Economic Explanation of Net Benefits of Tourism Growth

Economic Explanation of Net Benefits of Tourism Growth to the Community 17/06/2005 Mondher Sahli & Jean-Jacques Nowak 1

Presentation outline Introduction I - Meaning of sustainable tourism II- Tourism economic evaluations: old and new approaches III- General equilibrium modelling in tourism Conclusion 2

I- Meaning of Sustainable Tourism Achieving sustainable tourism requires that: n n 3 Tourism development is planned and managed so that it does not generate serious environmental or socio-cultural problems in the destination. The economic benefits from tourism are WIDELY SPREAD throughout the residents of the host community.

Objectives n Examine how an inbound tourism boom could make developing countries residents’ worse off. n Explain how a tourism boom can affect the key economic variables. 4

Critiques commonly advanced in the literature n n 5 Environmental and socio-cultural costs Economic costs : ONLY leakages and, to lesser extent, inflation.

II- Tourism economic evaluations n Dominant techniques used to assess the economic impacts of tourism : * multiplier analysis * input-output models 6

Traditional Economic Approach n Any increase in tourism will look good Nothing said about negative costs elsewhere in the economy BUT n Negative effects could be just as large as the positive and, in certain cases, even larger n 7

What is wrong with traditional techniques? n n 8 Resources (labor, capital and land) flow freely to the tourism sector Prices of goods, services and factors of production often fixed

In reality n Economies = general equilibrium systems with sectoral interactions n Limited Resources n Prices not always fixed n 9 Any measures of a tourism shock (boom) must take into account the negative as well as the positive impacts.

New Approach: General equilibrium model n n n 10 This approach is quite recent in tourism analysis and has been applied in both theoretical and empirical studies : Theoretical studies: Copeland 1991; Nowak and Sahli (1999, 2003); Hazari and Kaur 1995; Hazari and Sgro 2004; Hazari and Sahli 2005. Empirical studies: Adams and Parmenter 1995; Zhou et al 1997; Dwyer et al. (2000, 2004, 2005); Blake et al. 2003; Gooroochurn and Sinclair 2005.

New Approach: General Equilibrium Model n This technique models : - 11 market for goods and services factors of production consumer spending external constraints links between sectors

III- Example of general equilibrium modelling in tourism n n 12 Structure of the model Consequences of a tourism boom: main results

III-1 Main assumptions H 1 - Rivalry between tourism and agriculture for land labor H 2 - Harris-Todaro structure of the labor market 13

Model Structure 14

H 2: Harris-Todaro Structure n 16 In the urban region: wage rate is fixed at a level higher than the competitive one (unions, respected legislation…) unemployment n In the coastal/natural region: flexible wage rate (small hotels are predominant in the tourism sector). Full-employment of labor

III-2 -Impacts of an inbound tourism shock with n n n 18 DES : foreign tourists’ demand for the tourism sector PS : Tourism price Δ : parameter that captures exogenous factors like the real income or tastes of international tourists; special events (World Cup, Olympic Games, …); SARS; war; disaster…. .

Impacts of an inbound tourism boom n n n Price increase of tourism products Expansion of tourism production Decline of agriculture production Labor Migration between the two zones Net total benefit of tourism to the community (+) or ( –) If (+) : welfare gain to the resident community If (–) : welfare loss WHY? ? 19

Variation of the domestic welfare: net total benefit 20

Variation of the domestic welfare 21

Two situations n Case 1: tourism is relatively more land intensive than agriculture n Case 2: tourism is relatively more labor intensive than agriculture 22

Two Situations Case 2: Tourism labor intensive Case 1: Tourism land intensive Terms of trade effect (1) + + Unemployment rate effect (2) - + Variation of real welfare: (1) – (2) 23 ++ (+) or (-)

Conclusions n General equilibrium approach has a major implications for the way that tourism researchers must assess the net total benefit of tourism to the community n Empirical studies using Computable GE models have recently been undertaken in several countries 24

Conclusions n 25 They support our theoretical results, which show that CGE economic contribution of tourism is much more modest than based on input-output analysis