Puerto Rico's Visitor Economy: Highlights
Analyzing the scale of the visitor economy in Puerto Rico and the dramatic shift on market share in the Caribbean
Tourist arrivals lie at the most common unit of measure to quantify the volume of international tourism. According to the United Nations World Tourism Organization (UNWTO), international tourist arrivals grew 7.0% in 2017, the highest increase since the global economic crisis back in 2009. However, with only 1.6% growth rate in the case of Puerto Rico, the story is quite different. In this first article of our new series that will offer a deeper insight on Puerto Rico’s visitor economy from a statistical analysis perspective, we will explore the historical reasons that paved the way for Puerto Rico’s and the Caribbean’s dramatic shifts in market share.
The first graph displayed on Foundation for Puerto Rico’s data portal is very revealing as it clearly shows the dramatic growth of tourism in the Dominican Republic over a 20-year period. It might be hard to believe now, but in 1995, Puerto Rico was the top tourist destination in the Caribbean, with 22% market share. At that time, the Dominican Republic was the second most popular destination with a 12% market share, followed closely by the Bahamas. Fast forward to 2018, and Puerto Rico has dropped to third in market share with just 15%, while the Dominican Republic is now at 24%. Cuba, as well, has emerged as a strong tourist destination in the Caribbean, surpassing Puerto Rico in tourist arrivals for the first time in 2016.
Total number of International Tourist (in millions)
It’s important to discuss the factors behind this shift in market share. As with any economic development analysis, there are many variables associated with this transformation. We will first discuss external factors to Puerto Rico, which are easier to pinpoint. The first thing we must recognized is that Caribbean economies like the Dominican Republic and Cuban went through dramatic transformations during the final half of the 90’s and the early 2000’s. In the case of the Dominican Republic, its economy grew exponentially during that period, reaching a 10% of gross domestic product (GDP) growth several times. This growth was driven by massive Foreign Direct Investment (FDI) in the country. According to the International Monetary Fund (IMF), FDI is highly correlated to tourism growth, as many of those investments are cdonnected with the visitor economy (hotels, roads, infrastructure, ports, airports, etc.). A closer look at FDI numbers in the Dominican Republic confirms this notion. From 1990 to 1995, the country accumulated $854 million of FDI, while during the period of 1995-2000 it accumulated $3.9 billion, equivalent to a 364% increase. Like stated before, a lot of that investment went to hotel development, leading to a rapid increase in the lodging inventory.
Dominican Republic - Foreign Direct Investment (in millions of $)
Although it is reasonable to think that the Dominican Republic won those visitors over Puerto Rico, it is not a fair comparison by any means. Puerto Rico and the Dominican Republic have had different development tracks. Puerto Rico had its “development miracle” in the 60’s, thanks in part to initiatives like Operation Bootstrap, which led to growth in GDP per capita unparalleled to other islands in the Caribbean during that period. This growth also led to the development of the tourism sector in Puerto Rico, with the construction of hotels and the expansion of the ports and airports. Likewise, the significant diaspora growth in big cities opened air access in places like New York and Chicago. This type of tourism growth and investment occurred in the Dominican Republic at a much later period. Thus, in 1995 the Dominican Republic and Puerto Rico were in different development levels, with the latter being a more mature destination. Besides the difference in maturity, one cannot compare the scale of the Dominican Republic with Puerto Rico. By being significantly bigger the Dominican Republic could sustain massive grow in tourist arrivals by means of increasing lodging capacity. The country is now approaching the 80,000 mark in hotel room inventory, compared to Puerto Rico who was stayed at around 15,000 rooms for many years (although with the arrival of short-term rental companies like Airbnb, the room inventory should now be surpassing the 25,000 figure).
This tourism trend could also apply to Cuba, which after 2006, began opening their tourism sector to the U.S. market. Cuba could also see similar tourism growth rates as in the Dominican Republic but will require similar FDI growth. Many analysts doubt Cuba could see FDI numbers as high as the ones in the Dominican Republic. Ultimately, it will depend on the Cuba government who has been sluggish at best at reforming and opening the economy.
