Tourism specialization and economic output in small islands

This study aims to investigate growth differentials among small islands and the impact of tourism specialization on the growth and the economic performance of small islands.

The study is based on trade theory and uses data from a panel of small islands for 1995-2007. It applies panel regression and standard time series methods combined with a qualitative approach.

Small islands experienced stronger basic patterns of growth than many developed countries, especially where economies of scale are not an issue. The findings further suggest that tourism specialization is not harmful to growth, and, in lieu of technological gaps and resource limitations, tourism specialization is a sound option. Size, a lack of complete sovereignty or independence and export orientation do not seem to affect the variance in the real per capita GDP at a greater degree. Finally, small islands may leverage returns to scale in global markets.

While tourism specialization is assumed to enhance growth, in the case of small island destinations, the study did not formally test whether increased terms-of-trade may be perpetually improved.

The study prompted four policy suggestions: small island economies should engage in tourism specialization; small island economies should allocate more resources to the tourism industry than other economic sectors; the success of tourism specialization does not depend exclusively on comparative advantage; and institutional realities and path dependence may play a role in economic performance.

The originality of this study lies in the detection of a paradox in mainstream economics that indicates that small islands may not enjoy sustained economic growth. The detection led to a surprising discovery that tourism specialization may propel growth. The value of the study is twofold: theoretical value is added by suggesting a reconceptualization of the construct capital; and, practical value is strengthened in the sense that tourism specialization may only work under a condition where upon tourism offerings command higher prices than other commodities.