Poverty Literature Review –Tourism Sector1
I.
Background
The importance of tourism in alleviating poverty in emerging economies has been widely recognized in
some circles. At the multilateral level, the United Nations World Tourism Organization (UNWTO)2 is a
sector advocacy organization and, since 2002, has been a firm proponent of a pro-poor approach to
tourism. Many national governments in developing countries have also made recent explicit policy
statements asserting a role for tourism in strategies for the reduction of poverty; about 80% of African
Poverty Reduction Strategy Papers include a reference to encouraging tourism.
According to the World Travel and Tourism Council (WTTC)3 , travel and tourism:




generates about 12% of global GDP, and contributes to an average of 40% of GDP in developing
economies;
accounted for more than 235 million jobs in 2010 (equivalent to about 8% of total employment),
and is forecasted to increase to 324 million (or 9.7% of total employment by 2012, equivalent to
one in ten jobs);
accounts for 36% of service exports in advanced countries and 66% in developing economies; and
is the main source of foreign exchange for 47 of the World’s 50 Least Developed Countries .
Travel & tourism is the largest employer next to agriculture globally. It is labor-intensive and is a
significant source of employment, especially for those with limited access to labor markets, such as
women, young, immigrant and rural populations. Women are strongly represented: they account for
between 60-70% of total labor force4. Youth employment is significant in the sector. Half of the tourism
workforce is under 25. With regard to the supply chain in the sector, one job in the core tourism
1
Written by Hayat Abdulahi Abdo, Economist, Global Manufacturing, Agribusiness, and Services (CMGSF).
Invaluable guidance and inputs were provided by Carolyn Cain, Chief Industry Specialist, Global Consumer and
Social Services (CMGCS); Ruchira Kumar, Private Development Specialist, Development Impact Unit (CDI); and
Shaun Mann, Senior Investment Policy Officer, Investment Climate Group (CICIN)
2 The World Tourism Organization (UNWTO) is the United Nations agency responsible for the promotion of
responsible, sustainable and universally accessible tourism.
3The
World Travel & Tourism Council (WTTC) is composed of private sector players in the travel and tourism industry
and works to raise the profile and communicates the economic impacts of the industry. The WTTC’s statistics cover
both the travel and tourism industries and also includes both domestic and international activities.
4
Toolkit on Poverty Reduction through Tourism, International Labor Office, 2011
1
industry generates about 1.5 additional jobs in the related economy but much higher in some countries.
It has significant linkages to other sectors such as agriculture, construction, utilities and transport
sectors. According to WTTC, 66 million jobs will be created in tourism over the next 10 years acting as a
key driver to economic growth and poverty reduction.
In 1950, the travel industry recorded only 25 million international tourism arrivals; this had grown to 940
million in 2010. By 2020, international tourism arrivals are expected to reach 1.6 billion. Travel and
tourism capital investment is estimated at US$651 billion or 4.5% of total capital investment in 2011 and
is expected to double by 2020. In 2010, international tourism receipts surpassed US$900 billion [again,
this is just cross border tourism]. Emerging Markets received 37% of these receipts, and their market
share continues to increase.
One of the key recommendations of IEG’s report on IFC’s Poverty Focus5 is to sharpen understanding of
poverty and poverty impact of IFC’s investments and guide staff on how to operationalize poverty focus.
To this effect, the objective of this paper is to better understand the link between tourism and poverty
reduction. Specifically, it focuses on the review of existing literature on poverty reducing impacts of the
tourism sector and also looks at the key findings of the impact assessment of a few of IFC’s
tourism/hotel projects. This is expected to help better articulate IFC’s role in poverty reduction through
the support of tourism projects in developing countries.
II.
