measuring the impact of tourism on economic growth
TRANSCRIPT
21
GEOTOUR 2006 Košice 5 – 7 October 2006
Measuring the impact of tourism on economic growth Stanislav Ivanov1 and Craig Webster2
ABSTRACT: The paper presents a methodology for measuring the contribution of tourism to an economy’s growth, which is tested with data for Cyprus, Greece and Spain. We use the growth of real GDP per capita as a measure of economic growth and disaggregate it into economic growth generated by tourism and generated by other industries. We argue that current methodologies examine only the relationship between tourism development (measured by different statistics) and economic growth but do not state how much of the economic growth is a consequence of tourism development. The methodology proposed in this research promises to more adequately gauge the impact of tourism on economic growth than other methodologies.
INTRODUCTION One of the chief reasons that governments support and promote tourism throughout the
world is that it has a positive impact upon economic growth and development. Tourism should generate employment and income, lead to a positive tourism balance of payments, stimulate the supplying sectors of tourism, and lead to a generally increased level of economic activity in the country. Thus, tourism should have an impact on the frequently used quantitative measure of the economic development, gross domestic product (GDP). As a result, a specialized literature has developed to measure the impact of tourism upon GDP to deal with measuring how tourism contributes to economic growth.
However, the problem of measuring the economic impacts of tourism requires a broader view on the analysis of the interaction between tourism and GDP. For example, the increase of tourism share in GDP may be a result of the stagnation of other industries and/or their replacement/ousting by tourism. Therefore, as an economic benefit of tourism we do not perceive the GDP generated by tourism and its share in country’s GDP but the stimulation of the economic growth by tourism (in line with recent studies discussed below). This research note is an attempt to measure more adequately the impact of tourism upon economic growth than previous models, allowing for a more accurate measure for the impact of tourism on the economy.
LITERATURE REVIEW 1 Stanislav Ivanov, Ph. D. International College – Albena 3, Bulgaria St., 9300 Dobrich, Bulgaria e-mail: [email protected] 2 Craig Webster, Ph.D., College of Tourism & Hotel Management P.O.Box 20281, Larnaka Ave, Aglangia, 2150 Nicosia, Cyprus, e-mail: [email protected]
22
Because of the importance of tourism in the economy and the hopes of governments that tourism will lead to economic growth and development, there is a substantial literature, to deal with the topic. As a result, there are many publications treating the contribution of tourism to GDP, in which the absolute value of tourism GDP, the share of tourism in GDP and their changes over time are discussed /Archer & Fletcher (1996), Biçak & Altinary (1996), Evensen (1998), Sharpley (2001), WTTC (2006)/. There are also a number of articles proposing various methodologies in order to deal with the measurement of the impact of tourism upon the economy.
One leading study on the impact of tourism and economic development is by Proença and Soukiazis (2005). In their investigation, the correlation between the bed capacity of Portuguese regions and the regional economic growth measured by GDP per capita growth. They find that 1% increase in accommodation capacity in tourism sector induces 0,01% increase in per capita income. Tourism also increases the convergence rate of per capita income in Portuguese regions.
Using a different methodology, Lanza and Pigliaru (1999) examine the tourist specialization of the country and its effect of the economic growth based on Lucas’s two-sector endogenous growth model. The authors state that countries with endowments of suitable natural resources large relative to the size of their labour force are likely to develop a comparative advantage in tourism and will grow faster than those who specialise in the manufacturing sector (p. 12).
In a similar fashion, Brau et al. (2003) further discuss the problem observing the correlation between the tourism specialization of the country (the ratio between international tourism receipts and GDP at market prices) and the real per capita GDP growth rate. They find that small tourism countries grew faster during the period 1980-1995 than countries from OECD, oil producers, least developed countries or other small economies, and conclude that albeit smallness of a country is detrimental to growth, the opposite is true if it is combined with tourist specialization.
Further, Eugenio-Martin et al. (2004) consider the relationship between tourism and economic growth for Latin American countries for the period 1985-1998 with an analysis based on a panel data approach. The authors show that the growth in the number of tourists per capita produces a positive effect on the economic growth of the countries with low and medium levels of income per capita, but not in the group of rich countries. This finding suggests that the increase in the number of tourists’ arrivals in a country offers an opportunity for economic growth while countries are developing, but not when countries are already developed (p. 11).
