Economics of Tourism Industry
This Project has been submitted by
Mr. Dheeraj K
Id No. 213031
On ECONOMICS I
During the MONSOON Semester 2014
The Economic Effects of Tourism Industry and Need for Sustainability
Monsoon Semester (2014)
The West Bengal National University of Juridical Sciences
The Economic Effects of Tourism Industry and Need for Sustainability
The Tourism industry is one of the biggest contributors to the global economy. It is a fast growing and constantly expanding industry. The tourism industry has other associated industries it thrives on and this makes this one of the most important sectors of the economy. This paper seeks to examine the economic impacts of the tourism industry, track its growth and effect on the global scale and discuss the need for a sustainable growth.
The Tourism industry encompasses all the firms, organizations and facilities which are intended to serve the specific needs and wants of the tourists. It is a booming and ever growing industry which currently constitutes 9.2 percent of the World’s Gross Domestic Product (GDP). In the post-world-war era, most of the developing countries had to turn to tourism to increase revenues and remedies for balance of payments deficits. The nature of demand and supply conditions of the tourism industry has also influenced its growth. The industry utilizes simple technology and resources like sunshine, existing scenery and manpower. The demand for tourism is ever rising; from 25 million international tourists in 1950 to 1.087 billion in 2013. The industry has been clocking nearly 5 percent increase every year. The UNWTO has forecasted a 1.8 billion international tourist forecast by the year 2030. As a result, the tourism industry has emerged as one of the biggest global industries. An industry of this magnitude has various economic impacts on the world economy.
Balance of Payments Effect
The balance of payment is an accounting record which is used to compare the financial and economic situations of a country with other countries. International tourism directly affects the balance of payments as an invisible export entry. Tourism has the capacity to stimulate economic growth by earning foreign exchange for the host nation and thus help in balance of payments. International tourism has earned a prime status in earning foreign exchange in major emerging economics. This provides a critical monetary input in the overall development of the country. Tourism has also proved to be an important source of finance for capital goods import in developing nations.
Tourism uses significant amounts of foreign exchange on marketing and promotion, import of capital goods and services a tourist requires. For favorable effects of tourism on the balance of payments, the foreign exchange revenues for a country must exceed its foreign currency expenditures. When tourism is not integrated with the rest of the economy, foreign exchange earned is not retained by the host economy.
The expenditure of foreign exchange in sustaining the tourism industry is known as leakage. The most common sources of leakage are import of material and capital good for the industry, import of consumables, employment of foreigners and repartition of profits by foreign companies involved in the industry. Leakages could also include charges on foreign debt incurred for tourism development, depreciation of infrastructure due to use my tourists and damage to the environment.
To prevent this leakage, the tourism sector needs to evolve closer links with the local economy. This would result in the increase in the purchase of local products which would also raise the income and employment potential.
Income Multiplier Effect
Owing to the forward and backward linkages of the tourism sector, the host economy is benefited by tourist expenditure and related investment as it induces income generation. The money from tourism spending flows primarily to businesses and government agencies. Apart from them, other businesses, households and governments are also affected by this flow of income. The impacts are direct, indirect and induced.
Direct Effects – they are the production changes associated with the immediate changes in tourism expenditure.
Indirect Effects – they are the production changes resulting from various rounds of re-spending of the income receipts of the tourism industry
Induced Effects – they are the changes in economic activity resulting from household spending of income earned directly or indirectly through tourism spending.
For example, an increase in the number of tourists dining at restaurants would directly yield increased sales in the restaurant sector. The additional sales, and associated changes like increased taxes, salaries, and supplies are direct effects of tourist spending. Changes in sales, jobs and income in the grocery industry form the indirect effects. Business supplying services and materials to the grocery industry represent another round of indirect effects. This way the tourism industry if effectively linked with other economic sectors in the region. Restaurant and grocery supply employees, supported directly or indirectly by the tourism industry spend their income on day-to-day needs and services. The sales, income and jobs that result out of this expenditure constitute the induced effects.
The principal factors affecting the extent of income multiplier effect caused by tourist expenditure are initial volume of tourist expenditure, size of the economy, linkages between tourism establishments and other sectors and leakages. Within the tourism industry as well, the effect varies between formal and informal sectors. The formal sector which is characterized by international standard hotels, foreign cuisines, air conditioned transport, etc., is highly dependent on foreign participation owing to its high initial capital requirements. As a result formal sector entails high leakages in the form of profit transfer, repartition of profits, large quantity of imports when compared to local establishments that rely on local sources.
For an effective tourism industry, the linkages and multipliers of each tourism activity have to be examined and a cost benefit analysis has to be done with regard to low cost high volume mass tourism and high price low volume, special activity. For example, Safari tourism – a high price low volume activity – is associated with higher per capita expenditure but a meager multiplier effect when compared to beach tourism.