Tourism Sector and Its Impact on the Poor
Although it is limited, there is robust empirical evidence that a substantial amount of the financial flows
from tourism can accrue to poor households. A detailed study of the tourism value chain in Luang
Prabang, a World Heritage Site in northern Laos, concluded that benefits earned by the poor are
equivalent to approximately 27% of total tourism expenditure within the destination. The poor are
defined as the informal sector and unskilled and semi-skilled workers. A World Bank study in the nature
tourism areas of Northern KwaZulu Natal (South Africa) found that benefits accruing to the poor
(unskilled and semi-skilled workers together with small enterprise and communities) amounted to 37%
of tourist expenditure in the wildlife areas. A similar study in protected areas of Namibia has shown
benefits to the poor amount to around 17% of total tourism turnover at the Parks. A study of the
‘Winter Sun’ mainstream holiday package value chain in The Gambia, estimated that flows to the poor in
the form of wages or enterprise earnings are 14% of tourism expenditure in the destination. In 2007, the
World Bank analyzed two large hotels (one 3-star and one 5-star, both operated by Sun International) in
Livingstone, Zambia and concluded that the 380 rooms directly employed 840 people (2.2 per room),
were responsible for 60,000 tourists coming to Zambia in 2006, provided the government US$8 million
in direct revenue from taxes, visa fees and park fees, and spent US$4 million in the local economy. That
US$4 million generated another 400 jobs, of which over 300 were women, and sent nearly 1000 children
to school.
According to Mitchel and Ashley (2010)6, the three key pathways by which the benefits (or costs) of
tourism activity can be transmitted to the poor are (a) direct effects; (b) indirect and induced effects;
and (c) dynamic effect.
5
IEG defines poverty focus as support for private sector development that contributes to growth and to patterns of
growth that enhance opportunities for the poor. This definition is consistent with discussions on inclusive growth and
pro-poor growth.
6 Tourism and Poverty Reduction: Pathways to Prosperity, Jonathan Mitchell and Caroline Ashley
2
Figure 1: Three Pathways of benefits to the poor from tourism
Pathway 3
Dynamic Effects
Changes in
exchange rates
and exports
Changes in
prices, and
wages
Tourism Sector
Pathway 1
tourist arrivals and
ects
ct Eff
Dire
Poor
Households at
destination
Pathway 2
Induced effects
Ind
ire
Infrastructure
and
Transport
Poor Households
outside destination
SMME
Development
ct e
ffe
cts
Government
Spending
expenditure
Non - Poor
Households
Intersectoral linkages
Natural
Assets
Leakages
Non- tourism
sectors
Imports
Diversification
(supply chains)
Human
Resources
Development
(a) Direct Effects of Tourism to the Poor (Impact through Direct Participation of the Poor in the
Tourism Sector): these include both labour income and other forms of earnings from the tourism
sector.

7
Wages from the formal sector: formal sector employment is a critical pathway by which resources
flow from tourists through suppliers (hotels, restaurants, transport companies, etc) to the poor.
Employment in the sector is often regarded as the main contribution to the benefits of tourism to
unskilled households. Jobs in the tourism sector are potentially quite accessible to the poor as they
require relatively few skills, with employers providing the requisite training. Existing data indicates
that 1 job is created per 20-50 tourists and direct jobs per hotel room ranges 0.3-2, depending on
the type of accommodation-with an average of one full time equivalent job generated per hotel
room7. This will often depend on the type of hotel product with higher end hotels creating more
jobs/room with higher service standards. Many of these opportunities are for semi-skilled and unskilled households. The evidence also suggests that formal sector tourism employment ranges from
12 to 76% of the total income from tourism to the poor. Aside from wages, service charges and tips
can add significantly to remuneration. In countries with generous minimum wage legislations (such
as South Africa) and tight labor markets (Cape Verde) or highly skilled staff (Safari drive guides in
Kenya and Tanzania), formal sector wages often account for the bulk of direct benefits flows to the
poor. In this context, wage employment to the well-being of the poor is significant and will often lift
a family out of poverty on a sustainable manner. However, in other countries, where the formal
sector employment accounts for a more modest share of total employment, formal sector wages
Tourism and Poverty Reduction: Pathways to Prosperity, Jonathan Mitchell and Caroline Ashley
3
will be much less significant channel for the transmission of pro-poor benefits (eg, Ethiopia, the
Gambia and Laos).