In addition, Balaguer and Cantavella-Jordá (2002) construct a model, which includes the real gross domestic product, international tourism receipts in real terms, and the real effective exchange rate. They find that earnings from international tourism affect positively the Spanish economic growth and a long-run stable relationship between economic growth and tourism expansion exists. Vietze and Freytag (2005) investigate the influence of biodiversity on economic growth. They show that the relationship is not direct but through the positive effect biodiversity has on inbound tourism receipts per capita.
The common characteristic of all above-mentioned empirical studies is that they examine the relationship between tourism and economic growth with the help of econometric models – cross-country or cross-regional data. They all find that tourism stimulates positively the economic growth. However, their common disadvantage is that they do not say how much of the economic growth is, in practice, attributable to tourism. In this regard, the aim of the current paper is to present a methodology to measure the impact of tourism on economic growth based on disaggregating the economic growth into two parts – economic growth generated by tourism and generated by other industries.
23
METHODOLOGY
An impact is considered an economic benefit or cost if it increases the welfare of local population. Thus, economic growth should increase the welfare for the local population, although certain segments will benefit more than others. In this regard in current paper we use the growth of real GDP per capita rg as a measure of economic growth.
The growth of the real GDP per capita rg is:
(1) 100.1
0
)(
1
)(
00
01
⎟⎟⎟⎟⎟
⎠
⎞
⎜⎜⎜⎜⎜
⎝
⎛
−=
NY
NY
gpq
pq
r ,
where )( 01 pqY is the GDP in constant prices, )( 00 pqY - the GDP in the base year, N is the average size of the population, index 1 denote current period, index 0 is the base period.
We disaggregate the nominator of (1) to separate the tourism GDP in constant prices t
pq oY )(1
from the GDP in constant prices of other industries∑≠ti
ipq o
Y )(1, and tourism GDP in base
period tpq o
Y )(0 from GDP of other sectors in base period∑
≠ti
ipq o
Y )(0:
(2) 100.
0
)(
0
)(
0
)(
1
)(
1
)(
0
00
11
⎟⎟⎟⎟⎟⎟
⎠
⎞
⎜⎜⎜⎜⎜⎜
⎝
⎛−−+
=
∑∑≠≠
NY
N
Y
NY
N
Y
NY
go
oo
oo
pq
ti
ipqt
pqti
ipqt
pq
r
We regroup the expressions in the nominator and come to:
(3) 100.
0
)(
0
)(
1
)(
ˆ
0
)(
0
)(
1
)(
0
01
0
01
⎟⎟⎟⎟⎟⎟⎟
⎠
⎞
⎜⎜⎜⎜⎜⎜⎜
⎝
⎛
−+
−=
∑∑≠≠
NY
N
Y
N
Y
NY
NY
NY
go
oo
tr
o
oo
pq
ti
ipq
ti
ipq
g
pq
tpq
tpq
r
44 344 21
The first expression in (3) shows this part of the growth of real GDP per capita that is a consequence of tourism development, i.e. the impact of tourism on economic growth (Ivanov, 2005):
(4) 100.
0
)(
0
)(
1
)(
0
01
NY
NY
NY
go
oo
pq
tpq
tpq
tr
−= .
24
It must be mentioned, that trg reflects only the direct impact of tourism on economic
growth. The indirect and induced effects are part of the difference between rg from (1) and trg
from (4) and are considered direct effects of other industries on economic growth. Lanza and Pigliaru (1999), Brau et al. (2003), Balaguer and Cantavella-Jordá (2002) and
Vietze and Freytag (2005) consider only the impact of international tourism on economic growth through the tourism receipts, while Proença and Soukiazis (2005) focus on the bed capacity, but not how it is utilized. Our methodology combines both the inbound and domestic tourism from one side, and the utilization of the bed capacity (i.e. the generated GDP). It can be applied to any industry or type of tourism provided the necessary statistical data is available.
The methodology could be also applied with data on Gross Value Added (GVA), because is the “measure of the contribution to GDP made by an individual producer, industry or sector. Gross value added is the source from which the primary incomes of the System are generated and is therefore carried forward into the primary distribution of income account” (SNA1993: §1.6).
