Small island tourism economies and country risk ratings

Abstract

During the last two decades, there has been a growing fascination with the livelihood of islands with small populations and territories which overwhelmingly rely on tourism as a source of exports. The small island tourism economies (SITEs) analyzed in this paper were colonised, and had depended heavily on financial aid from their former colonists for infrastructure development that has declined dramatically since the collapse of the Soviet Union. These economies are developing countries which need a consistent inflow of foreign direct investment to maintain economic growth. They have limited resources, are perceived to suffer from frequent natural disasters, and the international financial community considers them to be risky entities. For this reason, the paper provides a comparison of monthly country risk ratings compiled by the ICRG for six SITEs from 1984 to 2001 and analyses the relationship between country risk and economic growth for these six SITEs using annual data from 1985 to 2000. The economic growth rate is positively correlated with risk ratings in only 13 of the 24 cases. This is a surprising result as the country risk literature asserts that increases in risk ratings are noticeably influenced by higher economic growth rates, and vice versa.