Table 1: Wage employment and the poor8
Share of total pro-poor income generated by formal
sector employment the rest will be generated by the
informal sector)
Share of tourism jobs to the poor
Share of tourism wage bill captured by the poor
Namibia: 76%
Tanzania: 75%
South Africa (Madikwe): 68%
Cape Verde: 48%
Cambodia: 48%
Brazil: 31-49%
The Gambia: 17%
Laos(Luang Prabang): 12%
Unskilled:
Malawi: 56%
Maldives: 45%
Nambia:54%
South Africa (Kwazulu-Natal): 46%
“Local” Residents
Ethiopia (Lalibela): 100%9
Ethiopia (Addis Ababa): 88%
Ghana (Accra): 20%
Unskilled and semi-skilled
The Gambia: 85%
South Africa (Kwazulu-Natal): 70%
“Local” Residents
South Africa (Kwazulu-Natal): 73%
South Africa (Madikwe): 55%
As demonstrated in the table above, wages earned by the poor is a significant share of the total tourism
payroll in these selected countries/destinations, despite the fact that the unskilled and semi-skilled earn
much lower wages than other skilled staff. There is also strong empirical evidence that wages in the
tourism sector are generally attractive, particularly supplemented by tips and service charges, in
comparison with the alternatives available in many developing countries.

Income from small, micro and informal tourism businesses: One of the pro-poor arguments for
tourism stems from its ability to generate income to the informal, micro and small businesses (tour
guides, tourist taxi drivers, craft retailers, fruit sellers, juice sellers, etc). Studies show that this is the
most successful channel of income flow from tourists to the poor living around the destination.
(b) Indirect and Induced Effects of Tourism to the Poor (Impact on poverty through indirect participation
of the poor in the tourism sector): Secondary effects comprise indirect and induced effects. Indirect
effects occur where a change in tourism expenditure impacts on the non-tourism economy. This arises
when workers in the tourism sector spend their earnings locally, thus generating further income for
poor households. Indirect linkages affect three main groups of the poor. The first is farmers who sell
food to hotels and restaurants. There are several empirical evidences indicating that food and beverage
purchases constitute about one-third of hotel purchases and the great majority of this supply comes
8
Tourism and Poverty Reduction: Pathways to Poverty Reduction, Jonathan Mitchell and Caroline Ashley
It means that all the “unskilled” and semi-skilled” jobs created by the hotel are coming from the local
area where the hotel is located
9
4
from domestic resources. For example; in Ethiopia, 90% of food eaten by tourists is sourced locally,
mostly from rural small-holding famers and hence 44% of the total hotel expenditure on food was
transmitted back to poor producers. The second group is a diverse range of micro and informal
entrepreneurs who provide local goods and services such as laundry, security, construction, and
consumable goods to the tourism sector. These supply chains will tend to be short - so beneficiaries will
almost all be located within the tourist destination itself. The third groups are the unskilled workers in
non-tourism sectors that supply inputs, such as in construction, furnishing and light manufacturing. In
general, empirical evidence shows that indirect effects are not only large but also disproportionately
pro-poor, compared to direct effects. Multiplier analysis indicates that indirect effects are about 60-80%
of the size of direct effects but this often depends on the destination, local availability of supplies,
services and labor. Importantly, the share of benefits to the poor is much larger in the case of indirect
effects.
(c) Dynamic effects on the Macro and Local Economy (ie poverty impact through growth): These include
the broader impact of tourism on the macro and local economy such as: (i) changes in infrastructure,
public and social goods, (ii) private sector development, specially small and medium enterprises (SME)
development and entrepreneurship; (iii) changes to the production structure of the economy; (iv)
changes in wages and prices; and (v) major contributor of foreign exchange and tax revenue to the
government in many least developed countries, in which the latter can catalyze fiscal changes that
benefit the poor. Also, improved infrastructure can help spread benefits from the tourism sector’s
growth specifically to the poor. A study on “Tourism and the Economy of Tanzania” showed how a
program of rural infrastructure that reduces transport costs can impact on the distributional effects of
tourism growth in Tanzania. Without improved rural infrastructure, most of welfare gains from tourism
would have concentrated in urban areas.
III.
