Relationship Between Tourism Expansion and Poverty Alleviation

Literature Review and Project Outline

Research Theme:

“Tourism as an economic tool to promote economic growth and alleviate poverty in the world.”
 

Research Objective:

“This study will provide additional empirical evidence on the linkages between tourism expansion, economic growth and poverty alleviation, with a specific focus on ASEAN, to shed light on government policy and investment.”

Literature Review

In the past decade, tourism has proved to be a trigger for development and is gradually being recognized as an effective tool to alleviate poverty (Croes & Vanegas, 2008). United Nation World Tourism Organization (UNWTO) has been an advocate for tourism as the solution to overcome poverty in the world and has launched projects such as ST-EP (Sustainable Tourism – Elimi­nating Poverty) and PPT (Pro-Poor Tourism). However, unfortunately, this tool has not been widely utilized by many of the world leaders. For example, the policymakers in the Association of Southeast Asian Nations (ASEAN) countries did not proactively use tourism as a tool when strategizing for ways to achieve the Millennium Development Goals (MDG) (ASEAN Secretariat, 2017) even though they had comparative advantages for tourism such as rich cultural heritage, appropriate weather and relatively low cost. (Tourism and poverty alleviation, 2002) One of the reasons for the misalignment of ideology (Zhao and Ritchie, 2007) might be due to the lack of empirical evidence internationally on the magnitude of how tourism can affect economic growth and poverty reduction, as the studies on tourism-led poverty alleviation have been limited and contradictory.

The theoretical link on how poor could benefit from tourism activity is categorized into three key aspects. (Mitchell and Ashley, 2010) (1) Direct effects, which include the direct earnings from the tourism sector, such as revenues for business owners and labour incomes; (2) Secondary effects, which refer to the multiplier effect of tourism as tourism workers will spend their earnings on other sectors and it will generate indirect earnings within the local economy. The study found that the effect of multiplier ranges from 60% to 120% hence for every tourism dollar spent, it will generate a total income of $1.60 to $2.20; (3) Dynamic effects, which are the long-term benefits due to tourism development. Greater investments in infrastructure, business development, and human capital will also likely to have spillover effects on other sectors and in turn, will alleviate poverty as a whole.

             
_{Figure 1: Triangle of tourism expansion, economic growth and poverty reduction. (Kim, Song and Pyun, 2016)}

Generally, two main approaches had been used to explore the tourism-poverty link, either through econometric analysis at a macro level or qualitative case study approach. (Winters, Corral and Mora, 2013) As an overview of various studies, there are two links on how tourism could alleviate poverty (as shown in figure 1). The first link is the tourism-led growth hypothesis (TLG), which evolved from export-led growth hypothesis and could be used to explain indirect and dynamic effects from above. Researchers believed that, like exports, international tourism earns foreign exchange and could drive long-term economic growth, which will then lead to poverty reduction. (Balaguer and Cantavella-Jordá, 2002) The underpinning concept is well understood and the effectiveness is supported by various empirical studies that found a strong negative correlation between tourism expansion and economic growth in the less developed countries (LDC) such as Mauritius, Greece and South Africa. (Durbarry, 2004; Dritsakis, 2004; Akinboada and Braimoh, 2009) However, the TLG link is being questioned as Oh (2015) did a case study on Korea and found that even though there is a correlation between tourism expansion and economic growth but tourism is not a catalyst for the growth. Therefore, more empirical studies on more countries are needed to verify the causality of this relationship.

 Most empirical studies have been focusing on the TLG link and the direct link between tourism and poverty (link 2) has been largely overlooked. (Zhao and Ritchie, 2007) Croes (2014) was one of the few that studied the direct tourism- poverty link and it was a study that focused specifically on Costa Rica and Nicaragua. Even though an econometric case study design was used, which raised the question of external validity but a valuable data pattern was detected. The inferential analysis arises from this study was that tourism has a positive impact on poverty alleviation but the effect is not equal on all income groups with the extreme poor being the biggest beneficiaries of tourism expansion. Xu (2016) tested the effect of tourism growth on poverty alleviation and poverty gap in 66 developing countries using linear and panel quantile regression technique and found similar result as Croes – tourism has a heterogeneous effect on poverty alleviation for different poverty levels. However, contrary to Croes, it was found that tourism does not appear to be an effective tool of poverty alleviation in the case for the very low quantiles of poverty. In support of this, Llorca-Rodriguez, Casas-Jurado and Garcia-Fernandez (2017) did a fixed effect model using Panel data on Peru using various control variables and found that even though that tourism is beneficial for the poor but the benefits do not reach the extreme poor to the same extent.

