Cuba
and the ROC-Upscale destinations (which include Antigua,
Turks and Caicos, and the USVI, and which have maintained comparable, though
relatively low, growth rates) have experienced markedly lower annual growth
rates during the second half of this period.
The Dominican Republic’s unsustainable annual
growth rate of 21.2 percent between 1985-1993 drops to 7.5 percent between
1994-2002; Aruba’s from 16.8 to 1.7
percent; Puerto Rico’s from 12.7 to 5.1
percent; Mexico’s (Cozumel and Cancún) from 5.3 percent to roughly zero;
Jamaica’s from 7.9 to 2.0 percent.
Overall, excluding Cuba
and Dominican Republic
the annual growth rate has gone from 5.7 to 1.0 percent. Only Cuba’s
rate has visibly accelerated: from 11.8
to 14.1 percent per year.
ROC Upscale destinations have grown at about the
same annual rate over the entire period (although their growth rates as a group
are relatively modest). Losses in
tourist arrivals in Bermuda and Aruba
have been partially offset by gains in the Turks and Caicos and the USVI. It may be that some of these up-market resort
islands, because of more discriminating clientele and distinctive quality of
their differentiated products, are better insulated against the recent
attractiveness of some destinations in the Caribbean as
well as in Asia and Eastern Europe. Finally, the rapid recent growth for the Dominican
Republic in 2003 is
primarily attributed to the success of the Punta Cana region, which includes
some new and higher quality resorts promoted by international personalities
like designer Oscar de la Renta and entertainer Julio Iglesias.
(Table 3 about here)
Although the new tourist industry
in Cuba has
grown impressively, reaching roughly two million arrivals annually, it has not
been a panacea. The rigid and bureaucratic controls of the socialistic regime
are inefficient and make hotel managers into hotel “operators” (Interview with
managers of three Spanish hotel chains operating in Cuba,
June 2003). Tourism has also created ideological problems for the regime
because its so-called “apartheid” tourism prohibits Cubans from going to the
tourist resorts without foreign currency.
Prostitution subsequently exploded, some of it highly organized, leading
the regime allegedly to put on controls to try to prevent it (Bruni 2001;
Clancy 2002; Davidson 1996). After some
police crackdowns, prostitutes reportedly were driven off the streets and “Cuba
is no longer one of the world’s top destinations for sex tourism” (Eaton 2003),
although a more recent report notes that prostitution continues to be
“widespread in Havana” (McKinley 2004).
Finally, tourism’s economic impact
in Cuba has
been greatly diminished by the high leakage rate for imported inputs (such as
air transportation, food, raw materials, hotel furnishings, and managerial
salaries) that may exceed the 40-50 percent Caribbean
norm. In addition, net tourism revenues,
generously estimated for 2003 at US $800-900 million, plus the estimated $850
million from Cuban-American remittances to island relatives and friends (Suro
et al. 2003) amount to less than a third of the peak Soviet assistance to Cuba
of US $6 billion in 2003 dollars (Perez-Lopez 2001). This “net” tourism revenue does not of course
account for infrastructure and resort renovations that have occurred, further
reducing the net economic gains. As a
result of these circumstances, Cuban tourism continues to be plagued by a very
low visitor return ratio, 10 percent, in contrast to between 50-80 percent for
other Caribbean destinations (Simon 1995; Martin de
Holan and Phillips 1997).
Character of the Transition
exploration of the post-Castro Caribbean tourism
industry requires consideration of possible transition events in the government
and political economy of Cuba
(Gonzalez 2002). Given the interest in, and even the fascination with, Cuba,
a great deal has been written about this topic. In terms of possible scenarios,
however, only limited lessons may be drawn from transitions in Eastern
Europe and Asian nations (Åslund and Hewko 2002; Radu 2002)
because of Cuba’s
unique geography and history (Stein and Kane-Hanan 1996). The most obvious
difference between Cuba
and the former eastern-block or Asian nations is distance from the United
States; only 90 miles (145 kilometers)
separate the two. The histories of Cuba
and the United States
are also closely interlaced. Their
economies were really one prior to Castro: in 1959, the value of U.S.
investment in Cuba
was greater than it was for any other Latin American nation except for Venezuela,
but on a per capita basis, the value of U.S.
