Tourism in developing countries: refining a useful tool for economic development

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Tourism in developing countries: refining a useful tool for economic development

Nicole Vaugeois Theme: Tourism and the environment

Not withstanding many of the highly commendable motives for encouraging the growth of international tourism set out in the 1980 Manila Declaration, the overwhelming reason why countries proffer themselves as tourist destinations is for economic benefits. Archer, B.H., & Fletcher, J.E. (1990) Introduction: Tourism is an attractive tool for economic development, specifically in the developing world. Viewed as an export industry of three Gs -- "get them in, get their money, and get them out" tourism has assisted many developing countries to move away from a dependency on agriculture and manufacturing (Tooman, 1997). Chosen for its ability to bring in needed foreign exchange earnings, income and employment, tourism has become a popular addition to economic development policies in many African, Asian, South and Central American countries. Although tourism seems to be adding substantially to the economic growth of many of these regions, many developing countries are not reaping full benefits from tourism. Pleumarom (1999) writes that more than two-thirds of the revenue from international tourism never reaches the local economy because of high foreign exchange leakage. Understanding the many ways that tourism profits can leak out of an economy, and devising strategies to minimize leakage could make tourism a more effective economic development agent. The purpose of this paper is twofold: to describe the nature and sources of leakage of foreign exchange earnings from tourism, and to suggest strategies to maximize the economic benefits of tourism in developing countries.

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Tourism has become an important source of income for most of the countries of the world. Worldwide, international tourist arrivals in 1999 are estimated at approximately 700 million, resulting in over $500 billion in tourist receipts (Edgell, 1999), and tourism generates nearly 250 million jobs worldwide (WTO, 1999). The increasing fascination with tourism has been motivated in large part due to its potential economic benefits for destination areas. Early literature in tourism development emphasized the role of tourism in economic development, particularly for developing countries (Erbes, 1973). However, in the past two decades increased attention to the negative social, cultural and environmental impacts of tourism has also emerged, calling for more careful planning and management of tourism development (WTO, 1996; Mathieson & Wall, 1982, Wahab, 1997). As discussion of responsible tourism growth is still in its infancy, the dilemma for many countries is devising a way to develop a sustainable tourism industry one that maintains economic benefits and limits associated negative impacts. In other words, how can countries develop a tourism industry which provides the much needed economic benefits such as foreign exchange, employment and income while protecting the human and natural resources it is built upon? Again, emphasis in tourism literature suggests that avenues to achieve this goal lie in minimizing negative impacts by strategies such as environmental and social impact analysis, community control, and segmenting markets (Harrison & Husbands, 1996, Cater, 1993). While a shift has occurred among researchers to try and devise ways to minimize the illsassociated to tourism, little attention has been paid to retaining the positive contributions it can make to developing countries. If the ultimate goal of sustainable tourism development is to balance the scales, or maximize positive impacts and mitigate the negative, increased attention must be devoted to preventing positive economic benefits from leaking out of developing countries.

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Tourism: an attractive economic development tool The potential economic benefits of tourism are a major attraction for developing countries due to three pro-tourism arguments (Mill & Morrison, 1999). First, the trend in demand for international travel is projected to continue at astonishing rates due to the economic stability and travel preferences of people in the developed regions such as Europe, Asia and North America. Second, the income elasticity of demand for tourism means that as the household incomes of people in the developed world increase, more disposable income will be directed towards travel. And thirdly, developing countries are in need of foreign exchange earnings to support their economic development initiatives and to satisfy the demands of their own residents. Due to these pro-tourism arguments, many developing countries are choosing, or being encouraged to develop tourism over some of the more traditional industry alternatives such as agriculture and manufacturing. Although between 50 70 percent of people in developing countries are directly dependent on agriculture, reliance on the industry can result in numerous problems (World Bank, 1979). One of the primary problems with agriculture is that countries can be overly dependent upon a few specific crops or products (Mill & Morrison, 1999). In the competitive global market, where externalities are uncontrollable and price unpredictable, countries dependent on agriculture have an unreliable and inconsistent source of revenue. In these cases, tourism may play a role in diversifying the economy and complementing the income brought in through agriculture. For example, after introducing tourism into the Caribbean island economies, the $9 billion tourism sector brought in six times the revenue of all traditional agricultural exports (Simon, 1995). Other developing countries have sought manufacturing as an economic development policy option. As with agriculture, there are inherent problems when