In comparing GVA and GDP, we can say that GVA is a better measure for the economic welfare of the population, because it includes all primary incomes. From the point of view of the society as a whole GDP, despite its disadvantages, is probably a better measure for economic growth and welfare, because it includes also net taxes (taxes minus subsidies) which are the financial basis for the collective consumption of the society. However, both aggregate variables are applicable in the presented methodology. Formula (4) could also be applied to individual tourism characteristic activities or types of tourism, including rural tourism, to measure their impact on economic growth and economic welfare, provided the availability of the appropriate data.
APPLICATION
The proposed methodology was tested with data for Greece, Cyprus and Spain. The data were obtained from the official web sites of national statistics institutes of the countries in question. For Spain we used data in constant 1995 prices for GDP, GDP in tourism, GVA and GVA in tourism. For Cyprus the available data were for GVA and GVA in hotels and restaurants in constant 1995 prices, and for Greece – GVA and GVA in hotels and restaurants in prices from previous year. The average size of population was calculated as the mean of the population at the beginning and at the end of each year. The results are displayed in Tables 1-3 and Figures 1-2. The tables include the growth of GDP (Spain) / GVA (Spain, Cyprus, Greece) per capita in constant prices – rg /see formula (1)/, the same statistic for the tourism sector (Spain) or hotels and restaurants (Spain, Cyprus, Greece), and the contribution of tourism (Spain) or hotels and restaurants (Spain, Cyprus, Greece) to economic growth t
rg /see formula (4)/. Because of availability of data for GDP in tourism characteristic activities, we were able
to apply the full methodology only for Spain – see Table 1a. For Cyprus (Table 2) and Greece (Table 3) we use the GVA in hotels and restaurants. To make a comparison with Spain, we also calculated t
rg with GVA data (Table 1b). For Cyprus we see, that until 2001 the GVA per capita in constant prices created by hotels
and restaurants is growing faster than the same statistic for the economy as a whole, which leads to high contributions of hotel and restaurant establishments to economic growth. For example, in 1997 the GVA per capita in constant prices rose with 0.88%, half of which, or 0.42%, are directly attributable to hotel and restaurant establishments, and in 1999 they increased the GVA per capita with 0.75%. However, the hospitality industry shows negative growth in Cyprus from 2002
25
onward – the GVA per capita in constant prices generated by the industry drops with 8.32% in 2002. As a result, the t
rg values turn negative, going as low as -0.83% in 2002. This means the hotel and restaurant industry contributed less to the growth of GVA per capita in comparison to the rest of the economy, and in fact it slowed the economic growth. In the case of Greece, we see that the growth of GVA per capita in hotels and restaurants in constant prices is higher than the growth for the economy as a whole (with the exceptions of 1999 and 2003). As a consequence, the impact of tourism to economic growth is positive (with the exceptions of 1999) – in 2004 (the year of the Summer Olympics) t
rg =1.20%. Thus, for Greece, it seems that hotels and restaurants generally support the growth of the general economy.
However, for Spain, the case is more interesting, because we can compare the results if we use data for GVA in hotels and restaurants and GDP in tourism as a whole (Table 1a and 1b). The contribution of tourism to economic growth measured by the impact on growth in per capita GVA in hotels and restaurants in constant prices shows less volatility than the results based on growth in per capita GDP in tourism in constant prices. In 2001 the two indicators even move in different directions (Figure 1). The GVA in hotels and restaurants data show that hospitality firms have decreased the welfare of the population by -0.12%. In contract, the GDP in tourism data lead us to the conclusion that in 2001 tourism as a whole has increased the welfare by 0.15%. Because GVA in hotels and restaurants is a narrower concept than GDP in tourism we think that the results in Table 1a represent better the impact of tourism on economic growth in Spain. However, if no data are available for GDP in tourism, GDP or GVA in some characteristic tourism activities (like hotels and restaurants) could be used as a proxy.
Figure 2 displays graphically the contributions of tourism to economic growth for the countries in question, calculated on the basis of GVA in hotels and restaurants. The data show that the hospitality industry is much stronger contributor to economic growth in Greece than in Spain and Cyprus. In fact, the industry is decreasing the growth in the latter two countries.