enterprises in Cuba
was over three times larger than anywhere else in Latin America
(Thomas 1998). More Cadillacs were
bought in Havana in 1954 than in
any other city in the world (Ruiz 1968). Dollars and pesos were entirely
interchangeable. Even after nearly a
half-century of communism, these connections continue. For instance, Cuban music and artists
continue to be highly popular in the U.S.
and the main road to the Varadero Beach
resorts is dubbed by locals in the Matanzas
province as “Calle Ocho,” in reference to the main street of the Cuban American
community in Miami, Florida
(Zuniga 1998). These factors might
suggest a relatively rapid re-unification after a regime change.
On the other hand, any form of
regime change will likely involve distortions and upheavals in the short term,
as the histories of, for example, the Dominican
Republic and Iraq
confirm, both of which also had long-running dictatorships that ended
abruptly. How long this transition
period lasts depends in part on how power is transferred and on the likelihood
and manner of foreign interventions.
Whatever the transition, two broad scenarios are feasible. The form of government in Cuba
could remain the same as it is now or it could move toward democracy and
openness and free markets. If the current communist system remains in place,
whether or not Castro is in power, then this outcome is likely to have the
least impact on Cuba’s
tourism and on the rest of the Caribbean (Simon 1995).
Several factors account for this conclusion.
current tourism strategy of price (low-cost) leadership requires that both its
prices and its costs be lower than those of its competitors. The absence of
economic rivalry in the communist model, the lack of supporting industries,
and, more generally, the economic inefficiencies inherent in a communist
regime, suggest that it could not compete very effectively in the long term
against places like the Dominican Republic
tourists (Martin de Holan and Phillips 1997). Even if Cuba
did not have to import most of the inputs used for tourism, they would still be
producing these inputs with a socialist cost structure and then pricing
them at competitive world prices. Second, foreign investment would continue to
be made difficult by myriad regulations and bureaucratic policies that exist
within a deteriorated economy; majority foreign ownership would continue to be
prohibited; capitalism and private enterprise would be hindered; and tourists
would be kept physically and artificially apart from most Cubans. Third,
relations with the U.S.,
the potential source of the largest and wealthiest market for tourism, would
remain uncertain, particularly if Castro or his designees were to remain in
power, even absent the embargo. This in turn would have a further dampening
effect on foreign investment.
Many experts, however, do not
believe the present system will remain intact after Castro (Martin de Holan and
Phillips 1997; Gonzalez 2002; Stein and Kane-Hanan 1996; Weintraub 2000). They project a new political economy quickly
favoring freer trade, and much greater freedom of expression and travel. Perhaps more optimistically, they also
envision a shift toward democracy and a new constitution encouraging private
enterprise and recognizing private property.
This latter democratic scenario seems to us most likely after Castro,
but probably after an inevitable period of transition. Given the close pre-Castro U.S.-Cuban
commercial history and recent progress (closing in on the Dominican Republic as
the top Caribbean destination), the democratic scenario will provide needed
assurances for a renewed influx of U.S. travelers and investments and some resumption
of pent-up American visitor demand. It
is expected that investors will mount new product differentiation, market
segmentation, and communication efforts that currently they are unwilling to
supply under present constraints and uncertainty. At the same time, the growth of Cuban tourism
from market opening will also tend to affect surrounding destinations.
Assuming a significantly more
democratic scenario prevails, what are the likely consequences on tourism in Cuba
and their impact on other destinations? This will depend in significant measure
on the tourism products Cuba
offers. According to traditional
marketing theory, Cuba
could bring three categories of products to the Caribbean
tourism market (Lilien, Kotler and Moorthy 1992).