Making the Case for IFC’s Investments in Tourism Sector
IFC’s Portfolio: Since 1956, IFC has invested over US$2.5 billion (including syndications) with the total
commitment of US$1.9 billion from its own account in 250 hotel projects in more than 83 countries, 52%
in IDA countries, including 100 hotels investments in sub-Saharan Africa. Currently, IFC has a welldiversified 39 portfolio projects in 28 countries of which 51% are in IDA countries, IFC portfolio
companies have supported each on average 337 direct jobs, of which 32% are female; paid a total of
US$25 million in taxes (excluding value-added taxes) to the government; and spent a total of US$530
million in the local economy through purchases of goods and services.
Figure 2: Number of IFC’s Active Portfolio Projects as of January 31, 2012, (No. of Projects), %
Sub-Saharan East Asia and the
Africa (18), 27% Pacific(3), 5%
South Asia
(7), 10%
Europe and
Central Asia (8),
12%
Latin America and
the Caribbean
Middle East and (23), 34%
North Africa, (8,
12%
5
While most of the direct benefits from IFC’s hotel investments are captured in the current DOTS10
framework, it has been difficult to measure the indirect employment and income effects and the effects
on the poor through growth in the tourism sector. To this effect, IFC has undertaken more in-depth
analysis with a few case studies (as shown below) to better understand the indirect and induced as well
as the dynamic impacts of its tourism investments.
Summary of IFC‘s Tourism Sector Case Studies

Hyatt Regency in Kiev, Ukraine: The 234-room Hyatt Regency is a centrally located business hotel in Kiev.
IFC provided a long term senior loan of US$29.5 million towards total project cost (estimated at US$75
million) and it was IFC’s first investment in the hotel sector in Ukraine and the first branded 5-star hotel in
Kiev. The hotel has created 500 direct jobs (62% Women); generates US$10 million annually for the local
economy through purchases; pays the government around US$4 million annually in taxes and fees; and
creates foreign exchange earnings of between US$25-30 million annually. A survey of hotel customers
showed that they spend on average US$ 337 per day on transport, souvenirs, meals, drinks,
communication, and other out-of-pocket expenses, this estimated to generate an extra US$2.5 million
going directly into the local economy. IFC’s value addition to the success of this project is significant. IFC
shared its global expertise and knowledge of the sector and provided useful feedback the client both
during project implementation and operation; this was particularly important for this client as this was its
first venture into hospitality. IFC’s willingness to lend also attracted parallel lenders, enabling to complete
the project financial plan. IFC’s environmental and social standards were important in ensuring issues like
water quality were tackled effectively at an early stage of the project; these might have been expensive to
resolve had they not been flagged early. These had strong demonstration effect by setting standards for
subsequent investments in the sector in Kiev (refer to Annex 1 for the detailed development impact
analysis).

Peru Orient Express Hotels (POEH), Peru: POEH is a 50/50 joint venture between a local sponsor, Peru
Hotels S.A., and Orient Express Hotels Ltd (“OEH”), an international operator of boutique hotels as well as
luxury trains around the world. IFC provided financing towards the refurbishment of the Monasterio Hotel
in Cusco and the Machu Picchu Sanctuary Lodge (MPSL) in Machu Picchu. The 123-room Monasterio Hotel
and the 32-room MSPL have created 308 direct jobs, of which 23% are female, and the employees are paid
wages 25% above the local market. Additionally, they receive additional remuneration from the 10%
service charge levied and regular training. The hotel has contracts with about 50 local suppliers including
farmers with the total annual purchase of about US$1.5 million. A survey of hotel guests showed that they
spend on average around US$326 per day outside the hotel on souvenirs, transportation, tours, meals,
etc., most of which are supplied by local micro and small businesses. OEH has brought higher customer
service standards, hotel management and marketing techniques to Peru and thus changed the profile of
tourists traveling to Peru by attracting upscale travelers with higher spending patterns and longer stays
(refer to Annex 2 for the detailed development impact analysis).

Kigali Serena, Rwanda: In 2007, IFC supported the rehabilitation and expansion of Kigali Serena Hotel,
previously government-owned and operated but concessioned to Serena, and the only 5-star hotel in
Kigali. The support to the first 5-star hotel in Rwanda was critical to meeting the Rwandan tourism
development strategy’s objective of focusing on high-spend – low impact tourist and also providing critical
business infrastructure. Aside from the investment, IFC’s advisory services also implemented a SME
tourism linkage program in Rwanda in 2009 in cooperation with the local hotel association, scheduled to
run until 2013. The program is designed to address issues around revenue leakage, a weak tourism cluster
and limited access to funding affecting SMEs in the Rwandan tourism sector. Serena Kigali along with
10
DOTS: “Development Outcome Tracking System” measures indicators of financial performance, economic performance,
environmental and social performance and private sector development, but all from the perspective of the individual project
rather than the broader destination.