CONCLUSION
The paper presented a methodology for measuring the contribution of tourism to economic growth and applies the methodology to the cases of Cyprus, Greece and Spain. In the analysis, the growth of GDP per capita in constant prices is perceived as a measure of economic growth. Disaggregating the economic growth into economic growth generated by tourism and generated by other industries derives the impact of tourism on it.
We argue that current methodologies examine only the relationship between tourism development (measured by different statistics) and economic growth but do not state how much of the economic growth is a consequence of tourism development, which is the strength of our methodology. Our methodology is universal and can be applied to any industry or type of tourism provided the necessary statistical data are available. The methodology promises to give a much more accurate depiction of the relationship between the hospitality/tourism sectors and economic growth, giving decision makers, planners, and analysts greater insight into the relationship between the various sectors of economy and the economy in general.
26Ta
ble
1a. C
ontri
butio
n of
tour
ism
to e
cono
mic
gro
wth
– S
pain
(Gro
ss D
omes
tic P
rodu
ct)
SPA
IN
1999
20
00
2001
20
02
Gro
wth
of G
DP
per c
apita
in c
onst
ant p
rices
–rg
3.39
%
3.23
%
1.14
%
0.30
%
Gro
wth
of G
DP
in to
uris
m p
er c
apita
in c
onst
ant 1
995
pric
es
5.68
%
3.47
%
1.30
%
-3.7
0%
Con
tribu
tion
of to
uris
m to
eco
nom
ic g
row
th –
t rg
0.63
%
0.39
%
0.15
%
-0.4
2%
Tabl
e 1b
. Con
tribu
tion
of to
uris
m to
eco
nom
ic g
row
th –
Spa
in (G
ross
Val
ue A
dded
) SP
AIN
19
99
2000
20
01
2002
G
row
th o
f GV
A p
er c
apita
in c
onst
ant p
rices
–rg
3.11
%
3.18
%
1.23
%
0.23
%
Gro
wth
of G
VA
in h
otel
s and
rest
aura
nts p
er c
apita
in
cons
tant
199
5 pr
ices
3.
66%
1.
32%
-1
.69%
-0
.55%
Con
tribu
tion
of to
uris
m to
eco
nom
ic g
row
th –
t rg
0.27
%
0.10
%
-0.1
2%
-0.0
4%
Tabl
e 2.
Con
tribu
tion
of to
uris
m to
eco
nom
ic g
row
th –
Cyp
rus (
Gro
ss V
alue
Add
ed)
CY
PRU
S 19
97
1998
19
99
2000
20
01
2002
20
03
2004
G
row
th o
f GV
A p
er c
apita
in c
onst
ant p
rices
–rg
0.88
%
3.68
%
3.65
%
3.97
%
3.00
%
0.86
%
0.17
%
1.41
%
Gro
wth
of G
VA
in h
otel
s and
rest
aura
nts p
er c
apita
in
cons
tant
199
5 pr
ices
4.
75%
4.
38%
8.
07%
7.
17%
2.
95%
-8
.32%
-4
.59%
-4
.78%
Con
tribu
tion
of to
uris
m to
eco
nom
ic g
row
th –
t rg
0.42
%
0.40
%
0.75
%
0.69
%
0.29
%
-0.8
3%
-0.4
1%
-0.4
1%
Tabl
e 3.
Con
tribu
tion
of to
uris
m to
eco
nom
ic g
row
th –
Gre
ece
(Gro
ss V
alue
Add
ed)
GR
EE
CE
19
97
1998
19
99
2000
20
01
2002
20
03
2004
G
row
th o
f GV
A p
er c
apita
in c
onst
ant p
rices
–rg
10.1
5%
10.0
3%
6.70
%
7.28
%
8.57
%
6.41
%
9.38
%
8.34
%
Gro
wth
of G
VA
in h
otel
s and
rest
aura
nts p
er c
apita
in
cons
tant
pric
es fr
om p
revi
ous y
ear
27.7
7%
10.4
4%
-2.4
7%
7.67
%
14.4
2%
7.37
%
8.19
%
15.9
7%
Con
tribu
tion
of to
uris
m to
eco
nom
ic g
row
th –
t rg
1.85
%
0.81
%
-0.1
9%
0.54
%
1.03
%
0.55
%
0.62
%
1.20
%
27
Figu
re 1
. Con
trib
utio
n of
tour
ism
to e
cono
mic
gro
wth
- Sp
ain
0,27
%
0,10
%
-0,1
2%-0
,04%
0,63
%
0,39
%
0,15
%
-0,4
2%
-0,6
0%
-0,4
0%
-0,2
0%
0,00
%
0,20
%
0,40
%
0,60
%
0,80
%
1999
2000
2001
2002
Year
Contribution of tourism to economic growth
Spa
in (G
VA
in h
otel
san
d re
stau
rant
s)S
pain
(GD
P in
tour
ism
)
28
Figu
re 2
. Con
trib
utio
n of
tour
ism
to e
cono
mic
gro
wth
(GV
A in
hot
els a
nd r
esta
uran
ts)
-1,0
0%
-0,5
0%
0,00
%
0,50
%
1,00
%
1,50
%
2,00
%
1997
1998
1999
2000
2001
2002
2003
2004
Year
Contribution of tourism to economic growth
Gre
ece
Cyp
rus
Spa
in
29
LITERATURE: [1] Archer, B. H., and J. E. Fletcher (1996) The economic impact of tourism in the Seychelles.
