Macroeconomic impact of an international fishery regulation on a small island country

Drifting fish aggregating devices (dFADs) are widely used in global tuna fisheries but raise ecological concerns and contribute to increased fishing capacity and bycatch. In February 2023, the Indian Ocean Tuna Commission (IOTC) adopted Resolution 23/02 for a 72‑day seasonal dFAD closure starting in July 2024. Many contracting parties, including several developing and coastal states dependent on tuna landings, objected to the measure due to its possible economic repercussions. The paper investigates how an international dFAD closure could affect a small, tuna-dependent economy by tracing macroeconomic impacts beyond the fishing fleets to the entire value chain. Focusing on the Republic of Seychelles—where tourism and fishing are key foreign exchange earners—the study develops a recursive dynamic computable general equilibrium model to quantify the transmission channels and economy-wide effects of a seasonal dFAD closure. Using a worst‑case counterfactual (a 12% drop in fish exports, equivalent to a 6‑week cannery shutdown each year), the research aims to understand potential macroeconomic consequences and the mechanisms through which a fishery regulation outside national control could propagate through a small open economy.

The paper reviews interactions in shared tropical tuna fisheries, where different gears target different age classes (e.g., purse‑seine with dFADs and pole‑and‑line on juveniles vs. longline on adults). Earlier work suggested substitution effects between purse‑seine and longline catch rates for yellowfin, though establishing clear causal links across species (yellowfin, bigeye) remains challenging. In the WCPO, limiting dFADs to achieve bigeye MSY implies forgone skipjack and yellowfin catches; estimates suggest large welfare losses (about USD 1.2 billion) primarily for Pacific SIDS, with limited consumer gains, and benefits only under modest dFAD reductions (~15%). Ecological effects of management include bycatch trade‑offs: dFADs increase bycatch (e.g., silky sharks), and spatial closures can reduce bycatch with moderate impacts on target tuna catches. However, single‑species measures can inadvertently shift effort (e.g., toward dFADs to avoid yellowfin TAC constraints), potentially increasing bycatch. Economically, SIDS relying on access fees (e.g., under the Vessel Day Scheme) face revenue risks from dFAD limits; climate change may further redistribute tuna biomass, threatening government revenues. Industrial purse‑seine fleets are increasingly dFAD‑dependent, with modeled closures in the Atlantic/Indian Oceans leading to 12–37% lower catches per vessel, and ~15% revenue losses per trip in the WCPO. Given the role of port services, processing, and logistics, fishing-dependent economies experience strong multiplier effects. Prior economy‑wide assessments in marine sectors used IO and CGE approaches; the CGE framework allows price adjustment and linkages to environmental factors. The paper positions its dynamic CGE approach within this literature to capture sequential, economy‑wide effects of a fishery management shock on a small island economy.

The study develops a recursive (myopic) dynamic computable general equilibrium (CGE) model for Seychelles, a small open economy taking world prices as given. The model links successive static equilibria via capital, labor, and public debt dynamics and is calibrated to a 2019 Social Accounting Matrix (SAM) constructed from the 2014 SUT and 2019 national accounts, balance of payments, and government finance statistics. The domestic economy includes 23 industries and 35 products (aggregated to nine sectors for presenting results), with the 'fish industry' grouping fishing and fish processing. Agents: firms, households, government, and the rest of the world. Key features: - Firms produce with constant returns to scale using labor, industry-specific capital, and intermediate inputs; technology allows substitution across inputs. Public capital raises private factor productivity. Firms minimize costs (Shephard’s lemma) and pay taxes; gross output is transformed via fixed proportions; goods from different industries are aggregated with CES. Investment is determined ad hoc based on rental rates and capital goods prices; firms retain a fixed share of capital returns as savings. - Households supply labor and choose consumption vs. leisure, with time endowment growing at the population rate. Income sources include labor and capital, government transfers, and net transfers from abroad; they pay income and sales taxes. Utility is a top-level log function over total consumption and leisure, with total consumption a CES composite over goods; optimization is two-step with standard price responsiveness. - Government consumes and invests in public capital, financed by taxes and bond issuance. Expenditures cover consumption, public investment, transfers, and interest on debt; commodity allocation follows fixed shares. Government debt is held domestically and abroad, with interest payments; public investment augments public capital, boosting private factor productivity. - External linkages: Exports and domestic sales are allocated via a CET function to maximize revenue. On the demand side, Armington CES composites capture imperfect substitution between domestic and imported goods. Investment by sector of destination is a Cobb‑Douglas aggregation of sector-of-origin capital goods, chosen by cost minimization. - Equilibrium and dynamics: Prices adjust to clear goods and labor markets; wages clear the labor market; capital is industry‑specific with investment flows responding to rate-of-return differentials across industries. Savings–investment balance holds, financed by domestic plus foreign savings. A closure rule sets the foreign savings-to-GDP ratio exogenously to avoid unsustainable debt; household saving rates adjust each period to ensure macro closure. Exogenous labor force growth and the evolution of private/public capital and debt drive dynamics; baseline GDP and trade trajectories follow IMF projections. Shock design: A worst‑case seasonal dFAD closure is represented as a 12% one‑time reduction in the nominal value of fish product exports in year 1, then held at that lower level in subsequent years, mimicking an annually repeated seasonal closure with constant effects. Outcomes are reported as deviations from the reference (baseline) path.