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relying upon manufacturing. In order to manufacture something, a country must have easy access to a source of raw materials for production. Thus, manufacturing is more successful in nations that are richly endowed with natural resources. Many developing countries are also plagued with chronic shortages of skilled labor, one of the necessary inputs for a strong manufacturing base. And, even when these problems are nonexistent, export oriented industries still face full international competition in selling their products (Mill & Morrison, 1999). Tourism, like manufacturing, requires similar access to land, labor and capital resources. Yet, tourism, in the way that the product is produced and delivered, may be a more viable alternative for developing countries. Most countries have the basic raw materials required to establish a tourism industry. Whether using its heritage, architecture, landscape, water or people, the mix of natural and cultural resources is what makes a destination unique and marketable to visitors. As international policy agreements on trade of services advances, there are fewer restrictions on international travel than trade (Edgell, 1999). Demand for tourism is expected to remain strong into the new millennium and with advances in technology reducing the time required to travel, the distance between the consumer and the tourism product is becoming negligible. Finally, unlike other industries, tourism prices are more under the control of the seller than the buyer. These traits combined, tourism is seen as an attractive economic development option for many countries in the developing world. But, as the OECD cautions, there are few if any developing countries which could, or perhaps even should, rely principally on tourism for their economic salvation(Erbes, 1973). Assessing whether tourism is a good choice for economic development requires more than simply understanding its projected growth. A number of other reasons make tourism a suitable fit for developing countries. Tourism differs substantially from agriculture and manufacturing industries in that it produces an invisible export. As a

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service industry, the product is consumed in the destination that it is produced in. The transportation costs for the experience are borne by the consumer who must travel to the exporting country to obtain the product. This eliminates any freight costs associated to delivering tangible products overseas. Tourism also allows countries more leverage in manipulating exchange rates to influence visitor expenditures on site. For example, destination areas can lower exchange rates to attract a greater number of visitors. More than other industry, tourism is multifaceted and either directly or indirectly affects other sectors of the economy. For example, the tourism product relies directly on, and produces economic benefits for, transportation, accommodations, food and beverage and entertainment sectors. Indirectly, other businesses that are involved in servicing the aforementioned sectors receive increased economic benefits as well. It is not the intent of the author to advocate tourism as an economic development tool for all developing countries. The decision whether or not to enter into the tourism system in not one to be made lightly. The industry differs from agriculture and manufacturing in many ways including the organization, nature of the activity, required human, social, technical and natural capital, and resulting economic, social and environmental impacts. And, although scant evidence exists in the literature, the development of tourism differs from the developing and developed worlds (Liu, 1998). To put it most succinctly, Jenkins (1980:27) suggests that tourism in developed countries can be regarded as mainly a social activity with economic consequences; in developing countries it is largely an economic activity with social consequences Many . of the suggestions in this paper reflect the difference that tourism has from other industries, and from the developed world. Partly, the intent of this paper is to bring attention to these differences in order to suggest strategies which will work given the context and unique position of developing countries on the path to sustainable tourism