The first would entail new product innovation: products and services radically new both to
the Caribbean market and to Cuba,
i.e., activities and services that would be truly new and that would compete
against other classes of existing or traditional tourism products and
services. Examples would be short ferry
services from Key West or Miami to Havana where tourists and visiting
relatives/friends (VFRs) could bring their cars and vans to drive in Cuba;
fast-speed ferry boats (hovercrafts, similar to the ones in Capri, Italy) from
Key West and Miami to Havana; city tourism, capitalizing on the city of Havana
and its vast resources and architectural styles. The unique proximity of Cuba
to the United States
would be a real advantage, along with the curiosity factor for the island and
its history: Hemingway, mojitos, I Love Lucy. Such new offerings would be expected to
increase overall visitors to the Caribbean, attract a
new type or class of visitor, and compete with other destinations in varying
will likely develop new brands,
i.e., by entering an established product line already in existence in the
already has experience with all-inclusive resorts that cater to Europeans who
typically arrange their travel through large tour operators. With appropriate
could easily move into the more upscale and specialized market segments,
catering to more elite U.S.
and other customers with higher service and performance expectations and
compete more directly with islands like Bermuda and
Turks and Caicos. Ecotourism opportunities in one of the largest and most
bio-diverse islands in the world will also compete with those of other similar
destinations even in places in Central America like Costa
Rica (Linden 2003). In addition, with the
right investments, Cuba
could become a competitive winter golf destination (Friedman 2000), affecting
the Dominican Republic
in particular. Cruise ship visitors
would be another new brand that could compete successfully with several other
island destinations (particularly Puerto Rico) and Cuba’s
proximity to Miami and its size and
plentiful deep harbors could make it a major destination for cruise ships. The
existence of several major airports and a national airline (Cubana) with an
extensive fleet give Cuba
additional advantages and flexibility over other Caribbean
The third category would involve a simple extension of existing product lines:
the introduction of products only marginally new to Cuba
and to the Caribbean region that are immediately
recognized and understood by consumers as simple extensions of existing product
lines. As the largest nation in the Caribbean, Cuba
has tremendous opportunities to expand and to offer “new models” or “styles” of
the same basic product in its various keys and smaller islands, some of which,
of course, are the size of several other Caribbean
countries. These products that simply
product inventory will tend to compete with comparable, middle-and-down
destinations and should depress prices in this price-sensitive and vulnerable
segment due to an increase in supply.
Products in these three categories
will compete differently with different nations and destinations but Cuba
in theory and in practice might compete with every destination in the Caribbean.
The converse is not true. The curiosity factor for Cuba
and its proximity to the United States
will likely be significant variables and “early sales” are likely to have a
major impact on its tourism arrivals and on those of competitors. This
curiosity factor could last for a significant time, but might also be mitigated
by a lack of adequate infrastructure and by the extent of turmoil associated
with a change in government in Cuba.
In any event, after a transition is complete, one would expect a “sales”
profile that rises sharply in the early stages of product introduction, then
peaks, and falls off to some equilibrium level. A crucial element in where this
equilibrium level settles will be the ability of other Caribbean
destinations to lure back repeat visitors as well as the competitive reactions
and countermoves of their key rivals.
Three recent studies are useful in exploring
the quantitative impact of Cuba’s
opening up. The first study was a comprehensive
analysis (though poorly documented and difficult to replicate because its
quantitative results were modified by unspecified qualitative or subjective
factors) conducted by the U.S. International Trade Commission staff in response
to a request from the House Committee on Ways and Means of the U.S. Congress to
examine the economic impact of U.S. sanctions on Cuba (U.S. International Trade
Commission 2001). The ITC report used a gravity regression model, supplemented
by “expert” modifications and adjustments, to estimate the effects of sanctions
on bilateral trade and on tourism. The other two were prepared by the Brattle
Group (Robyn et al. 2002) and by analysts at the University of Colorado-Boulder (Sanders and Long 2002) in
response to requests by the Center for International Policy and by the Cuban
Policy Foundation, respectively, organizations that have in the past expressed serious
concerns about the continuation of the U.S. travel and trade embargo against
In each report, an effort is made
to forecast the various effects on trade and tourism from the elimination of
embargo on U.S.
trade and travel. The ITC’s report shows the smallest effect on tourism because
their study considers this impact assuming an uninterrupted continuation of the
present Castro regime and its economic and social policies. The ITC’s range of
100,000 to 350,000 additional U.S.
tourists each year over the number that now travel there nevertheless appears
too conservative. It represents
four percent of the million U.S.
visitors to the Caribbean,
far below Cuba’s
earlier share in the 1950s, and seems low given Cuba’s
proximity to the U.S.
and pent-up demand conditions. The report mentions no diversion impacts from
other destinations in the Caribbean except for a brief
mention of Puerto Rico.
