THE ECONOMICS OF TOURISM AND HOSPITALITY
The Role of Tourism and Hospitality in Iconomic Development Several developing countries have used tourism and hospitality developmen as an alternative to help economic growth. The reasons for this are: first, there is a continuous demand for international travel in developed countries; second, as income in developed countries increases, the demand for tourism and hospitality also increases at a faster rate; and third, developing countries need foreign exchange to aid their economic development.
The Organization for Economic Cooperation and Development (OECD) has concluded that tourism and hospitality provides a major opportunity for growth to countries that are at the intermediate stage of economic development and require more foreign exchange earnings.
Tourism and hospitality is an invisible export which differs from international trade in many ways.
1. In tourism and hospitality, the consumer collects the product from the exporting country, thereby eliminating the freight costs for the exporter, except in cases in which the airline used are those of the tourist-receiving country.
2. The demand for pleasure travel is largely dependent on non-economic factors, such as local disturbances, political unrest, and changes in the fashionability of resorts/countries created mostly by media coverage. At the same time, international tourism and hospitality is both price elastic and income elastic. This means that changes in price and income will also change the demand for pleasure travel.
3. By using specific fiscal measures, the exporting or tourist-receiving country can manipulate exchange rates so that those for tourists are higher or lower (normally the latter is implemented in order to attract large numbers of tourists) than those in other foreign trade markets. Also, tourists are allowed to buy in domestic markets at the same prices as the local residents (the exceptions are the duty-free tourist shops operated in many Caribbean islands and elsewhere).
4. Tourism and hospitality is a multifaceted industry that directly affects several sectors in the economy, such as hotels, shops, restaurants, local transport terms, entertainment establishments, handicraft wrensacers, and indirectly affects many others, such as equipment manufacturers and utilities. Tourism and hospitality brings many more non-monta, a benefits and costs thunsother export industries, such as social, cultural, and environmental benefits and costs.
Economic Impact
When travelers outside the destination area spend on goods and services within the destination, tourism and hospitality ace as an export industry by bringing
in revenues from economic activity in
outside sources. Tourist expenditures also increase the level of
hospitality as a means
the host area directly. Many countries have utilized tourism and
necessary to finance economic growth.
to increase foreign exchange earnings to produce investment
The tourism and hospitality industry's economic impact on a destination area can be immense since it provides a source of income, employment, and foreign exchange.
Direct and Secondary Effects
In order to measure the economic impact of tourism and hospitality on the destination area, it is important to know the direct and secondary effects of visitor expenditures on the economy of the area. Tourist expenditures received as income by businesses such as hotels, restaurants, car rentals, tour operators, and retail shops serving tourists have a direct effect on the economy of the host area. The term "direct" means that the income is received directly. Indirect or secondary effects mean that the money paid by tourists to businesses are, in turn, used to pay for supplies, wages of workers, and other items used in producing the products or direct services bought by tourists.
Tourism Multiplier
The term "multiplier" is used to describe the total effect, both direct and secondary, of an external source of income introduced into the economy. The tourism multiplier or multiplier effect is used to estimate the direct and secondary effects of tourist expenditures on the economy of a country. The multiplier effect is illustrated in Figure 2.
A tourist makes an initial expenditure into the destination. This expenditure is received as income by local tour operators, handicrafts store owners, hoteliers, and taxi drivers. In the first round of transactions, a hotelier may use some of the money received to buy some supplies, pay some wages, and retain some profits. The income in the second round may be spent or saved, while the employee who has received payment for services rendered may spend some of it on rent and some on food, and may put some into savings. The money spent on supplies in the third round of spending goes for such things as seed, fertilizers, and imported raw materials. Any income spent on imports has leaked out of the local economy. This process continues until the additional income generated by a new round of spending essentially becomes zero. Leakage is the value of goods and services that must be imported to service the needs of tourism and hospitality. To estimate the total economic impact on an area, imports must be subtracted from the income generated by visitors.
The formula for tourism multiplier is:
K = y/E
Where:
K = the multiplier
y = the change in income generated by E
E-the change in expenditure (the initial sum of money spent by the tourist)
The size of the multiplier depends on the extent to which the various sectors of the economy re er led to one another. Whe ethe tourism and hospitality sectors buy heavily from oo ie local economic sectors for goods and services, there will be a smaller tendency to import and the multiplier wil be sisater shan if the reverse were true.
A simplified formula for tourism multiplier is:
K = 1-L/1 - (c - cj - tic)(1 - td = b + m)
where:
K = the multiplier
L = the direct first-round leakages
c = the tendency to consume
cj = the proportion of that propensity spent abroad
tic = the indirect tax
td = the value of direct deductions (income tax, national insurance, and so on)
b = the level of government benefits
m = the value of imports
Most developing economies have an income multiplier range between 0.6 and 1.2, while developed economies have a range between 1.7 and 2.0.
Cost-Benefit Ratio
Those concerned with developing the tourism and hospitality industry, whether a government or a private individual, would like to know the extent of potential benefits and their costs. Benefits divided by costs equal the cost-benefit ratio. To arrive at these ratios, the following procedures are used:
1. determine where the tourist dollar is spent;
2. determine what percentage of each expenditure leaves the local economy;
3. derive a "multiplier effect," a ratio applied to income that reflects multiple spending within an economy;
apply the multiplier effect to the tourist expenditures to arrive at the total benefits of tourist expenditures in dollars;
derive a cost-benefit ratio expressed as dollars received/dollars spent; and apply the cost-benefit ratios to tourist expenditures to provide estimates of. income and costs of tourist business to a community, for both the private and public sectors.