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development. The following section will turn attention to some of the not so attractive features of tourism, which need to be considered by those organizing tourism in developing countries. International tourism is usually price-elastic and income elastic, meaning that it is sensitive to changes in price or income. Shifts in either can result in significant changes in travel patterns. This can be positive when the household incomes of visiting markets are stable, but can result in problems for destinations dependent on visitors who are experiencing an economic crisis. This effect was recently experienced in the Pacific Asian region where many countries who depended on Asian visitors experienced lower visitation levels due to the 1997 Asian economic crisis (WTO, 1999). Perhaps more importantly, tourism is different from other industries in that it brings a number of other non-monetary benefits and costs (such as social, environmental and cultural) to destination areas. It is this feature of the tourism industry, which has forced destinations to consider a new, more balanced approach to tourism planning and policy in the 1990 Sustainable tourism development, as promoted by the s. United Nations, should seek to reduce or control the negative environmental and social impacts resulting from tourism, while continuing to benefit local economies. A complex goal, sustainable tourism development is beyond the scope of this paper. However, achieving sustainable tourism development requires additional costs for destination areas. Therefore every dollar that can be retained in the local economy will help to balance the impacts resulting from tourism.

Economic impacts: issues in retaining foreign exchange earnings The positive economic impacts of tourism are commonly listed as increased foreign exchange earnings, increased income, and increased employment in destination areas (WTO, 1996; Mill & Morrison, 1999; Edgell, 1999; Lundberg et al, 1995). All three

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forms of economic impact are central to economic development. There has been a lot of attention on economic impacts of tourism in the literature (Loomis & Walsh, 1996; WTO, 1999), mostly focused however on methods to estimate income from tourism via economic impact assessments, or claims of direct and indirect employment generated by tourism. This has not been without good reason, as both of these methods produce convincing figures that are used to show the significance of tourism. In fact, public relations literature for tourism destinations are often laced with claims of the economic expenditures and jobs created by tourism. For example;

Tourism is one of the most promising aspects of Zimbabwe's economy, attracting thousands of visitors and earning millions of dollars. Over the past 10 years Zimbabwe's tourist sector has scored impressive annual growth rates of nearly 20%. According to the Zimbabwe Tourism Authority (ZTA) total tourism receipts account for 4.6% of the country's GDP. It is estimated that tourism employs close to 100,000 Zimbabweans, up from 40,500 in 1990. This growth in employment is impressive considering Zimbabwe's unemployment rate is more than 50% of the potential workforce and that employment figures have remained static since 1990. African Business, 1999.

These figures also convince local residents that tourism is benefiting the society economically. Yet, income and employment aside, one of the primary motives for choosing tourism to assist in economic development is to bring in much needed foreign currency to produce the investment necessary to finance growth in other economic sectors (Archer, 1995, Liu, 1998). Tourism, for example, has been one of the few growth industries in the Caribbean, and for many has become the main source of hard currency earnings, accounting for 50 to 70 percent of the area's foreign exchange earnings (Shurland, 1998). Perhaps then, increased attempts need to be made to understand the significance of foreign exchange earnings in developing countries, specifically how much is being generated, retained and used for the economic goals of the region.

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Economic impacts from tourism typically report the amount of new income being received in a destination area, and then use a multiplier to account for the additional respending that result afterwards. There is a danger however, of overstating the foreign exchange earnings of tourism when leakage is not taken into consideration. Leakage refers to the amount of money that leaves an economy to import goods and services needed for tourism development. For example, materials imported from another country to build tourism infrastructure, people brought in to fill tourism positions, and supplies purchased elsewhere to cater to specific needs of tourists are all examples of leakage. This leakage must be subtracted from foreign exchange earnings to obtain a true estimate of the economic impacts associated to tourism as shown in illustration 1.

Illustration 1. Leakage of Foreign Exchange Earnings

Destination Area: Developing Country

LEAKAGE

VISITORS

BRING FOREIGN EXCHANGE EARNINGS

Costs of goods and services purchased to satisfy the visitor Costs of equipment and materials needed for infrastructure Payments to foreign factors of production Expenditures for promoting the destination abroad