The main criticism in this research area is that the existing relevant literature lack global understanding and the validity of causality between tourism expansions, economic growth and poverty reduction is not proven as they were mainly derived from either country-specific case studies or qualitative researches. Xu (2016) Furthermore, the recent few empirical studies did not contribute much to bridge the gap as they are fragmented, lacks a consistent methodological development and limited in scope. Future studies could help to further validate the role of tourism expansion in economic growth and poverty alleviation by doing more econometrics analysis using time series data or panel data in the developing countries in order to provide insights on the value of government’s investment in tourism. (Winters, Corral and Mora, 2013) Some critics have highlighted the costs of tourism development in LDCs such as damage to the natural environment (Gohar and Kondolf, 2016), cultural erosions (Aramberri, 2001) and widening of inequality gap (Croes, 2014) and this may be due to limited and insufficient information to form investment and policy guidance. Therefore, after validating the links, studies should continue to investigate on how to fully maximize the potential of tourism by looking at under what circumstances that the links are the strongest.

Project Outline

1. Motivation

Poverty is a worldwide phenomenon and has been one of the main challenges for world leaders. The Millennium Development Goals (MDG) era had remarkable achievements as the extreme poverty rate in developing countries has dropped from 47% to 14% in 15 years. (The Millennium Development Goals Report, 2015) As a continuation, United Nations’ Sustainable Development Goals (SDG) aims to end all forms of poverty by 2030. (United Nations, 2018) However, as of 2018, there are still more than 700 million people living in extreme poverty and are struggling to fulfill the basic necessities such as education, healthcare and access to water. (United Nations, 2018) The optimistic forecast according to the current growth trend suggests that 400 million people will still be living in extreme poverty by 2030 hence it might imply new policies and financing models may be needed to accelerate economic growth in order to meet the aims set by SDG.

The world is becoming more integrated and global tourism and travel is one of the most consistent and fastest growing sectors in the world economy. (OECD tourism trends and policies, 2018) UNWTO suggested that tourism development could be a strategy to further stimulate economic growth and reduce poverty, especially in developing countries as it contributes to job creations, export revenues and has a spillover effect. In 2017, this sector alone accounts for around 10% of both the gross domestic product (GDP) growth and total employment. (World Travel and Tourism Council: Economic Impact, 2018). Therefore, international organizations such as UNWTO are encouraging world leaders to prioritize on investment of tourism development because tourism receipts and arrivals could be an effective poverty reduction tool only if appropriate policies for labour market and human resources development are available. (Saayman et al, 2012)

As this research area is relatively new, the relevant empirical studies are limited and mostly focused on specific regions, therefore the overall picture of the tourism-poverty link on a macro-level is still unclear. (Kim, Song and Pyun, 2016) There is an ongoing debate on whether tourism contributes to economic development, or even poverty alleviation hence in this paper, I would like to contribute to the tourism-led poverty alleviation literature by adding new empirical evidence, specifically in the Southeast Asia region and in turn provide more insights on the importance of tourism development for ASEAN policymakers when they are strategizing for the Sustainable Development Goals (SDG).

2. Objective

This study will look at the tourism-poverty link by attempting to answer these questions:

-          Is there a long-run equilibrium relationship between tourism expansion and economic expansion in ASEAN? (TLG Hypothesis)

-          Is there a long-run equilibrium relationship between tourism expansion and poverty reduction in ASEAN? (Direct link)

-          If both relationships exist, to what extent does poverty reduction respond to the change of each of the variables?