Undesirable Economic Aspects of Tourism
Some undesirable economic aspects of tourism and hospitality are higher prices and economic instability. Because of additional demand and/or increased imports, tourist purchases may result in higher prices in a destination area. This would mean that local residents would also have to pay more for products and services.
Since pleasure travel is a discretionary item, it is subject to changes in prices and income. These fluctuations may result in economic instability.
How to Maximize the Economic Effect of Tourism and Hospitality
Growth Theories
Some economic growth theories have been proposed to maximize the economic effect of tourism and hospitality within a destination area. These are the theory of balanced growth and the theory of unbalanced growth.
Proponents of the theory of balanced growth suggest that tourism and hospitality should be viewed as an important part of a broad-based economy. This theory states that tourism and hospitality needs the support of other industries. Its objective is to integrate tourism and hospitality with other economic activities. To obtain maximum economic benefit, tourism and hospitality goods and services should be locally produced.
Supporters of the theory of unbalanced growth see tourism and hospitality as the spark to economic growth. While the proponents of the theory of balanced growth stress the development of supply, supporters of the theory of unbalanced growth emphasize the need to expand demand. As demand is increased through the vigorous development of tourism and hospitality, other industries will move to provide products and services locally.
Economic Strategies
The key to maximizing the economic effects of tourism and hospitality is to maximize the amount of revenue and jobs developed within the region. To attain this objective, some economic strategies have been adapted, such as import substitution, incentives, and foreign exchange.
Import Substitution
It imposes quotas or tariffs on the importation of goods which can be developed locally. It also grants subsidies, grants, or loans to local industries to encourage the use of local materials. Its objective is to minimize the leakage of money.
Incentives
The wise use of incentives can encourage the influx of capital, both local and foreign, necessary to develop tourism and hospitality supply. The most common forms of incentives are:
1. tax exemptions/reductions on imported machinery, materials, and the like;
2. reduction in company taxation by means of favorable depreciation allowances on investment, or special treatment in relation to excise taxes, sales taxes, income taxes, turnover taxes, profit taxes, or property taxes,
3. tax holidays (limited period);
4. guarantee of stabilization of tax conditions (for up to 20 years);
5. grants (for up to 30% of total capital costs);
6. subsidies (guaranteeing minimum level of profit, occupancy, etc.);
7. loans at low rates of interest;
8. provision of land freehold at nominal or little cost or at low rents;
9. free and unrestricted repatriation of all or part of invested capital profits, dividends, and interest subject to tax provisions; and
10. guarantees against nationalization or appropriation.
Before implementing an incentive strategy, a destination should:
1. examine the performance of the schemes of other countries in light of their resources and development of objectives;
2. research the actual needs of investors;
3. design codes of investment concessions related to specific development objectives with precise requirements of investors; and
4. establish targets of achievements and periodically monitor and assess the level of realization of such targets.
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Foreign Exchange
Many countries have placed restrictions on spending in order to maximize foreign exchange earnings. They have limited the amount of their own currency that tourists can bring in and take out of the destination to ensure that foreign currency is used to pay bills in the host region. Tourists may be required to pay hotel bills in foreign currency. Visitors may be required to show that they have enough money for their stay before they are permitted to enter the country or they maye of their vesuired to enter with a specified amount of foreign currency for the duration of their visit.
Many developing countries have used tourism and hospitality development as an aid to economic growth. The reasons for this are: there is a continuous demand for international travel in developed countries; and the demand for tourism and hospitality will increase as incomes in developed countries increase. Developing countries need foreign exchange to aid their economic development.
The economic impact of tourism and hospitality on a destination area is enormous since it provides a source of income, employment, and foreign exchange.
Tourist expenditures have direct and secondary effects on the economy of a country.
The tourism multiplier is affected by leakages or the value of services that must be imported to lower the multiplier effect; the less leakages, the greater the multiplier effect.
The cost-benefit ratio determines which economic sector will produce the most benefit in terms of income generated relative to the cost of development. It is obtained by dividing the benefits by the costs.
There are some economic aspects of tourism and hospitality which are undesirable.
These are higher prices and economic instability. Higher prices are brought about by additional demand and/or increased imports, while economic instability is the result of fluctuations in prices and income.
The economic effect of tourism and hospitality can be maximized through the following: strategies, import substitution, incentives, and foreign exchange.
Identify the following.
1. It imposes taxes on imported goods which can be produced locally.
2. It describes the direct and indirect effect of an external source of income introduced into the economy.
3. A ratio obtained by dividing the benefits with the costs.
4. The value of goods and services that must be imported to service the needs of tourism and hospitality.
5. An economic theory which emphasizes the development of supply.
6. earned from foreign currency spent by foreign tourists.
7. Limitations established by a country to control the amount of money taken or exchanged within a country.
8. An economic theory which emphasizes the need to expand demand.
9. Financial aid given by the government to industry.
10. Goods bought from foreign countries.
Enumerate the following.
11-12. The undesirable economic aspects of tourism and hospitality
13-17. How to maximize the economic effects of tourism and hospitality
18-20. Forms of incentives