Negative impacts and leakage

1669 word (7 pages) essay in Economics

5/12/16 Economics Reference this

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Tourism has many hidden costs, which can have unfavourable economic effects on the host community. Often, developed countries are better able to profit from tourism than poor ones. Whereas the least developed countries have the most urgent need for income, employment and general rise of standard of living by means of tourism, they are, unfortunately, least able to realise these benefits. Among the reasons for this are large scale transfer of tourism revenues out of the host country and exclusion of local businesses and products.

The direct income for an area is the amount of tourist expenditure that remains locally after taxes, profits, and wages are paid outside the area and after imports are purchased; these subtracted amounts are called leakage. In most all inclusive package tours, about 80% of travellers’ expenditures go to the airlines, hotels and other international companies (who often have their headquarters in the travellers’ home countries), and not to local businesses or workers. In addition, significant amounts of income actually retained at destination level can leave again through leakage. A study looking at tourism ‘leakage’ in Thailand estimated that 70% of all money spent by tourists ended up leaving Thailand (via foreign owned tour operators, airlines, hotels, etc.). Estimates made for other Third World countries range from 80% in the Caribbean to 40% in India.

On average, of each US$ 100 spent on a vacation tour by a tourist from a developed country, only around US$ 5 actually stays in a developing-country destination’s economy.

There are two main ways that leakage occurs:

Import leakage: which occurs when tourists command standards of equipment, food, and other products that the host country cannot supply. It is typical of less- developed countries where food and drinks must often be imported, since local products are not up to the tourist’s standards or the country simply doesn’t have a supplying industry. Thus, in such a scenario, much of the income from tourism expenditures leaves the country again to pay for these imports. According to UNCTAD The average import- related leakage for most developing countries today is between 40% and 50% of gross tourism earnings for small economies and between 10% and 20% for most advanced and diversified economies. However, import leakage is not only typical of developing countries. Even in developed regions, local producers are often unable to supply the tourism industry. Due to the high quantity and quality needs of the 64-room hotel “Kaiser im Tirol” in Austria, an award- winning leader in sustainable practices, the hotel cannot find sufficiently reliable, and good, organic food suppliers in the local farming networks.

Export leakage: Often, especially in poor developing nations, multinational corporations and large foreign businesses are the only ones that possess the necessary capital to invest in the construction of tourism infrastructure and facilities. As a consequence of this, an export leakage arises when these overseas investors take their profits back to their country of origin. A 1996 UN study, carried out in the Caribbean evaluated the contribution of tourism to national income, gross levels of incomes and/or gross foreign exchange. The results showed that net earnings of tourism, after deductions for all necessary foreign exchange expenditures, were much more significant for the industry than for the region itself. Significant leakage was mainly attributed to: (a) imports of materials and equipment for construction; (b) imports of consumer goods, particularly food and drinks; (c) repatriation of profits earned by foreign investors; (d) overseas promotional expenditures and (e) amortisation of external debt incurred in the development of hotels and resorts. The impact of the leakage varied greatly across the studied countries, mainly depending on the structure of the economy and the tourism industry. From the data presented, St. Lucia had a foreign exchange leakage rate of 56% from its gross tourism receipts, Aruba 41%, Antigua and Barbuda 25% and Jamaica 40%.

UN Atlas of the Oceans (2006c), Recreation and Tourism: Impacts of Tourism: Economic: Negative impacts; leakage. Internet. Accessed 22/02/2008


Negative impacts; enclave tourism and other effects

Local businesses often see their chances to earn income from tourists severely reduced by the creation of “all inclusive” vacation packages. When tourists remain for their entire stay on the same cruise ship or in the same resort, because it provides everything they need, not much opportunity is left for local people to profit from tourism; this is often refereed to as enclave tourism. The Organisation of American States (OAS) carried out a survey of Jamaica’s tourist industry that looked at the role of the “all inclusives” compared to other types of accommodation. It found that although all inclusive hotels generate the largest amount of revenue their actual impact on the economy is smaller per dollar of revenue than other accommodation types. It also concluded that “all inclusives” imported more, and employed fewer people per dollar of revenue than other hotels.