-          If both relationships exist, what are the directions of the causal relationships
 

3. Data

This paper will do an econometric analysis of the tourism-poverty link using panel data regression on 6 countries in the ASEAN region from 1990 to 2015 (Cambodia, Indonesia, Laos, Philippines, Thailand and Vietnam). However, some data are not collected annually therefore I will estimate the missing variables using a time trend when necessary. Also, by taking into account of the business cycle, I will use the 5-year average poverty ratio to ensure the robustness of the results. The dependent variable, poverty, is defined by headcount ratio (H), which refers to the percentage of population living below $1.25 a day and the data could be obtained from the ASEAN Secretariat. Economic growth has been the main factor that affects poverty and it will be represented by GDP growth. Tourism variables would be represented by international tourism arrivals (TA) and international tourism receipts (TR). The data for these proxies could be extracted from the World Bank.

4. Methodology

Equation 1 is the general panel data regression for this study:

           (1)

is the cross section of each country; is the time period, year; is the poverty level of country in year ;is the tourism development level of country in year ;is the GDP growth rate of country in year ;is the intercept, which represents the contribution of other important factors on poverty reduction;is the random error term; and are the output elasticity of tourism and GDPG respectively.

Group unit root test (ADF) will be carried out to account any spurious regression. F test and Hausman test would then be used to decide if fixed or random effect model would be used.

References

• Akinboade, O. and Braimoh, L. (2009). International tourism and economic development in South Africa: a Granger causality test. International Journal of Tourism Research.
• Aramberri, J. (2001). The host should get lost. Annals of Tourism Research, 28(3), pp.738-761.
• ASEAN Secretariat (2017). ASEAN Statistical Report on Millennium Development Goals 2017. Jakarta: ASEAN Secretariat.
• Ashley, C. and Roe, D. (2002). Making tourism work for the poor: Strategies and challenges in southern Africa. Development Southern Africa, 19(1), pp.61-82.
• Balaguer, J. and Cantavella-Jordá, M. (2002). Tourism as a long-run economic growth factor: the Spanish case. Applied Economics, 34(7), pp.877-884.
• Collacott, H. (2018). How we must approach poverty eradication in today’s world. [online] Development Initiatives. Available at: http://devinit.org/post/how-we-must-approach-poverty-eradication-in-todays-world/
• Croes, R. (2014). The Role of Tourism in Poverty Reduction: An Empirical Assessment. Tourism Economics, 20(2), pp.207-226.
• Croes, R. and Vanegas, M. (2008). Cointegration and Causality between Tourism and Poverty Reduction. Journal of Travel Research, 47(1), pp.94-103.
• Dritsakis, N. (2004). Tourism as a Long-Run Economic Growth Factor: An Empirical Investigation for Greece Using Causality Analysis. Tourism Economics, 10(3), pp.305-316.
• Durbarry, R. (2004). Tourism and Economic Growth: The Case of Mauritius. Tourism Economics, 10(4), pp.389-401.
• Gohar, A. and Kondolf, G. (2016). Sustainable Tourism along the Red Sea: Still Possible?. Civil Engineering and Architecture, 4(2), pp.39-46.
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• Llorca-Rodríguez, C., Casas-Jurado, A. and García-Fernández, R. (2017). Tourism and poverty alleviation: An empirical analysis using panel data on Peru’s departments. International Journal of Tourism Research, 19(6), pp.746-756.
• Mitchell, J. and Ashley, C. (2010). Tourism and poverty reduction. London: Earthscan.
• OECD tourism trends and policies 2018. (2018). Paris: OECD.
• Oh, C. (2005). The contribution of tourism development to economic growth in the Korean economy. Tourism Management, 26(1), pp.39-44.
• Step.unwto.org. (n.d.). Background and Objectives | Tourism and Poverty Alleviation. [online] Available at: http://step.unwto.org/content/background-and-objectives [Accessed 17 Nov. 2018].
• The Millennium Development Goals Report. (2015). New York: United Nations.
• Tourism and poverty alleviation. (2002). Madrid: Word Tourism Organization.
• United Nations (2018). The Sustainable Development Goals Report 2018. New York: United Nations.
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• Xu, H. (2016). A PANEL QUANTILE REGRESSION ANALYSIS OF TOURISM EFFECTS ON POVERTY ALLEVIATION.
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