Transfer pricing: purchases by the visitor in their home country

Exemption of duties or taxes for foreign owned companies

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Leakage results from at least six factors (Mill & Morrison, 1999). First, the costs of goods and services purchased to satisfy the needs of visitors. If, for example, visitors to a destination want to eat food that is not grown domestically, the destination must make arrangements and pay to bring in the food from places it can be obtained. If the destination is marketing itself on being able to deliver this aspect of the tourism experience, it must then satisfy the desires of the visitors it has attracted. A second form of leakage occurs when destinations must purchase materials and equipment from other countries to supply the needed infrastructure for tourism. Many developing countries do not produce for example, the materials or expertise required to build hotels, transportation and sewage facilities that are essential to support tourism. A third form of leakage is for payments to foreign factors of production. Here, any commissions, interest payments, rent or profits that are paid outside the country for tourism related products should be considered as leakage. Many foreign owned hotel chains and entertainment corporations for example, import everything from building materials, furnishings and labor to construct and operate in developing countries (Pleumarom, 1999). A fourth form of leakage to consider is the expenditure for promoting a destination abroad. For example, most countries operate a National Tourism Organization either inside or outside the destination. Costs involved in promoting the destination and attracting tourists must be deducted as leakage, which is not a common practice among countries economic impact assessments (Mill & Morrison, 1999). Transfer pricing is a fifth form of leakage. Here, profits and taxes accruing to a destination area are reduced when payments are made in the country of visitor origin rather than the destination. For example, many visitors purchase packages from tour operators who use foreign owned hotels, attractions and services in the destination area. These visitors, particularly when purchasing all-inclusive packages, leave very little new money in the destination area. Local banks can also miss out on the opportunity to

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generate income when visitors rely on the use of credit cards and traveler checks for s purchases. Finally, a sixth form of leakage occurs when destination areas exempt foreign owned companies from paying duties or taxes as an incentive to attract investment. This is particularly common among developing countries in the early stages of tourism development when tourism infrastructure needs are high (Mill & Morrison, 1999). Getting an estimate on the amount of and forms of leakage from tourism is a critical issue for developing countries. Unfortunately, many countries are under pressure to bring in foreign exchange earnings quickly to offset the initial costs involved in developing tourism infrastructure. As well, many do not have access to the materials or human resources needed to establish tourism, and therefore depend heavily on imported content. Some small island nations such as in the Caribbean have import content levels of over 50 percent for tourism (Mill & Morrison, 1999; Archer et al, 1995). Hastily, many of these developing countries see no other way to establish tourism than to import capital and labor, and attract foreign investment. The critical issue for developing countries then, is to devise strategies to minimize leakage.

Strategies to maximize the economic benefits from tourism in developing countries: In short, the way that developing countries can maximize the economic benefits from tourism is to bring in more money from visitors and organize tourism to minimize leakage of both money and jobs. Although this sounds rather simple, the number and agenda of various stakeholders involved in tourism development make it complex. s This section will discuss some strategies to enhance the economic benefits to host countries.

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Tourism in the developing world differs in the role that government and the private sector play in establishing policy and encouraging development. National policies on tourism in developing countries are usually the domain of the state, whereas in more developed countries, private entrepreneurs often dominate policy formation and enactment (Liu, 1998). In most developing countries, owing to the small size of the private sector and the shortage of funds, the government necessarily takes on the role of entrepreneur (Shurland, 1998). This is usually in response to proposed private foreign investment. The aims of the private sector often oppose those of the public sector, with the former hinging upon profitability. The state, on the other hand, must take into account non-economic ramifications as well - for without governmental involvement, short-term developments can foster long-term problems. Governments in the developing world generally have the responsibility of formulating and enforcing tourism policy, and for many, sustainable tourism goals are central to their tourism plan. This should include, as already stated, increasing the economic impact of tourism to the local economy by reducing the leakage of foreign exchange earnings. As previously mentioned, one of the ways to increase economic impacts of tourism is to bring in tourists who spend money in the developing country. As mass tourism markets have been criticized for the negative environmental and social impacts they cause, there is growing attention on targeting fewer visitors, and those with higher household incomes expecting that they will spend more during their visit. Although this sounds logical, the strategy has its critics (Mill & Morrison, 1999). There is little known about the net foreign exchange earnings that result from different types of visitors and types of tourism purchases. Although it has not been clearly shown, visitors with high household incomes may spend more, but they may also require substantial investment in infrastructure and facilities with high import content. The question for many destinations to consider carefully is: it better for the destination to mass market is

