Tourism has been the main source of income for many small island economies for decades. It brought jobs, investment and foreign currency, and it made those economies dependent on a single, volatile sector. The pandemic showed how quickly that dependence can become a vulnerability, and several governments are now asking what a more resilient economy would look like.
The question is difficult, because the alternatives are limited and the benefits of tourism are real.
Why tourism dominates
Small islands often have few natural resources, limited land and high transport costs, which makes manufacturing difficult. Tourism, by contrast, uses what they have: climate, coastline and culture. It also creates jobs across a range of skill levels, from hotels to transport to food supply.
The vulnerability
A single-sector economy is exposed to shocks it cannot control: travel restrictions, recessions in source markets, airline route changes and natural disasters. When tourism stops, income stops, and there is little else to fall back on. That is what happened during the pandemic, and it prompted a rethink.
What diversification requires
Options include fishing and agriculture, offshore finance, digital services and renewable energy. Each has obstacles. Agriculture faces land and scale limits, finance faces reputation and regulation issues, and digital services require connectivity and skills. Diversification is therefore incremental rather than transformational.
Some governments are pursuing higher-value, lower-volume tourism rather than growth in arrivals. That means fewer visitors spending more, with a focus on local ownership and retention of revenue. It reduces pressure on infrastructure and the environment, and it requires marketing and product development that small states often lack.
The climate dimension
Islands face rising seas, stronger storms and coral loss, all of which threaten the assets tourism depends on. Adaptation is expensive, and it competes with the investment needed to diversify. The two agendas are connected, because a degraded environment undermines both tourism and the alternatives.
The indicators worth following are the share of GDP from tourism, the growth of other sectors and the level of local ownership. Those figures show whether diversification is happening or merely discussed.
The role of remittances
Many small island economies depend heavily on money sent home by citizens working abroad. Remittances are a more stable source of income than tourism in some cases, because they continue during travel restrictions. They also create their own dependency and can decline if host economies weaken. A resilient economy draws on several sources, and remittances are one of them rather than a solution on their own.
For a small state, resilience is not self-sufficiency, which is unattainable, but the ability to absorb a shock without collapse. That means having more than one source of income, fiscal buffers, and the institutional capacity to respond quickly. Tourism can remain central, provided it is not the only thing holding the economy up when a shock arrives.
The role of climate finance
Small island states are among the most exposed to climate impacts and among the least able to finance adaptation. Access to international climate finance is complicated by application requirements that exceed the administrative capacity of small governments. Simplified access, more grants and support for project preparation are recurring requests, and progress has been limited. Adaptation and economic diversification compete for the same scarce resources, which sharpens the trade-off.
Diversification does not require abandoning tourism. It can mean shifting toward higher-value visitors, spreading demand across the year, and keeping more of the spending local through ownership and supply chains. Each of these reduces pressure and increases retention, and each requires marketing, training and investment that small states often lack. The goal is a tourism sector that supports the economy without holding it hostage.
What to watch
The indicators worth following are the share of GDP from tourism, the growth of other sectors and the level of local ownership. Those figures show whether diversification is happening or merely discussed, and they matter more than any single policy announcement. For small states, the goal is not to end tourism but to ensure that the economy can survive a season without it.
The role of government
Diversification is not something markets deliver on their own in a small economy. Governments set the conditions: infrastructure, skills, regulation and access to finance. Where those are missing, no amount of private initiative produces new sectors. Small states that have diversified successfully usually did so with deliberate public investment and a clear strategy sustained across changes of government, which is itself a difficult achievement in a small polity.
Diversification is a long project measured in decades, and its results are difficult to attribute to any single decision. That makes it easy to defer and hard to celebrate, which is why small states that pursue it tend to do so quietly and persistently rather than with a single dramatic strategy.
This report draws on UN Tourism and the World Bank’s work on small states.
Image: Charles O’Rear · Public domain · via Wikimedia Commons.