The other two reports estimate much
larger numbers, but are less clear on the specific assumptions they make about
the economic and political conditions that may prevail. For example, Sanders and Long (2002) do not
state whether private ownership would be allowed in any of their scenarios or
whether “joint ventures” between the Cuban regime and the investors would be
mandatory. Such restrictions by the Cuban government have in the past inhibited
foreign ventures and drawn concern from the European Union (“Foreign
Investment” 2002). Under their most
favorable forecast, these authors project, by the end of a five-year
transition, some 3 million U.S.
citizens would travel to Cuba
annually. This estimate is based on two conjectures: (1) that Cuba would regain
the 20 percent share of total Caribbean tourists the authors assert it enjoyed
in the 1950s (Maribona’s actual 1959 estimate is closer to 30 percent—see Table
1); and (2) that Americans would comprise roughly 70 percent of the Cuban total
as they do at similar destinations (the authors cite Cancún, Mexico, as an
example) today. Additionally, based on a
questionnaire sent to travel agent “experts,” they estimate that half of the
new U.S. tourists
going to Cuba
would actually be diverted from other Caribbean
destinations. Their study thus implies
that almost one out of every five U.S. tourists now going to the other islands
would be lured away by Cuba (roughly 1.5 million out of 8 million in 2002),
which would cause major short-term dislocations even if the changes took place
over several years.
The third report (Robyn et al.
2002) estimates that 3.2 million U.S.
tourists would visit Cuba
post-embargo. Their estimates are based
on the patterns of travel back to the Dominican Republic by
Dominican-Americans, whom they believe are the “most comparable group” among
the Caribbean “emigrants” to Cuban Americans (most Cuban-Americans are in fact
political exiles rather than traditional economic emigrants like
Dominican-Americans) and on the travel patterns of Canadians to Cuba as a
percentage of the Canadian population. Specifically, they assumed that
Cuban-Americans living in the U.S.
would, on average, return to visit at 80 percent of the rate of Dominicans.
Moreover, since one percent of all Canadians, or 308,000, traveled to Cuba
in 2000, they applied the same rate to the U.S.
population of 280 million, i.e., 2.8 million U.S.
tourists to Cuba.
The study also assumed that 80 percent of the U.S.
tourists or 2.2 million would be diverted from other islands. This amounts to more than one of every four U.S.
citizens who visited the Caribbean in 2002, implying an
even larger potential impact on neighboring tourism.
implied by two latter forecasts seems
possible within the of recent tourism trends in
the Hispanic Caribbean. During the decade of the 1990s, the number of hotel
rooms in the Dominican Republic increased by 36,000, or 126 %, and the number
of stayover arrivals by 2 million; tourists to Cancún and Cozumel in Mexico have also increased dramatically
since 1990 (Padilla and McElroy 2005). Cuba, which is over three-fourths the
size of England and three times larger than the Dominican Republic (the second
largest country in the Caribbean after Cuba), has already experienced some
remarkable increases. In the absence of
investment, the number of Cuban hotel rooms rose 250 percent between 1990 and
2004, from 13,000 to almost 45,000, an increase of over 30,000 rooms. Between 1995 and 2004, the number of tourists
increased 170 percent, from 775,000 to over 2.1 million. While this issue is addressed explicitly
below, it is likely Cuba’s
hotel capacity could increase rapidly over a 5- to 10-year period, particularly
under a favorable (U.S.)
in tourist arrivals projections
million isconsidered to
be it is considered, in-between estimate
of 2.0 to 2.5 million new or additional U.S. tourists to Cuba appears
reasonable by the end of a five-year, post-embargo, free-market transition,
In addition, for purposes of simulating likely impacts, it seems
to assume that up to two-thirds, or 1.5 or 1.6 million, of new U.S.
visitors would be diverted from other Caribbean
destinations. This diversion level falls in the middle of the projection range
made by researchers and represents a consensus of several CEOs and senior
managers representing most of the major European hotel chains now operating in Cuba
and the rest of the Caribbean region.