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visitors who arrive in greater numbers and spend less but require fewer imported goods and services? Clearly, as this strategy is being chosen by many destination areas, further research into the nature of nature of tourism expenditures by different visitors is needed, especially in comparison to the amount and types of infrastructure needed to attract high spending tourists. Another strategy to maximize economic benefits is to encourage import substitution within developing countries. If quality products and services are available within the host country at a reasonable price, then the amount of imports [and therefore leakage] does not have to be so high. Unfortunately, many developing countries do not have these products and services readily available, but governments who are keen to establish tourism as a form of economic development could become involved by offering subsidies, grants or loans to local businesses. As well, to encourage use of local goods and services, quotas or tariffs on the use of imported goods could be implemented. The last strategy may be viewed as aggressive by other countries, however it may be necessary in developing countries where loyalties to brand images on foreign products has already been established. Governments of developing countries may want to consider implementing incentive programs to local and foreign investors to encourage the use of local architecture, design and materials. Through a range of fiscal and other incentives (see table 1), governments can stimulate and influence the amount of local content used in tourism development. Many of the incentives listed in table one are to attract capital investment, however for many developing countries the issue is a shortage of local labor. In this case, efforts to train and educate the local workforce may be necessary to ensure that leakage from employing outside labor is kept to a minimum. Perhaps one of the more complicated but necessary strategies for developing countries to consider is finding a way to work with trans-national tourism corporations

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(TNC The demand for travel in the past few decades, coupled with the globalization s). of trade and services sectors has resulted in the rise of numerous TNC in the tourism s sector. Hotels, airlines, restaurants, travel agencies and tour operators have become more sophisticated in marketing and serving millions of travelers. With their success, has come a wave of criticism from smaller companies who view TNC as operating for s their own profitability at the expense of destination areas. For example, Pleumarom (1999) writes that many overseas chain hotel and resort properties are operated without any foreign equity involvement with headquarters in the developed world. Others, with their own agenda, can engage in policies that run counter to the national tourism plans. TNC generate lower foreign exchange receipts than do smaller local owned s operations, an important realization for many developing countries.

Table 1.
Categories of Incentives Fiscal Incentives

Categories and Types of Government Incentives.

Types of Incentives Tax holidays or deferrals Remission of tariffs Tax reductions Non refundable grants Low interest loans Interest rebates Forgivable loans Loan guarantees Working capital loans Equity participation Training grants Infrastructure assistance Leaseback s Land donations Description Government agency defers the payment of income taxes or other taxes for a predetermined time period. Government agency relaxes or removes import duties on goods and services required by the project. Government agency lowers the normal tax rates that would be paid by the project. Reduces a project capital budget. s Reduced the amount of interest that the project must pay during its operating life. Government agency rebates a portion of the project interest s costs during its operating life. Government agency loans funding to the project and then forgives all or part of these over an agreed-upon time period. Government agency guarantees a loan given to a project by a private financial institution. Government agency loans funds to meet the working capital of a project. Government agency purchases some of the available shares in the project, and becomes an equity investor. Government agency provides a nonrefundable grant to the project for staff training purposes. Government agency assumes the costs of some or all of the infrastructure required for the project. Government agency purchases land, buildings, or equipment and then leases them to the project. Government agency donates land free of charge to the project. Source: Mill & Morrison, 1999 p: 290