• A simulated 12% decline in the nominal value of fish product exports leads to substantial macroeconomic impacts. Real GDP deviates from the baseline by about -0.1% in year 1, -1.5% in year 2, -3.7% in year 3, and reaches -8.8% by year 7. - Public debt rises relative to the reference path, exceeding a 4% deviation by year 7. - Aggregate demand components all contract after the shock: private consumption, private and public investment, government consumption, and exports decline in tandem with income. Total real exports deviate by -2.0% in year 1 and -10.2% by year 7; total real imports deviate by -2.7% in year 1 and -8.6% by year 7. - Fish exports are hardest hit: real fish product exports deviate by -9.4% in year 1 and -33.2% by year 7, suggesting persistent supply chain disruption impeding recovery. - Tourism shows limited short-run resilience: real tourism revenue deviates +0.5% in year 1 and +0.1% in year 2, then declines to -3.0% by year 7; by the end, the economy becomes more dependent on tourism, heightening vulnerability to shocks. - Sectoral GDP impacts are widespread: by year 6–7, most industries’ sectoral GDP falls around -9% to -10% vs. baseline; the fishing industry declines by more than -19% and manufacturing by about -18%. Tourism is less severely affected (around -6% by year 6). - Transmission mechanisms: (1) Keynesian/income loop—fishing is highly capital-intensive (about 92% of primary income as capital income), so the shock depresses capital income, investment, and consumption; lower relative fish prices do not boost domestic consumption because canned tuna is almost entirely exported. (2) Leontief/input–output multipliers—sharp cuts to intermediate demand (e.g., frozen tuna inputs, transport and storage, fuel, packaging, electronics, stevedoring) propagate through suppliers; the fish industry’s output multiplier is high (~1.99). (3) External accounts—given the fish industry imports one-third of inputs and exports 96% of output, the trade balance deteriorates, creating a twin deficit; reduced tax revenues (including lower royalties/corporate taxes from the partly state-owned cannery) increase financing needs. - Contextual metrics for Seychelles underscore exposure: fish products average nearly 90% of merchandise exports; foreign demand for fish accounts for roughly 19% of GDP; the fish industry directly and indirectly accounts for about 8% of domestic GDP at basic prices. During 2019–2022, canned fish export volumes rose ~40% (nominal +20%), illustrating the sector’s stabilizing role during the pandemic, but a dFAD closure would reverse these gains. - Comparison with historical shocks: past ENSO (1998) reduced fisheries/processing output value by 34% and real GDP by ~5%; COVID‑19 (2020) cut foreign visitors by 70% and GDP by ~11%, indicating the scale of external shocks to which Seychelles is vulnerable.

The analysis shows that a fishery management shock originating outside a small island economy can propagate broadly through interconnected value chains and macroeconomic channels. By modeling a 12% reduction in fish exports, the study demonstrates that the initial trade shock rapidly depresses capital income in a capital-intensive fishing sector, undermining investment and consumption and lowering real GDP relative to trend. Through strong supplier linkages (high multipliers), the downturn spreads to transport, energy, and other input-providing sectors, while reduced exports and imports jointly worsen the external balance. Lower fiscal revenues (fishing-related royalties, corporate income tax, and import duties tied to shrinking trade) enlarge the public deficit and debt, limiting the government’s countercyclical capacity. Although tourism initially cushions the impact slightly, it cannot offset the loss from fisheries and eventually declines, leaving the economy more concentrated and vulnerable to shocks. These results address the research question by quantifying economy‑wide repercussions of a seasonal dFAD closure and clarifying the principal transmission channels—Keynesian income effects, Leontief multipliers, and external account dynamics—through which a fisheries regulation affects a small open economy. The findings underscore the importance of integrating socioeconomic dimensions alongside ecological objectives in RFMO decision-making and highlight spillovers between distant-water fleets and coastal states.

Using a recursive dynamic CGE model calibrated to Seychelles, the study quantifies the macroeconomic spillovers of a worst‑case seasonal dFAD closure represented as a persistent 12% drop in fish exports. The shock propagates beyond the fishing fleet to the entire economy, leading to compounding deviations from the growth path—nearly -9% in real GDP after seven years—and a shift toward greater reliance on tourism, increasing vulnerability to future shocks. The results are comparable in scale to impacts from strong ENSO events for Seychelles, emphasizing exposure to external disruptions. The paper’s main contribution is to bring an economy‑wide, dynamic perspective to fisheries management impacts on small island economies, clarifying key transmission mechanisms and fiscal-external consequences (twin deficits). Future research should expand the scope to the entire Indian Ocean tuna fishery, encompassing all fleets and CPCs, to inform a fair and sustainable agreement that balances ecological goals with social and economic realities, and to test scenarios with effort reallocation and alternative raw material sourcing that could mitigate shocks.

• Scenario likelihood: The modeled closure is unlikely in practice because many IOTC members (including Seychelles and key partners) objected to the measure, meaning the shock is likely overestimated. - Behavioral and supply substitutions: Potential reallocation to free‑school fishing and substitution of raw material inputs for the cannery are not explicitly modeled, which could dampen impacts. - Data constraints: An updated SAM was not available; the 2019 SAM was constructed using 2014 SUT coefficients and 2019 aggregates. The focus is on deviation trends rather than precise levels. - External financing: Grants, aid, loans, and FDI are treated as fixed in the model and cannot rise endogenously to cushion the shock. - Scope: The analysis centers on Seychelles; broader systemwide effects across the Indian Ocean fishery and all CPCs remain to be assessed.