6
several other hotels in Kigali have been actively involved in the program and training workshops of SMEs.
Consultations with both Serena Kigali and suppliers suggest that this programme has enhanced local
sourcing in the Rwandan tourism sector. The 148-room Kigali Serena Hotel has created a total of 1,916 jobs
of which: (i) 350 direct jobs (of which 33% are for women and only 5% for foreigners), (ii) 528 temporary
jobs during the construction and renovation phase of the hotel, and (iii) 1038 jobs outside the hotel in the
Rwandan economy on farms, taxis, restaurants and outsourced services. Staff directly employed by Kigali
Serena, including permanent employees and casuals, represents the largest element of the hotel’s
operational expenditure: the total payroll comprised 26% (US$2.7 million) of total expenditure in 2011. The
survey to measure the induced impacts of the hotel staff spending in the local economy reveals that 70% of
net salary is spent on food, housing, and education, in equal amounts. The rest is spent on savings, medical
costs, entertainment and remittances. Significantly, almost all spending by the hotel staff is very local in
nature and average wages appear to exceed the basic needs (food, housing, and education) for the staff.
The survey of hotel guests also suggests that the average guest spends US$137 per day outside the hotel
and with the average length of stay of 3 days; the guests spend about $5.3 million annually outside the
hotel, generating induced impact in the local economy. In addition, the hotel generates substantial
revenue to the government with various taxes and the high concession fee, with estimated value of
US$15.7million over 5 year period generating dynamic effects through redistributive government spending.
Figure 3: Snap Shot of the Development Impact of POEH
7
Figure 4: Kigali Serena-Economic impact 2011 (total US$14,220,309)
6
USD millions
5
4
unclassified
3
leakage
local
2
1
0
discretionary
tourist spend
IV.
staff
payments to GOR
F&B
utilities
outsourced
services
Conclusion
Based on the above literature review and on IFC’s case studies, one can easily argue that there is a
strong link between tourism and poverty reduction and hence can make the case for IFC’s investments
in tourism supporting the IFC mission of creating opportunities for people to escape poverty and
improve their lives. While some of the transmission links are obvious in particular the direct and indirect
links, the dynamic effects are much less so. It is clear that tourism creates jobs, particularly for women,
semi-skilled and unskilled workers. The poor can also benefit from working on small tourism businesses.
The indirect impacts of tourism are disproportionately pro-poor in particular the linkages via the food
and other supply chains. Although the dynamic impacts of tourism sector on the economy can be
significant, not much has been done to understand its impact on the poor. The literature on the impact
on the base of the pyramid and the absolute poor is also limited. However, it is fair to assume that most
of the poor impacted by tourism activities particularly those unskilled workers, informal and microentrepreneurs, and small farmers can be categorized under the base of the pyramid. Also, there is no
existing literature isolating the various income and employment effects for resort versus business
hotels.
V.
Next Steps
Going forward, effort will be made to explicitly articulate poverty impact of IFC’s tourism investments in
project documents11. To this effect, diagram 5 below that maps out the direct and indirect transmission
links to poverty of a tourism project is provided to guide investment staff and sector teams.