projections and simulations shown in Table 4 are based on recent historical
growth trends as well as on specific information about the plans and developments
at individual destinations as derived from a variety of sources such as CTO,
WTO, and information about local tourism from other sources such as local
publications and newspapers. This exercise was approached by assuming that the
five-year, post-embargo transition would begin in 2005. Thus, 2004 was the base
year used in making these forecasts and diversion estimates. It is also assumed
(and fully expected) that Cuba would continue attracting Canadian, European,
and Latin American tourists during the transition, but that it would increase
its share of U.S. tourists during the first five years after Based on these considerations, stay-over tourists to
the Caribbean are projected to increase from 18.8
million in the base year (2004) to 22.4 million by the fifth year, just under
20 percent for the period, a somewhat conservative forecast given recent
trends. Some destinations would of course increase faster and some slower: the
Dominican Republic, for example, would grow 22 percent over the five years
while the Cayman Islands would grow by 4.5 percent. Cuba
would grow from 2.1 to 3.2 million 49 percent,
excluding those tourists diverted from other destinations. (With the diversions, as discussed below,
stay-over tourists to Cuba
would increase by an additional 1.6million).
To establish more
if Cuba could
reasonably be expected to accommodate such significant growth from the base
year, the following factors were considered:
First, during the base year, 2.1 million tourists arriving in Cuba
stayed an average of slightly more than 10.5 nights and demanded approximately 22
million bed nights. Put differently,
Cuba’s 90,000 total available beds (45,000 rooms) were occupied at the 1994-2002
average of 67 percent occupancy (WTO 2004) for 245 days (365 x 0.67), resulting
in the 22 million bed-night demand for that year. By year five, it is projected
that Cuba would have a total of 4.8 million stay-over visitors, including 2.3
million U.S. tourists and 2.5 million others.
In estimating additional visitor
demand for hotel rooms, it is conservatively assumed—given existing familial
bonds between Cubans in Cuba and the Cuban diaspora, as well as the short (and low-cost)
travel distance from the U.S.—that one in eight (300,000) of the new U.S.
tourists would not need hotel accommodations, as they would stay in private
residences. The remaining 2 million U.S.
tourists staying an average of seven nights—currently the U.S.
average in the Caribbean (Duval, 2004)—would require 14
million bed nights. The 2.5 million
other visitors were assumed to stay an average of 10 nights, reflecting the
longer vacation stays of European and Canadian visitors, but down slightly from
the historical average (10.5) to adjust for increasing crowding. As a result,
the total demand for bed nights is projected to be a grand total demand of 39
million bed nights. An additional 17 million bed nights (39 minus the existing base
year total of 22) would be required.
capacity would need to increase by three-fourths over the base year levels to
accommodate this influx of additional visitors, implying an addition of 6,500
to 7,000 new hotel guest rooms each year (or roughly 10 large hotels per
year). This implies a significant (but
feasible) annual capital investment of between US $350 and US $500 million per
year (assuming a per room cost of $50 to $70 thousand). This level of expansion
would in fact parallel the annual growth Cuba
experienced between 1991 and 1995 when the government mounted a major tourism
investment program after the fall of the Soviet Union,
an expansion that took place without U.S.
investor participation (Martin de Holan and Phillips 1997: 785). Development on this scale would provide
35,000 additional hotel rooms (70,000 beds), sufficient to accommodate the
forecasted demand at expected occupancy levels.
estimate the quantitative impacts of the projected diversion of 1.6 million U.S.
tourists from surrounding Caribbean destinations to the
the following calculations were made. First, from the base year levels, the
number of U.S.
tourists for each destination for year five was estimated. In the absence of a
preferred distribution technique, the allocation of diverted U.S.
tourists was based on each destination’s share of total U.S.
visitors (minus Cuba’s)
in year five. For example, since Mexico
(Cancún and Cozumel) was projected to have a 23 percent
share of all U.S.
tourists to the Caribbean in year five (excluding Cuba),
its share of the 1.6 million U.S.
tourists diverted to Cuba
would be 360,000 (or 23 percent of 1.6 million). Finally, the percentage impact of the
diversion for each destination’s tourism industry was estimated by dividing the
total diversion by total tourists in year five.
