From Boom to Resilience: How Tourism Shapes Growth in Small Developing States

The 2025 IMF Working Paper authored by Daniel Carvalho Cunha, Rodrigo Garcia-Verdu, and Pedro Jucá Maciel from the International Monetary Fund’s African Department delivers a thorough and timely analysis of how tourism affects economic performance in small developing states (SDS). Using advanced econometric techniques and leveraging high-frequency local data, the study delves into both the cyclical vulnerabilities and recovery potentials of tourism-dependent economies. By turning a spotlight on Cabo Verde, a geographically and economically unique archipelago, the paper identifies tourism as both a growth engine and a potential point of fragility for SDS. It bridges macroeconomic theory with on-the-ground realities, offering empirical findings that are directly relevant to policymakers in similar economies across the globe.

Recession Hurts Less, Recovery Comes Faster

Contrary to the patterns observed in larger emerging markets, recessions in SDS tend to leave behind fewer long-term scars. The study’s analysis, which uses a local projection approach to map out the trajectory of key growth variables over time, shows that the impacts of economic downturns in SDS, often triggered by collapses in tourism, are typically temporary. While capital investment, particularly in hotel infrastructure, takes an initial hit during recessions, the tourism sector’s rebound tends to lift the economy back toward its pre-crisis potential. This quick recovery is largely due to the relatively stable and elastic demand for tourism services from advanced economies, which serve as primary sources of visitors. However, the study emphasizes that this resilience is not without caveats: the volatility in tourist arrivals remains a significant source of risk, particularly when recessions coincide with global shocks such as pandemics or financial crises. The authors also show that while employment and capital investment recover, fiscal metrics such as public debt often deteriorate and take longer to normalize.

Cabo Verde: A Natural Economic Laboratory

Cabo Verde’s archipelagic geography, with its nine islands and distinct economic ecosystems, provides the perfect testbed for studying the localized effects of tourism. Two islands, Sal and Boa Vista, dominate the country’s tourism industry, attracting more than 80 percent of all foreign visitors. This sharp concentration allows researchers to compare outcomes across tourism-centric and non-tourism-centric regions. The authors use monthly VAT collections at the island level as a proxy for economic activity and pair them with tourist arrival data to estimate short-term elasticities. The results are revealing: a 1 percent increase in tourist arrivals in Sal or Boa Vista boosts local economic activity by about 0.4 percent over the following year. However, in non-tourism-centric islands like Santo Antão, Fogo, or Maio, the spillover benefits are minimal or even negative, highlighting the enclave nature of Cabo Verde’s tourism economy.

National Impacts and Asymmetric Risks

Using the regional findings, the study estimates the national elasticity of GDP to tourism in Cabo Verde at 0.16. This figure, while modest at the aggregate level, conceals major internal disparities. In a modeled downside scenario where tourist arrivals fall by 20 percent in Sal and Boa Vista, the national economy would contract by about 3.2 percent, leading to an automatic increase in the public debt-to-GDP ratio by an estimated 3.6 percentage points. On the other hand, the study also simulates an upside scenario. If non-tourism islands were better integrated into the national tourism network, for instance, through improved transport infrastructure and targeted policy incentives, their economic responsiveness could match that of the tourism hubs. In this case, the national elasticity could rise to 0.4, implying that a 20 percent rise in tourist arrivals would generate an 8 percent increase in national GDP. This stark contrast underscores the macroeconomic stakes involved in tourism sector planning and the untapped potential that lies in broader regional inclusion.

Strategic Recommendations for Tourism-Dependent States

The IMF researchers advocate for a multi-pronged approach to strengthen the resilience and inclusivity of tourism-driven growth. First, they recommend investing in infrastructure that links tourism hubs with less-developed regions, thereby enabling more equitable participation in the tourism economy. Second, fiscal policy should be countercyclical, building buffers during booms to deploy during downturns. This includes establishing unemployment insurance systems, targeted social transfers, and facilitating credit access for small and medium enterprises. Third, governments should reduce balance of payments vulnerabilities by diversifying both the tourism offering and the broader economy, especially through the development of renewable energy and local food production. Lastly, the paper emphasizes the importance of maintaining adequate international reserves to cushion the blow of sudden external shocks.

While the study’s conclusions are highly relevant for tourism-heavy SDS, it also acknowledges its own limitations. The unique geography of Cabo Verde may not translate neatly to other countries, and the availability of high-frequency data remains a challenge in many SDS contexts. Future research could delve deeper into variations within SDS based on income levels, regional fragility, or climate exposure. Nevertheless, the findings provide powerful evidence that smart, inclusive, and forward-looking policy interventions can transform tourism from a cyclical vulnerability into a sustainable pillar of growth.