Economic Impacts in Tourism

ECONOMIC IMPACTS OF TOURISM

Over the years attempts have been made to know what are the benefits of tourism and to whom these benefits accrue. As in other industries tourists affect the economy of those areas, or regions, countries, or continents, where it takes place. These are known as tourist destinations, or receiving areas. Especially the developing countries depend upon the inflow of tourism to sustain their economy. The areas from which tourist come to visit, these destinations are known as generating areas. The tourists are carrying money with them to spend in other places. This is a gain for receiving countries and to provide them services the people get employment so that the
main effect is on income, on employment, balance of payments & development of Receiving Country.

Economic impact analysis-There is many economic tools that can be used to measure changes in economic activity to a country due to tourism activities. The most widely used are ones that address changes in sales (or spending), changes in regional income, and changes in employment. Economic analyses can be quite complex. On its most simple form however it can be defined as follows:

Economic impact = Number of Visitors * Average spending per visitor * Multiplier

When attempting at calculating the economic tourism impacts to a region the following points merit attention:

1.   It is important not to confuse economic impacts which benefit the users. Economic impact assessment studies focus on the actual flow of money into a region rather
than the benefits that accrue to the visitors themselves (as measured in economic valuation or cost-benefit studies).

2.    One should be careful when using multipliers as they tend to be confused and misused in many recreation and tourism studies. It is best to avoid multipliers altogether and attempt focusing on obtaining good estimates of visit or spending and it affects region's economy:-

3.    It is important to isolate tourist spending from local spending even when local residents constitute a large portion of the ''tourists'' to an area.

POSTIVE IMPACTS

 Foreign Exchange Earnings-Major economic benefit in promoting tourism is earning of foreign exchange. Tourism expenditures and the export/import of related goods and services generate income to the host economy and can stimulate the investment necessary to finance growth in other economic sectors. Tourism in recent years, has emerged as one of the largest foreign exchange earning economic activity in India. Tourist arrival in 2007 has went up to 5 .08mnand Foreign Exchange earnings has went up to 10. 73bn.Income from foreign tourism in form of foreign exchange earnings adds to national income and as an invisible export. Tourism
is thus a very useful means of earning much needed foreign currency. These earnings assume great significance in balance of payments calculations.

Balance of Payments - This shows the relationship between a country's total payments to all other countries and its total receipts from them, or we can say that BOP is a statement of income and expenditure on international account Payment and receipts on international account are of three types:

(1 )visible balance of trade (related to import and export of goods)

(2) Invisible items (related to services like transportation, shipping, banking& insurance & tourism)

Most countries from time to time have serious problems with balance of International payments. In such cases tourism can have potential contribution to 'Balance of payments’.

Income-Income is generated from wages and salaries, interest, rent, & profits. In a labor-intensive industry such as tourism, the greatest proportion is likely to be derived from wages & salaries paid to those working in jobs either directly serving the needs of tourists or benefiting directly from tourist expenditure. Income will be greater in those areas which generate large number of tourists, where stay of tourists is long. Income is also generated from interest,
rents and profits on tourism business, e.g. the interest paid on loans to an airline in order te buy aircraft, or rent paid to parking sites. We should also count taxation on tourism activities, such as sales tax on hotel bills, duty and taxation on petrol used by tourist. The sum of all incomes in a country is called the national income, and importance of tourism to a country's economy can be measured by looking at Proportion of national income created by tourism.

Tourism as a source of income is not easy to measure at least with any degree of accuracy. This is because of the multiplier effect. The multiplier is a factor by which tourist spending is increased in process, i.e. the flow of money generated by tourist spending multiplies as it passes through various sections of economy through multiplier effect.

Multiplier theory emerges from KOHN & KEYNES. The multiplier mechanism has also been applied to tourism and in particular to tourist expenditure, e.g. Let us assume tourist spends 1000/- in hotel This amount is received as income by the hotelier & owner of facilities who will
pay the taxes and save some money (e.g. tax 20% = 200/- and saving 100/-) Rest will be spent on cost incurred in meeting the demands of visitor (e.g. goods & services as food, drink, furnishing,
laundering, electricity, & entertainment) i.e. 700/-.Some of what they spend goes to buy items imported into the area, but rest goes to shopkeepers, suppliers and other producers inside the area (200/ - for import and 500/- for local purchase in the area) Of these 500/- spent within community some will go to local suppliers for such items as food The shopkeepers then pay their
employees who will pay tax.(20% of 500/- =100/-and saving 50/-) and save some amount, Rest will be spent in turn to shop in other stops locally, although some of what they purchase will have been bought into region from outside i.e. 350/-and 100/-on imports,250/- on purchase.

Of these 250/- again the circulation will go on with a declining expenditure at each level of circulation. Each time the money is circulated in this way some will be lost to the area. Taxes paid are transmitted outside the area. Some of the savings may be similarly removed from the area, and some of the money has gone to pay for the goods imported into the area from other regions of the country or even abroad. Expenditure in which the money is lost to other
areas are known as leakages from system. 

