Economics of Airport Development ‘Agricultural diversification, tourism growth and air access problems’

by Dr Rudy Matthias

Though one of the oldest and best known economists, Adam Smith, argued that the “invisible hand” of the economy should be left to allocate society’s scarce resources, it has become clear to policy makers that there are many worthwhile investments, that if the market is left to its own devices, may never be undertaken, as the returns from those projects may not justify the investment made. As I reasoned in the previous article, governments are usually forced to step in, in such cases to avert the market failure by providing certain goods and services that the society needs to grow and develop.{{more}}

I also opined last article, that perhaps one of the best examples of a service that is needed in this country, but one for which the returns are likely to be too small to attract private investors, is an international airport on mainland St. Vincent. The airport is important to us to alleviate the air access problems we face, as the economy moves gradually from one that was mainly agrarian to one that is now more service oriented.

Post-independence economic performance

Notwithstanding the economic transformation taking place, the economy has performed well since independence. Over the 25-year period, 1979 to 2004, real growth rates averaged over 4 percent per annum. For most of these years, the mainstay of the local economy was agriculture, with banana being the main crop, accounting for a large share of the labour force and the lion’s share of the country’s foreign exchange earnings.

It is clear, however, that the reforms that began in 1992 in Europe, our primary market for bananas, precipitated a major shift in the economic performance of the banana industry and the economy. In reviewing our economic performance, it is useful therefore to sub-divide our post-independence economic performance into two sub-periods, the first being the years 1979 to 1992 and the second, 1993 to 2004.

Agricultural Diversification around Bananas

During the first period (1979 to 1992), the agriculture sector was the single most dominant sector in the economy. Back then, agriculture accounted for about one-fifth of total output in the economy. The banana industry was then the most important industry in the agricultural sector. On its own, the banana industry accounted for about one third of the total output of the agricultural sector.

During those early years, the economy grew in real terms by an average 5.2 percent per annum, buoyed by the agricultural sector. In its glory years, the banana industry achieved an annual average growth rate of 32.5 percent, sustained over a thirteen-year period, 1979 to 1992. At this phenomenal rate of expansion, one readily understands the extent to which our country benefited from and depended on the banana industry.

However, these good times could not have lasted forever and it is now clear that the farmers were unprepared for the less favourable times that were ahead in the industry, even though the proposed changes to the banana regime in the European market were known to us for a long time.

As the banana industry declined, so did the overall economy. During the period, 1993 to 2000, the economy grew by only 2.85 percent per annum, on average, about half of what it achieved during the period 1979 to 1992, when the banana industry was thriving. The adverse impact of the decline in banana was also noticeable from our external sector: our trade balance grew progressively worse, widening from a deficit of EC$165.7 million in 1993 to EC$250 million in 2000. The bright spot in our external current accounts is trade in services, with tourism emerging as the most important services sector. For example, tourist expenditure grew by an average rate of 8.6 percent per annum, from US$30 million in 1990 to US$95 million in 2004 (See tourism industry data presented in Appendix 2).

The current government of the Unity Labour Party, which assumed office in April 2001, set about to arrest the economic decline by taking a series of well-timed “strategic interventions” with the intent of jump-starting the economy. One of the several prongs of this economic programme is to diversify the agricultural sector around bananas and to continue to invest in tourism, as the country’s new engine of growth

In recent years, the government has invested in several agricultural projects such as the Poultry Hatchery, Coconut Water Bottling Plant, several new and refurbished Fish Markets, Cassava Processing Plant and an Agricultural Processing Facility, all of which are likely to benefit the country over the long term.

Investing in Tourism, the New Engine of Growth

Going forward, government will continue to promote agricultural diversification while investing in tourism. These two sectors are viewed as complementary, as agriculture can benefit from developments within the tourism sector.

Still, our tourism industry is at the growth stage of its lifecycle, compared to other more mature tourism products in the other countries of the region. For this reason, there are comparatively more attractive investment opportunities in the Tourism sector which promise higher rates of return to investors than they could get elsewhere in the region.

Indeed, the vigorous promotional work of the sector, spearheaded by the Ministry of Tourism, has now placed St. Vincent and the Grenadines among the established tourist destinations in the region and the destination now ranks high on several important criteria. This, of course, partly explains the accelerated rate of growth of the sector compared to what has been the case in the early years.

Addressing our Air Access Related Problems

While the tourism industry has immense potential for growth, all of this could be thwarted unless we urgently address the air travel related difficulties (the sheer hassle) visitors face in getting to St Vincent and the Grenadines. Recognising the importance of the Tourism industry and the urgent need to address the air access difficulties, the Government has approached the problem in three main ways.

First, government decided to construct a Jet-capable airport on Canouan. This Jet airport will provide direct access from North, Central and South America for visitors to Canouan – one of the fastest growing destinations in the Grenadines- and the other islands in the Grenadines.

Secondly, with the cooperation and assistance of friendly governments at regional hub airports, government has put in place a number of administrative measures, to reduce the problems visitors and residents face travelling to and from St. Vincent and the Grenadines through Hewannora and Grantley Adams International Airports. While commendable, these arrangements are yet to achieve their desired effects.

Thirdly, government decided to rehabilitate the E.T Joshua airport terminal building, to make it more comfortable for passengers and to expand the apron area to facilitate safer aircraft parking, all to the tune of US$12 million.

Finally, the government took the bold step to build an international airport at Argyle, on mainland St. Vincent. Due consideration was given to improving Arnos Vale to accommodate medium range jets, however, the technical advice received indicates that the development of Arnos Vale is severely constrained, both in terms of the width and length of the runway. Even though some of the existing constraints could be reduced, it would not be possible to eliminate all of the obstacles at that location.

The technical studies, however, point to two alternative sites on the mainland (one at Kitchen, on the South Eastern side and the other at Argyle, on the Eastern side of the country), both of which can accommodate an airstrip of up to 3,000 metres long. Government decided upon the Argyle site, as the Kitchen site has immense potential for tourism development and is twice times the cost of Argyle. The decision was, therefore, taken to construct a new international airport at Argyle.

In the next article, I will discuss the approach the government takes to financing a project as large as a new international airport, given the country’s meagre resources.