To provide a context for discussing
the projection results, strategic group maps are presented in Figures 1-4
visually tracking changes in Caribbean tourism over the
past two decades. They highlight the
emergence of the Dominican Republic
and the resurgence of Cuba
using averages for five-year periods or pentads. (Data for 2004 were estimated based on
preliminary data and/or time trends so there would be four full pentads of
comparison). On the vertical axis, the
average economic level of the destination is shown, showing Low Scale, Middle
Scale, and Upscale, depending on average tourist spending at the destination.
The horizontal axis shows the language spoken at the destination. Each circle is a destination or country and
the diameter of the circle represents the total number of arrivals or the size
of its market share. The maps thus highlight the particular niche within which
rivals are positioned in this competitive space. Comparing the 1985-89 pentad
with the five-year periods for 1990-94, 1995-1999, and 2000-04 clearly shows
the rise of some destinations and the decline of others. The striking gains for Cuba
and the Dominican Republic
in market share are offset by declines for Barbados,
Netherland Antilles (mainly St. Maarten), the USVI, and even Mexico. On the other hand, Puerto Rico
maintained market share over the two decades.
(Figures 1-4 about
The opening of Cuba
is anticipated to accelerate the trends shown in these strategic group maps,
and results from the projection and diversion analysis confirm that this is the
case. Between the base year and the
completion of the five-year, post-embargo period, all destinations in the
region except the Dominican Republic would lose at least some market share to Cuba
(see Table 4). The Dominican
Republic, which has been increasing in
tourism levels rapidly, has also been making special efforts to increase the
number of U.S.
tourists among its very large tourism industry and has significantly increased
marketing expenditures in the U.S.
for this purpose in recent years. But significant declines are projected for
the combined Mexican destinations, Cancún and Cozumel,
and Bermuda. All
other major destinations to the north—Bermuda, Jamaica,
Cayman Islands, USVI— also lose market share. Cuba
would experience a doubling in market share, from 11 to 22 percent, by the end
of the transition period.
Most of Cuba’s
growth would be fueled by the pent-up demand and by U.S.
visitor diversion from competing destinations.
According to Table 4, the diversion would fall in the roughly 400,000
annual visitor level in Mexico
and in the 200,000 to 300,000 level for Puerto Rico,
and the Dominican Republic.
However, the negative impact on overall visitation levels is projected to be
substantial, averaging 10 percent for all competing destinations. As expected, the biggest declines are
forecast for the large resort areas like Mexico,
and Puerto Rico, as well as those highly dependent on
the U.S. market
like the Cayman Islands, Bermuda,
and the USVI. Diversion is less of a
concern for the small ROC islands and destinations more dependent on European
and other visitors like the Dominican Republic
and Netherlands Antilles.
forecasts are speculative because they rest on three assumptions: (1) that
potential infrastructure and amenity bottlenecks will not seriously curb Cuba’s
post-embargo growth; (2) that in a short time Cuba’s tourism can throw off the
anti-competitive shackles of its socialized past and successfully meet the
international resort standards that the competitive Caribbean tourism demands;
and (3) that during the transition the defensive reactions of Cuba’s rivals do
not significantly alter its growth path.
The latter may include expanded marketing, attractive room and airline
discount packages, and price competition.
The projections also ignore the special peculiarities of individual
destinations. For example, the high
level of VFR travel for Puerto Rican Americans may reduce diversion in Puerto
Rico. If the
“all-inclusive” and low-price character of Cuba’s
mass tourism style is expanded over the transition, this could cause greater
diversion than those estimated for similar destinations like the Dominican
and St. Lucia,
and smaller impacts for the less “all-inclusive” Cancún and Cozumel. Likewise, Bermuda’s
upscale image and geographical distance may markedly reduce its estimated
exposure. Crowding or political and social turmoil during the transition period
could also cause negative diversion, from Cuba
to other islands. On the other hand, if Cuba
initiates development of some of its superlative ecotourism and marine assets,
some small, similarly endowed destinations like Belize,
and St. Vincent and the Grenadines
may be materially affected. Beyond these
considerations, the presence of its national airline gives Cuba
a self-sufficiency in transporting tourists that most other Caribbean
nations and destinations do not enjoy. Overall, however, this analysis suggests
the lifting of the U.S.
travel and trade ban, coupled with the liberalization of Cuba’s
government and of its economy, will clearly affect its competitors negatively
across the region in the short run.