Every time the money changes hands it provides 'new' income and continuing series of conversions of money spent by tourist form the multiplier effect. However, the more the conversion occurs, the greater its beneficial effect on economy of recipient country but
because of the leakages transfer of money is not absolute. We can forecast the value of multiplier if we know the proportion of leakages. In above example- tax was 20% of income i.e. 20%of 1000/- which means 20/100ths. Savings were 10/ 100ths of income and import were 20/100ths of income. So total leakages= 50/100ths or 1/2 of original income.

Multiplier = 1
Proportion of leakages
Multiplier = 1 =2

1/2

Multiplier effect will be greater if leakage is less. So if tourism Industry buys goods or services from local market sector rather than importing, it means leakage is less then only multiplier effect will be more. In this way TIM (Tourism income multiplier) may be quite high where many firms are in hands of locals and tourism will contribute far more than the amount originally spent by the tourists themselves. Home grown products thus be substituted for imported food stuffs and a significant saving effected. Such savings help to increase multiplier, which in turn would help the host country to derive maximum economic benefits from its tourist industry. The principal reasons for leakages are:

·    Cost of imported goods, especially food and drinks.

·    foreign exchange costs of imports for development of tourist facilities.

·    Remittance of profit abroad.

·    Management fees or royalties or franchises.

·    Payment to overseas carriers and travel companies.

·    Cost of overseas promotions.

Employment-Another major direct economic effect of tourism relates to employment. The tourism industry is highly labor- intensive service industry and hence valuable source of employment. It employs large number of people and provides range of jobs from unskilled to highly specialize. According to the estimates from the travel and tourism satellite accounts of the Bureau of Economic Analysis (BEA), total employment in travel and tourism reached a
new peak in 2006 of8.5 million jobs, surpassing the previous high of 8.4 million jobs in 2000 Tourism industry has tremendous capacity to create both direct and indirect employment,” Direct employment refers to employment directly related to tourism industry. As a result
of this direct employment, employment is also generated in the businesses that supply goods and services to the Tourism sector} This is referred to as indirect employment". Starting from hotel to various tour operators, tourist offices, transport operators, tourist guides jobs ranging from hotel managers to deckchair attendants, from excursion booking clerks to cleaners employed in tourist resorts. It also provides employment to persons outside tourist industry e.g.
the people who are supplying vegetables, meal, fish, poultry, cereals etc. to hotels, the electricians’ plumbers, furnishers, & furniture- repairers, taxi drivers, shops, emporiums selling handicrafts, hand looms. The basic infrastructure-roads, airports, water, supply and other public utilities and also construction of hotels and other accommodation units create jobs for thousands of workers both skilled and unskilled. In countries having problem of unemployment, tourism can be a great encouragement to economic development & especially employment.

It is said that ratio between investment and job creation is much higher in tourism related activities than in case of manufacturing. For example, most of hill stations, where industries can not be set up, employment opportunities are present because of tourism.

Just as tourism is globally important, so it is important for regions within economy. The multiplier which affects income in a region affects employment in the same way. If a tourist stays at a Destination jobs are directly created in tourism industry there. These workers and their families residing in the neighborhood must also buy goods and services locally, their family require education and need medical schools and hospitals to serve these needs The
Employment Multiplier is in the ratio direct and secondary employment generated by additional tourism expenditure to direct employment alone. So if 100 new jobs in the tourist industry gave
rise to 20 more, the multiplier would be :

120
100=1.2

Development of Infrastructure-- This is another benefit. The infrastructure investments justified primarily for tourism--- airports, roads, water supply and other public utilities- may be widely shared by other sectors of economy. Similarly the improvements in existing infrastructure in order to attract tourists is also of crucial importance. These changes are beneficial not only to tourists but to the resident population also. The provision of infrastructure may provide basis or serve as  an encouragement for greater economic diversification. Thus tourism brings overall welfare to economy.

Regional Development-Tourist expenditure is also of special significance in areas which otherwise are isolated, economically undeveloped and have unemployment problems. Tourism is important not only because it is a source of foreign exchange but also as it encourages development in less developed regions. Many of the backward regions contain areas of high scenic beauty and of cultural attractions. Tourism development in these regions may become a significant factor in minimizing these regional imbalances in employment and income. Khajuraho in India which is now an internationally famous tourist spot is an example of one
such region. The development of areas around Khajuraho and in it has provided employment to thousands and has access to all types of facilities. Many such areas oftourist interest where development is not possible, tourism can provide lot of prosperity to local population.

