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Economic Development and Tourism

Tourism has been seen as an important form of economic development. It also promoted as an agent of an economic and social change A service based industry capable of creating employment and income. An important form of economic activity

Leakage and Multiplier Analysis


Dr Jan Mosedale

The impact and role of tourism will vary from region to region. Destinations can rise and fall in popularity.

Economic benefits
Foreign exchange earnings and the balance of payments

Economic benefits
Foreign exchange earnings and the balance of payments Generation of income

Economic benefits
Foreign exchange earnings and the balance of payments Generation of income Generation of employment

Economic benefits
Foreign exchange earnings and the balance of payments Generation of income Generation of employment Improvement of infrastructure

Economic benefits
Foreign exchange earnings and the balance of payments Generation of income Generation of employment Improvement of infrastructure Encouragement of Entrepreneurial activity

Economic benefits
Foreign exchange earnings and the balance of payments Generation of income Generation of employment Improvement of infrastructure Encouragement of Entrepreneurial activity Stimulation of regional economies and mitigation of regional economic disparities

Economic Cost of Tourism


http://www.youtube.com/watch?v=C0u9s0LWxqo& context=C46ab5caADvjVQa1PpcFPtMPoYGrhrrrSHNY 5sCot5ISTBF75syjY= Incidental costs

Economic Cost of Tourism


Incidental costs Opportunity cost

Economic Cost of Tourism


Incidental costs Opportunity cost Overdependence on tourism

Economic Cost of Tourism


Incidental costs Opportunity cost Overdependence on tourism Inflation and land values

Economic Cost of Tourism


Incidental costs Opportunity cost Overdependence on tourism Inflation and land values Leakage

Economic Cost of Tourism


Incidental costs Opportunity cost Overdependence on tourism Inflation and land values Leakage Seasonality

Economic Cost of Tourism


Incidental costs Opportunity cost Overdependence on tourism Inflation and land values Leakage Seasonality Cost of tourism management (development, marketing, operations)

Using tourism as tool for economic development


Developing nations - foreign exchange Developed nations - post industrial development Regional economies - economic transition Urban economies - rejuvenation Remote economies - economic survival Rural economies - diversification and reversing population trends

Leakage
Multiplier inversely related to leakage Common sources of leakage - Overseas promotion - Import of materials for construction - Consumables - Repatriation - Foreign loans

Import leakage 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, according to UNCTAD. Export leakage (Repatriation) Multinational corporations and large foreign businesses have a substantial share in the import leakage.

A study of tourism 'leakage' in Thailand estimated that 70% of all money spent by tourists ended up leaving Thailand (via foreign-owned tour operators, airlines, hotels, imported drinks and food, etc.). Estimates for other Third World countries range from 80% in the Caribbean to 40% in India.
Source: Sustainable Living

Impacts explained
http://www.youtube.com/watch?v=1WgvKEqDI3k&l ist=PL0B4B5A329608FA23&index=1&feature=plpp_vi deo

Economic Impact
Direct
visitor expenditure minus the value of imports

Multiplier
multipliers are coefficients that express the amount generated in an area by an incremental unit of tourist expenditure (Getz, 1994: 442) The multiplier is a numerical ratio which seeks to express the relationship between a unit of tourism expenditure and its wider impact in the economy. 1. transaction (or sales) multiplier 2. output multiplier 3. Income multiplier 4. employment multiplier 5. government revenue multiplier

Indirect
Re-spending of tourism expenditures expenditure, such as payments to employees, payments to suppliers, builders, accountants, banks

Induced
re-spending of the income in the local economy generating another round of economic activity

Might sound simple, but actual collection of data is very difficult, especially for induced effects!

The Multiplier
Allows total impact of initial expenditure to be calculated Can calculate MULTIPLIER by dividing a unit of tourist expenditure by the proportion of it which leaks out of the economy in the form of savings or imports Inversely related to LEAKAGE

Basic Measurement of Economic Impact with Multiplier Method


Economic impact of tourism= Number of tourists * Average Spending per visitor * Multiplier To assess impact of new tourism devt -Three steps:
estimate change in number of tourists to region due to proposed action/policy estimate average level of spending in local area apply the change in spending to a regional economic model or set of multipliers to determine secondary effects

The Use of Multiplier Figures:


Policy making and planning Analysing the national or regional effects of public or private sector investment in tourism Simulating the economic impact, sector by sector of any proposed tourism developments Examining the relative magnitudes of the impacts made by different types of tourism Comparing tourism with other sectors

Regional & national variation in multipliers


Leakage varies from: NZ UK Dominica Antigua Caymen Is 60% small island communities 10% more developed destinations 2.4 1.7 1.2 0.88 0.65

Thus multipliers also vary:

(Cooper et al 1998)

What are the factors influencing the level of leakage?


Size of country Economy Policy re imports Supply/demand relationships Type of tourism Stage of development Visitor Location cultural considerations

National vs regional
National multipliers usually higher than regional Larger economic base Smaller leakages

Thus national multipliers are a POOR GUIDE to regional economies

Use and Abuse


Multiplier varies with tourist type
E.g Vaughan (1977) Edinburgh
Day trippers 0.203, Guest House 0.330

Weaknesses of multipliers
Data deficiencies Secondary data inadequate Time, expense of collecting primary data Partial industrialisation

Restrictive assumptions Supply constraints Static nature of models

References
Archer, B.H. 1982. The value of multipliers and their policy implications. Tourism Management 3(2): 236-241. Cooper, C., Fletcher, J., Gilbert, D. and Wanhill, S. 2005, Tourism principles and practice, Pitman Publishing,London. Wall, G. and Mathieson, A., 2006, Tourism : change, impacts, and opportunities, Wiley, Harlow, Essex, England. Smith, S.L.J., 1995, Tourism analysis: A handbook, Longman Group, England. http://www.uneptie.org/pc/tourism/sust-tourism/economic.htm