Tourism with its wide range of constituent sub sectors is one of the largest industries in the world. It is a labour intensive industry which provides work for a large number of people, from various diverse sections of the society from the most specialized to unskilled work force. The impacts of tourism in employment go far beyond sectors where the tourists directly spend their money. Due to the multiplier effect of the industry, employment is indirectly generated in other sectors as well. Every, one in eleven jobs in the world is related to the tourism sector. Job creation is growing one a half times faster than any other industrial sector. Tourism being a multi-dimensional activity, has an enormous potential to create jobs and rectify unemployment problems in developing nations and help in poverty elevation of the host country. The industry being labour intensive, require relatively short training periods for most jobs. Employment can be created with relatively low investment in fixed assets per employee.
Other Economic Effects
The industry stimulates enormous investments in new infrastructure, which has a twofold benefit- it improves the living conditions of local residents and creates new jobs. Tourism development projects include transportation, sewage systems, water treatment plants, restoration of monuments, museums and an overall maintenance of the environment.
In addition, the industry provides governments with tax revenues through accommodation and restaurant taxes, transport system taxes, sales tax, entry fees, import taxes, employee income tax and other fiscal measure. The world export in relation to the tourism industry accounted for 1.4 trillion US dollars and the tourism industry as a whole accounts for 9.2 percent of the world’s GDP.
Need for Sustainability
An ever increasing number of destinations worldwide have opened up to, and invested in tourism transforming the industry into a key driver of socio economic progress through export revenues, creation of jobs and infrastructure development. Over the past six decades, tourism has experienced continued expansion and diversification becoming one of the largest and fastest growing economies in the world. It is often forgotten that concept of sustainability has an economic dimension alongside its social and environmental dimensions. An essential element of sustainable tourism industry is economic viability.
Economic efficiencies result in judicious use of resources with potentially minimal adverse environmental and social impacts from their usage. Tourism development is fundamentally driven by business. The governments however play a crucial role as partners in tourism development in planning and strategy, land sanctioning, infrastructure development, marketing, responsibility for public and natural attractions, maintenance and controlling the impacts of the industry.
The various favorable effects of the industry have resulted in large scale economic expansion which has induced host economies to propagate tourism. This has further resulted in negative effects. The negative effects include, large scale destruction of eco-systems to accommodate tourist infrastructure, deterioration of the natural resources by the tourists, increasing levels of pollution, littering, etc. Tourism in today’s world finds it necessary to manipulate and modify the environment to suit its purpose. The consequences are not predictable and can certainly lead to environmental degradation and self-destruction.
Since, the Earth Summit held in Rio de Janeiro in 1992, there has been mounting pressure on the tourism industry to lift its environmental performance and work towards ecologically sustainable forms of tourism development
The concept of sustainability expresses the idea that humankind must live within the capacity of the environment to support it. The world commission on Environment and Development defines sustainable development as that which meets the needs of the present without compromising the ability of the future generation to meet their own needs. New forms of tourism are accompanied by new environmental challenges and more demanding standards for sustainable development. With the current trend of expansion of the tourism sector, its growth and development must be committed to sustainability.
An existing tourist attraction can be added with created attractions, improved facilities and infrastructure to present a new blend of structures, activities and functions to service a clientele. The amendments if carried out sensibly can contribute to the substantial upgrading of the environment and enhance visitor enjoyment and ecological sustainability.
One of the most fundamental challenges that the tourism industry faces is the ability to adjust to the change in environment. Changes brought about by human intervention, no matter how well intentioned will invariably be accompanied by negative response and effects. The change is a tourist destination will lead to the change in ambient environment. The important thing to note is that the change shouldn’t alter the environment completely. The features that attracted the tourists in the first place can lose their appeal with intensification of use and change. Alien structures introduced to the environment may not always agree with the natural environment and may have a negative impact on the inflow of tourists and may fail in attracting new tourists or retaining them. Change does not necessarily equate degradation, but tourist destinations carry with them the potential seeds of their own destruction, as they allow themselves to become more commercialized and lose the qualities which originally attracted tourists.
The tourism industry provides a significant number of beneficial economic impacts to the host country. It results in multifarious gains to the economy. It is characterized with high growth and low protectionism and hence is a viable option for countries to extract revenue specially developing nations. It provides increasing per capita income, more employment opportunities and much needed foreign exchange. The tourism sector being closely dependent on various other sectors causes income flow in a number of associated sectors. Development of tourism destinations also helps the local population in extracting revenue and better living conditions. Nevertheless, certain policy actions have to be taken up to control leakages and outflows. Integrating the tourism sector with other local sectors and import substitutions can help in controlling the leakage and in retaining the profits and thus help in the overall development of the tourism sector.
However, care should be taken to limit the development and proceed with a sustainable form of development. A sustainable tourism industry is the end product an economy should strive to achieve. The cost involved in achieving this type of an industry may be high and might seem futile for developing nations, but for the local people and for future generations this is a must. A sound tourism industry does not merely cost, but it pays as well. This huge industry needs to be judiciously and sensitively expanded lest it collapses.