conclusions corroborate the results of structured interviews conducted by the
senior author during 2002 and 2003 with a dozen CEOs and senior managers
representing the major European hotel chains operating in Cuba
and the region. The majority expected
that Cuba’s opening
up would have “a major impact,” though invariably they linked that outcome to a
fairly major, free-market overhaul of the Cuban economy. Some also felt that rapid investment would be
forthcoming given a “herd mentality” that operates in the tourism and resort
industry, and that it would be crucial for the Dominican
and other close-by competitors to focus on customer loyalty and repeat
visitation to soften the impact.
of Caribbean tourism offers many lessons and the first
one is that Cuba
has been and will continue to be a major force in the industry. The second is that the source of Cuba’s
importance lies primarily in its long-standing close economic, historical, and
cultural ties with the United States. This study argues that the full resumption of
U.S. travel and investment, after an assumed five-year transition toward a free
market, political economy, would propel Cuba back to its former prominence as
the number one insular destination in the region, a position it held in the
late 1950s before Castro. The analysis
further argues that because of its size, biodiversity, and proximity to the U.S.,
Cuba can offer
a range of both standard and innovative new tourism products and, at varying
levels, compete with all destinations in the region.
resurgence will accelerate market trends underway for two decades favoring the
larger Hispanic Caribbean countries like Cuba
and the Dominican Republic.
According to our estimates, in the fifth year after the transition, Cuba’s
growth would be fueled by 2.3 million new U.S.
tourists, of which 1.6 million would be diverted from other Caribbean
destinations. Such deflections of U.S.
tourists would have a major impact on most of Cuba’s
competitors. Thus, the widespread
concern about the post-embargo effects on surrounding destinations echoed in
the press and repeated in the senior author’s interviews with major hoteliers
across the region seems warranted.
projected impacts rest upon an architecture of plausible but uncertain
assumptions. First, although there are recent precedents, the feasibility of another
major increase in Cuba’s
room capacity over a relatively short period assumes that non-competitive legal
and other barriers to U.S.-Cuban trade and investment can be eliminated
quickly. Second, the diversion of
two-thirds (1.6 million) of the new U.S.
tourists to Cuba
from other Caribbean destinations is based on an
estimated consensus of recent research and expert regional opinion. To the degree that this ratio is too high,
all negative impacts on Cuba’s
competitors will be lower, although econometric estimates of the elasticity of
substitution among similar tourist destinations strongly indicate that Cuba
and the other Caribbean destinations would be close
substitutes (Witt and Witt 1995; Divisekera 2003; Durbarry and Sinclair 2003;
Lim 1997). Third, our diversion
estimates are based on current U.S.
shares of the respective resort areas projected into the future. If this distribution
is altered by, for example, focused marketing efforts, relative price changes, exchange
rate swings, or natural disasters over the transition period, particular
destinations will be differentially affected (Durbarry and Sinclair 2003).
Finally, our forecasts provide ceteris paribus impact estimates
that do not incorporate rival countermoves to retain market share and
strengthen customer loyalty during Cuba’s
post-embargo ascendance. These include intensive marketing and discounting,
development of new products, regional alliances, and other responses. If such strategies are effective in
curtailing diversion, as they are likely to be in some cases, they will alter
the results of these forecasts and simulations.
Finally, and perhaps more
importantly, growth of the magnitude implied by the foregoing analyses would
place further strains on Cuba’s
fragile environment and on its society writ large, particularly since these
changes would be taking place while its people and its governmental and civic
structures are presumably adapting to new systems. Cuba’s
crushing needs for capital and for a significantly higher quality of life for
its people, coupled with the absence of a tradition of strong local government or
an independent scientific/scholarly community, might lead to highly undesirable
outcomes that would take a long time to reverse. This suggests an important
need for international assistance and for greater cooperation with its Caribbean
neighbors in planning the development of tourism not only in Cuba
but also across the entire Caribbean region. This type
of regional cooperation and coordination, however, might be as necessary today
as it has been difficult to achieve in the past. Nonetheless, despite the
uncertainties inherent in this exploratory analysis, the impacts presented here
represent a reasonable framework for plans that deal thoughtfully with the real
challenges that the further opening of Cuba
implies for the tourism industry in the Caribbean.
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