That said, it seems like Puerto Rico has been stagnant since the 2000’s when it comes to the tourism sector. Some argue that Puerto Rico could have carved out part of the growth that occurred in the region during that time if it had better prepare to the rise of the Dominican Republic.
Understanding the scale of the visitor economy in Puerto Rico
The Correct Tourism Measurement
A question we often get at the Foundation is how big is the tourism sector in Puerto Rico. We hear numbers ranging from 10% to 50% all the time. The correct way to measure the size of an industry is by calculating the industry direct gross value added, which you can derived from GDP numbers in the national accounts. The Gross Domestic Product (GDP) in a country is the summation of all industry valued added contributions. Problem is, tourism is not an industry, thus you cannot find this number in the national accounts. Tourism is unique because its activity touches many industries, ranging from lodging, food and beverage, transportation and retail to mention some. The World Tourism Organization (WTO) recommends a Satellite Account to extrapolate the contribution of tourism activity from each industry. More than 65 countries have developed a tourism satellite account. Unfortunately, Puerto Rico is one of them, even though the Foundation has advocated for years to have one. What we do have is the tourism expenditure, which is calculated by the Puerto Rico Planning Board as part of the Balance of Payments (tourism is treated as an export). However, tourism expenditure is not equivalent to the direct contribution of tourism activity, as it is not valued added (it includes intermediate products). Outside the tourism expenditure, there are no additional economic indicators produced by the local government. The direct, indirect and total contribution estimates for tourism in Puerto Rico are produced by the World Travel ad Tourism Council (WTTC), an international industry group. One important element to take in consideration when comparing these estimates with the tourist expenditure numbers produced by PR Planning Board is that the WTTC includes local tourism consumption while the expenditure numbers don’t. The inclusion of internal tourism in the WTTC estimates is based on WTO recommendations around how to measure tourism.
How big is the Visitor Economy in Puerto Rico?
According the WTCC the direct contribution of tourism in Puerto Rico in 2017 was $2.5 billion, while the estimate for the total contribution (including in directed and induced) was $7 billion, equivalent to 7% of GDP. This far lower than most countries in the world, as Puerto Rico ranks 181 in contribution of tourism to GDP in the WTTC ranking. The average contribution of tourism to GDP in the Caribbean is 15%. In Puerto Rico, the biggest economic sector is manufacturing, which represents around 45% of the GDP. This is due to the big presence of US pharmaceutical companies in Puerto Rico that produce many drugs and allied products (2/3 of the manufacturing production in Puerto Rico comes from pharma). Although there is a sizable manufacturing sector, it has been shrinking recently due to the elimination of section 936 of the federal tax code, which exempted US companies established in PR from paying federal taxes, and other external factors, such as technology and US trade policy.
The Foundation has argued that the visitor economy in Puerto Rico is small due two main factors: low visitor expenditure (per visitor per day) and weak interindustry linkages. The low per visitor expenditure is driven by the short length of stay of leisure visitors and a large diaspora segment that stays with friends and family. According to Foundation for Puerto Rico, up to 40% of visitors could be associated with the diaspora. These visitors stay longer but have a low per day spent and thus low economic impact in the destination. The other factor that explains the low contribution of tourism to the economy are the weak interindustry linkages, which are driven in part by the high import rate of intermediate goods. The Internal linkages are strongly related to the economic contribution of tourism to an economy. By improving linkages, the Island can rely on visitor expenditure and human capital to influence economic development. Visitors demanding locally produced goods and services produce much higher economic effects.
The Foundation has argued that Puerto Rico could double the contribution of the visitor economy to 14% within 10 years, so it could be up to par with other countries in the region.
 Tsounta, Evridiki, “What Attracts Tourists to Paradise?”. IMF Working Paper- Western Hemisphere Department. December 2008.