Direct and Indirect Incentives

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Many international hotel chains employ a core of expatriate managerial staff. Thus, another criticism of multinationals is that they do little to provide meaningful employment opportunities for local populations. To maximize the employment benefits for local populations, the governments of developing countries should ensure that when attracting TNC that there is direct financial involvement in developing the human s, capital in the destination tourism mix. The World Tourism Organization has been s working with many countries such as China, Russia, North Korea and Mongolia to identify ways to address manpower scarcity in tourism (WTO, 1999). An alliance with major TNC may prove to be valuable in financing the development of human capital in s these tourism projects. A significant portion of international tourism expenditures are made on transportation to and from the destination. Although most developing countries own and operate a centrally owned airline, people from developing countries tend to use airlines from their country or origin. This may be due to the aggressive marketing of airlines to develop customer loyalty through rewards programs, or the fact that safety standards on airlines in the developing world are substandard. Regardless of the cause, the economic benefits involved in transportation are not reaching many developing countries. Again, to survive in the competitive airline industry and to reap more of the profits, airlines in developing countries may want to partner with the larger airlines and focus on providing safe, reliable domestic air transportation. Once destination areas have made substantial investments into the infrastructure necessary to cater to their chosen tourism markets, they can often become dependent upon large foreign tour operators to supply them with visitors. This important intermediary role can make it difficult for small local tour operators to survive. The large tour operators can bring in more people and often deal directly with local hotel chains

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and transportation services. Without the smaller local operator, these sectors can become dependent upon foreign tour operators to supply them with visitors. Due to the differing interests of foreign vs. local tour operators, developing countries can find themselves in a precarious position when foreign tour operators follow trends and pull out of the destination and provide packages in other locations. It is therefor in the longterm interest of developing countries to invest in, and encourage support of local tour operators who establish and secure their role in providing packages with local flavor. Another obvious way to maximize foreign exchange earnings is for developing countries to ensure that foreign currency is spent as much as possible. Some countries such as Cuba, have limited the amount of foreign currency that visitors can bring into and take out to ensure that foreign currency is used. Other countries like Belize, require that visitors show that they have $50.00 U.S. for every day of their visit. Developing countries may want to ensure that all possible foreign exchange earnings are staying within the country by tightening up on these loopholes which will inevitably be found and used if unchecked.

Further research needs: There is great need for further research into the role of tourism as an economic tool for developing countries. Through advanced economic impact techniques, measurements of tourism overall economic impacts are becoming more sophisticated, s particularly in the developed world. These impact statements are being used to encourage further entry into the tourism industry by rural communities, and by countries in the developing world. But further attention to the economic benefits that accrue to these areas needs to be better understood, considering the differences in the ability of these areas to organize tourism, and supply the products desired by those whose have the propensity to travel. Although we can measure the amount of money entering an

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economy from tourism, more attention needs to be paid to measure the amount leaving an economy. Without subtracting the amount of these leaks rural areas and , developing countries may be entering into tourism without a complete understanding of its consequences. While waiting for the promised economic benefits to arrive, these areas may be incurring more of the social and environmental costs of tourism development. Research in this area should explore the types of, and extent of leakage incurred in tourism in the developing world. A thorough description of foreign exchange leakage may help to identify where experimental research could be done to plug the holesand measure the resulting benefits to destination areas. With increasing attention being paid to alternative forms of tourism such as ecotourism, researchers should attempt to measure the economic impacts and compare them to those brought about by mass tourism. Indeed, these forms of tourism are being considered due to their ability to limit the negative social and environmental impacts of tourism, but if they are found to contribute to the positive economic benefits as well, they may be an even more attractive alternative for areas to consider.

Summary: Differing from the traditional industries of agriculture and manufacturing, the service industry of tourism is a viable alternative for developing the economies of many third world countries. In need of foreign exchange earnings, income and employment opportunities, developing countries often make the decision to become involved in tourism hastily. Due to the initial costs required to establish tourism infrastructure and attract visitors, developing countries can enter into tourism by importing a significant amount of materials and labor, and by attracting heavy foreign investment. With these systems left unchecked however, the potential for leakage of money from the destination

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is high. This paper outlined some of the ways that developing countries may be losing out on significant revenues from tourism and suggested strategies that could be considered to reduce leakage of much needed tourism profits. Indeed the critical issues of retaining tourism revenues in developing countries is essential in order to achieve the broader goal of sustainable tourism development. For developing countries will need to utilize financial resources to mitigate the negative environmental and social impacts resulting from tourism in the long term.

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