Annals of Tourism Research 23(1), pp. 32-47
[2] Balaguer, J., and M. Cantavella-Jordá (2002) Tourism as a long-run economic growth factor:
the Spanish case. Applied Economics 34(7), pp. 877-884
[3] Biçak, H. A., and M. Altinary (1996) Economic impact of the Israeli tourists on North
Cyprus. Annals of Tourism Research 23(4), pp. 928-931
[4] Brau, R., A. Lanza, and F. Pigliaru (2003) How fast are the tourism countries growing? The
cross-country evidence. CRENoS Centro Ricerche Economiche Nord Sud, Working Paper №03-
09, http://www.crenos.it/working/pdf/03-09.pdf (Accessed 09 May 2006)
[5] Eugenio-Martin, J. L., N. M. Morales, and R. Scarpa (2004) Tourism and Economic Growth
in Latin American Countries: A Panel Data Approach. Fondazione Eni Enrico Mattei Working
Paper Series, Nota di Lavoro 26.2004, http://www.feem.it/NR/rdonlyres/881EB22A-4CF2-4FE8-
9E78-D8C9AB1E65FD/1057/2604.pdf (Accessed 12 May 2006)
[6] Evensen, T. N. (1998) The impact of tourism on the Norwegian economy and employment.
Paper presented at the 4th International Forum on Tourism Statistics, 17-19 June 1998,
Copenhagen, http://www2.dst.dk/internet/4thforum/docs/c2-8.doc (Accessed 17 May 2003)
[7] Ivanov, S. (2005) Measurement of the macroeconomic impacts of tourism. Unpublished Ph.
D. thesis, University of Economics – Varna, Bulgaria
[8] Lanza, A., and F. Pigliaru (1999) Why are tourism countries small and fast-growing.
CRENoS Centro Ricerche Economiche Nord Sud, Working Paper №99-06,
www.crenos.it/crenos/PDF/99-6.pdf (Accessed 09 May 2006)
[9] Proença, S., and E. Soukiazis (2005) Tourism as an alternative source of regional growth in
Portugal. Centro de Estudos da União Europeia, Faculdade de Economia da Universidade de
Coimbra, Discussion paper №34, http://www4.fe.uc.pt/ceue/working%20papers/EliasSara34.pdf
(Accessed 09 May 2006)
[10] Sharpley, R. (2001) Sustainability and the political economy of tourism in Cyprus. Tourism
Vol. 49(3), pp. 241-254
[11] System of National Accounts /SNA/ (1993), United Nations Statistical Division,
International Monetary Fund, World Bank, EUROSTAT, Organisation for Economic
Cooperation and Development
30
[12] Vietze, Ch., A. Freytag (2005) International tourism, development and biodiversity: first
evidence. Public Choice Society Annual Meeting, New Orleans, Louisiana, 30th March – 2nd
April 2005, http://pubchoicesoc.org/papers_2006/vietze.pdf (Accessed 09 May 2006)
[13] World Travel and Tourism Council /WTTC/ (2006) The 2006 Travel & Tourism Economic
Research: Bulgaria. London, http://www.wttc.org/2006TSA/pdf2/Bulgaria.pdf (accessed 12 May
2006)