NEGATIVE ECONOMIC IMPACTS

1. Leakage-- Tourism has many hidden costs, which can have unfavorable economic effects on the host community. Often, developed countries are better able to profit from tourism than poor ones. Whereas the least developed countries have the most urgent need for income, employment and general rise of standard of living by means of tourism, they are, unfortunately, least able to realize these benefits. Among the reasons for this are large scale transfer of tourism revenues out of the host country and exclusion of local businesses and products

The direct income for an area is the amount of tourist expenditure that remains locally after taxes, profits, and wages are paid outside the area and after imports are purchased; these
subtracted amounts are called leakage. In most all inclusive package tours, about 80% of travelers , expenditures go to the airlines, hotels and other international companies (who often have their headquarters in the travelers' home countries), and not to local businesses or
workers. In addition, significant amounts of income actually retained at destination level can leave again through leakage. A study looking at tourism 'leakage' in Thailand estimated that 70% of all money spent by tourists ended up leaving Thailand (via foreign owned tour
operators, airlines, hotels, etc.). Estimates made for other Third World countries range from 80% in the Caribbean to 40% in India.

On average, of each US$ 100 spent on a vacation tour by a tourist from a developed country, only around US$ 5 actually stays in a developing-country destination's economy

There are two main ways through which leakage occurs:

I.    Import Leakage--which occurs when tourists demand standards of equipment, food, and other products that the host country cannot supply. It is typical of less- developed
countries where food and drinks must often be imported, since local products are not up to the tourist's standards or the country simply doesn't have a supplying industry Thus, in such a scenario, much of the income from tourism expenditures leaves the country again to pay for these imports.

2.    Export leakage--Often, especially in poor developing nations, multinational corporations and large foreign businesses are the only ones that possess the necessary
capital to invest in the construction of tourism infrastructure and facilities. As a consequence of this, an export leakage arises when these overseas investors take
their profits back to their country of origin.

Significant leakage is mainly attributed to: (a) imports of materials and equipment for construction; (b) imports of consumer goods, particularly food and drinks; ( c) repatriation of profits earned by foreign investors; (d) overseas promotional expenditures and (e) amortization of external debt incurred in the development of hotels and resorts.

Other negative impacts of the tourism industry include:

2.    Loss of Potential Economic Impacts -Tourism is a capital intensive industry and no local involvement is possible at that level. So large resources are required for
immediate tourist facilities airport, services, roads bridges, sewage & electricity are brought in either by government or private enterprises. This may reduce government
expenditures in critical areas such as education and health. Loss of potential benefits to local areas can occur and local resentments are generated if many tourist facilities
are owned and managed by outsiders. Similarly potential foreign exchange is reduced when imported goods and services are utilized in tourism.

3.    Economic and Employment Distortions-If tourism is concentrated only in one area or a few areas of a country or region, without corresponding development in other places, residents in undeveloped areas may show resentment-Employment distortions may be created if tourism attracts employees from other economic sectors such as agriculture and fisheries, because of its higher wages and perhaps more desirable working conditions.

· There may be resentment by the residents if migrant workers are brought in tourism especially when they permanently start residing there.

· Tourism is a seasonal industry. This also results in under employment & unemployment.

· Tourism industry requires huge tracts of land for sports, golf courses, car parks, & gardens. So lands are bought by outsiders who may not be sensitive to local ecology, environment, & community sentiments.

4.    Economic dependence-Many countries, especially developing countries with little ability to explore other resources, have embraced tourism as a way to boost the
economy. However, as a consequence their survival often has become dependent on regular tourism revenue infl ux. In The Gambia, for instance, 30% of the workforce
depends directly or indirectly on tourism. According to the WTO, in small island developing states, percentages can range from 83% in the Maldives to 21% in the
Seychelles and 34% in Jamaica.

5.Inflation and loss of Amenities for residents-Inflation is another direct result of coming of tourism to an area. foreign tourists pay happily higher price for goods and
services since they are cheaper than the same goods in their own countries. Prices shoot up during tourist season Overcrowding of parking place & water shortage is also there. These all problems are to be faced by the local community.

·In some places such as beaches, entry for local people is prohibited which develops resentment in them. ,

            Seasonal character of jobs-The seasonal character of the tourism industry creates economic problems for destinations that are heavily dependent on it. Problems that seasonal workers face include job (and therefore income) insecurity, usually with no guarantee of
employment from one season to the next, difficulties in getting training, employment related medical benefits, and recognition of their experience, and unsatisfactory housing and working conditions.

7.    Fluctuations in Productivity Index-Tourism is seasonal and depends upon climate changes, International & domestic political situations Therefore during off season
the productivity index of industry as a whole is reduced to investors, and in general to national economy.

· Natural calamities or rise of militancy in certain regions affect the whole tourism industry in India, which gives a setback to those who are economically dependent
only on tourism industry.

· Tourism services are perishable i.e. can not be saved for future sales. The activities of those subsidiary industries which supply needs of tourism have to suffer even if single day is no tourist day.