 Other negative impacts of the tourism industry include:

Infrastructure costs: where tourism development can cost the government and local taxpayes a great deal of money (e.g. road improvement, airport expansion) and may reduce government expenditures in critical areas such as education and health.

Increase in prices: Increasing demand for basic services and goods from tourists will often cause price hikes that negatively affect local residents whose income does not increase proportionately. In addition, tourism development and the related rise in real estate demand may dramatically increase building costs and land values.

Economic dependence: Many countries, especially developing countries with little ability to explore other resources, have embraced tourism as a way to boost the economy. However, as a consequence their survival often has become dependent on regular tourism revenue influx. In The Gambia, for instance, 30% of the workforce depends directly or indirectly on tourism. According to the WTO, in small island developing states, percentages can range from 83% in the Maldives to 21% in the Seychelles and 34% in Jamaica.

Seasonal character of jobs: The seasonal character of the tourism industry creates economic problems for destinations that are heavily dependent on it. Problems that seasonal workers face include job (and therefore income) insecurity, usually with no guarantee of employment from one season to the next, difficulties in getting training, employment related medical benefits, and recognition of their experience, and unsatisfactory housing and working conditions.

Economic crises, like the Asian crisis that hit Thailand, Malaysia and Indonesia a few years ago, can be devastating to inbound tourism flows. September 11th is yet another example of an economic crisis with devastating impacts, especially for small island states that have become severely dependent on tourism revenues for the survival of their economy.

UN Atlas of the Oceans (2006b), Recreation and Tourism: Impacts of Tourism: Economic: Negative impacts; enclave tourism and other effects. Internet. Accessed 22/02/2008

Positive Effects

The main positive economic impacts of tourism relate to foreign exchange earnings, contributions to government revenues, and generation of employment and business opportunities.

 The main aspects of each are briefly discussed below:

Foreign exchange earnings: tourism expenditures and the export/import of related goods and services generate income to the host economy and can stimulate the investment necessary to finance growth in other economic sectors. Some countries seek to accelerate this growth by requiring visitors to bring in a certain amount of foreign currency for each day of their stay and do not allow them to take it out of the country again at the end of the trip.

Contribution to government revenues: government revenues from the tourism sector can be categorised as direct and indirect contributions. Direct contributions are generated by taxes on incomes from tourism employment and tourism businesses, and by direct levies on tourists such as departure taxes. Indirect contributions are those originated from taxes and duties levied on goods and services supplied to tourists. The United States National Park Service estimates that the 273 million visits to American national parks in 1993 generated direct and indirect expenditures of US$ 10 billion and 200,000 jobs. When visits to land managed by other agencies, and to state, local, and privately-managed parks, are added, parks were estimated to bring around US$ 22 billion annually to the US economy. These expenditures also generate significant tax revenues for the government.

Employment generation: the rapid expansion of international tourism has led to significant employment creation. For example, the hotel accommodation sector alone provided around 11.3 million jobs worldwide in 1995. Tourism can generate jobs directly through hotels, restaurants, nightclubs, taxis, and souvenir sales. Indirectly it provides employment through the supply of goods and services needed by tourism-related businesses. According to the WTO, tourism supports some 7% of the world’s workers. In North Carolina for example, tourism expenditures in 2001 supported 196,400 jobs.

Stimulation of infrastructure investment: Tourism can induce the local government to make infrastructure improvements such as better water and sewage systems, roads, electricity, telephone and public transport networks, all of which can improve the quality of life for residents as well as facilitate tourism.

Contribution to local economies: tourism can be a significant, even essential, part of the local economy. As the environment is a basic component of the tourism industry’s assets, tourism revenues are often used to measure the economic value of protected areas.

 There are other local revenues that are not easily quantified, as not all tourist expenditures are formally registered in the macro-economic statistics. Money is earned from tourism through informal employment such as street vendors, tour guides, etc. The positive side of informal or unreported employment is that the money is returned to the local economy, having a great multiplier effect as it is spent over and over again. The World Travel and Tourism Council estimates that tourism generates an indirect contribution equal to 100% of direct tourism expenditures.

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