11
part of IFC’s Poverty Action Plan
8
Figure 5: Tourism Sector: Direct, Indirect, and Dynamic Effects on Poverty
9
Annex 1: Summary of Development Impact for Kiev Hyatt Regency
Groups Impacted by
the Project
Hotel Financiers
Hotel Employees
365 staff
62% Women (over
70% of whom are
supporting families)
Suppliers of Goods
and Services
160 staff for hotelrelated operations
52% Women (over
85% of whom are
supporting families)
Customers
Out of pocket
expenditure averaged
$337 per day – with an
estimated $25 million
spent in the local
economy annually
Government
Neighbors &
Environment
Competitors
New Entrants
Benefits to Group
Costs to Group




















 Taxes on earnings
 Financing costs
Diversification of business operations and risk
Social and political PR with a prestigious hotel
Return on investment
Salaries on average 30% better than market rates
Paid vacation
Job security
Free meals
Transport
Official contracts
High quality training
Access to credit due to official contracts
Medical insurance
Promotion opportunities across the Hyatt group
Regional employment mobility with Hyatt
Prestige value of Hyatt
Higher redundancy benefits if laid off due to official contracts
63 different suppliers are contracted with the Hyatt
Total $11 million annual revenue
Increase in turnover 6-80%
Halo effect from connection with Hyatt – estimated 20-30%
extra business
 Improved operating systems to satisfy Hyatt
 160 people employed on Hyatt-related work
o Hotel management outsourced
o Car hire, taxi service outsourced
o Security outsourced
o Laundry outsourced
o Window cleaning outsourced
o Landscaping outsourced
o Public area cleaning outsourced
o Stewarding outsourced
o Grease-trap cleaning outsourced
o Staff transport outsourced
 Access to a 5-star product
 Place to do business, high communication standards
 A place to host VIPs
 Access to quality restaurant
 Access to quality spa
 Improved service standards
 Improved safety standards
 $4 million in government taxes annually
 $1 million in utilities annually
 Enhances St. Sofia Square
 Enhances the business environment for Kiev
 Enhanced prestige for Kiev
 $100,000 per annum charitable contributions (0.25% of gross
revenue)
 Demonstration effect, a 5-star hotel is profitable
 3 new 5-star hotels are planned over the next 3 years
 Personal taxes @18%
 No dental insurance
 Formalize business
 Invest in improved
operating systems
 Invest in staff training
 Taxes on earnings
 Increased “hassle” factor
 High prices
 Revenue collection costs
 Increased traffic
congestion
 X% estimated lost business
 Price competition
10
Annex 2: Summary of Development Impact for POEH (Monasterio Hotel and Machu Picchu
Sanctuary Lodge)
Groups Impacted by the Project
Hotel Financiers
$23.4 million gross revenue
$3 million operating profit (after tax)
$ 1.5million net income
Hotel Employees
315 staff
24% female
Local Suppliers of Goods and Services
Customers
 Ave. length of stay - 3 nights
 Ave expenditure per day outside hotel- $326
 with an estimated $12 million spent in the
local economy annually
Government
Neighbors & Environment
Competitors
New Entrants
Complimentary Services
Benefits to Group
 Diversification of business operations and risk
 Social and political PR
 Return on investment
Costs to Group
 Taxes on earnings
 Financing costs
 25% above average compensation
 10% of service charge collected from guests
passed on to employees, which is estimated
at US$573 per month.
 9% of social security contribution Paid
 Paid vacation and free meals
 Medical insurance
 Job security
 Official contracts
 Training and promotion opportunities
 Regional employment mobility to other OEH
facilities (such as Mexico)
 Prestige value of OEH
 Staff being amongst the most sought after
employees in the hospitality segment
 32 local suppliers are contracted with the
Hotel( this excludes the local farmers, supplying
fruit and vegetables)
 Total $ 1.5 annual revenue
 Improved operating systems to satisfy POEH
 Accounting outsourced
 Cleaning and recycling outsourced
 Landscaping and gardening outsourced
 Public area cleaning outsourced
 Access to a 5-star product
 Access to quality restaurant
 Place to do conferences
 Improved service standards
 Improved safety standards
 9 million in government taxes and other
payments annually
 Taxes to the
government
 Opportunity cost
of labor
 Formalize
business
 Invest in
improved operating
systems
 Invest in staff
training
 Government taxes
 High prices
 Revenue
collection costs
 Training and internship opportunities for local
university students in the hospitality
 Enhances the tourism services in Cusco
 $33,000 per annum charitable contributions
including to orphanage, elderly homes, etc.
 Demonstration effect, encouraging the existing
hotels to improve service standards
 3 new 4-star hotels are planned over the next
3 years
 Increased demand for locally produced goods
including gifts, restaurants, bars, and transport
services, among other things
11