PW30-Jun-2015

Tourism as a Means of Economic Diversification

Many developing countries have tried to turn to the tourism industry as a means to shift resources away from goods that have lost competitiveness in world markets and diversify their economies. Yet, the outcome of tourism-led development in terms of broader economic and social advancement of countries depends on the extent to which linkages can be established between tourism activities and the broader local economy, notably by providing employment opportunities for unskilled workers and business for small and medium-scale enterprises. Recent improvements in input-output data and tourism satellite accounts make it possible to better quantify these interactions of tourism-related sectors with other parts of the economy, so that it becomes possible to better assess the role of tourism for productive diversification.

Tourism

The available evidence points to a considerable number of potential factors that can influence the extent to which tourism receipts benefit developing economies and help their diversification process. One crucial factor for tourism development is evidently a country's endowment with natural and man-made resources. In particular, countries with a relative abundance of natural resources have a higher propensity to specialize in tourism and can hope to embark on faster economic growth.

Tourist

The level of socio-economic and infrastructure development of a country is another determinant of tourism success. Generally, countries with better infrastructure and higher technological sophistication can expect higher growth from tourism. More broadly, the level of development as measured by per-capita income influences the extent to which tourism development can boost growth. For example, Eugenio-Martin and others (2008) investigate the role of economic development as a driver of tourism over time. They find that across high-income countries, differences in the level of economic development are not significant for attracting tourists, whereas across developing countries they are.

Institutions can also play a crucial role in determining how well a tourism-centered diversification and growth strategy succeeds. In particular, a high incidence of crime and violence is evidently highly detrimental to tourism development. Conversely, governmental accountability and effectiveness, political stability, and the rule of law, have been shown to enhance growth in tourism economies (see Brau and others, 2011).

Further, a favorable business environment that facilitates entrepreneurship and interactions between different parts of the tourism cluster can make a big difference in the extent to which tourism receipts benefit the wider economy. For example, well defined land-tenure rights and a stable and secure business environment can play an important role for successful tourism development. Moreover, a favorable investment climate is key to attracting physical capital, notably in the form of foreign direct investment, into the tourism sector.

Last but not least, trade regulations can hinder or enhance the benefits that come from exporting tourism services. Naturally, any transport charges or fees levied on inbound or outbound travelers can be highly detrimental to tourism development. Yet more generally, Geloso-Grosso and others (2007) stress the importance of opening and liberalizing services sectors beyond travel and tourism in order to allow linkages between tourism and the general economy to develop and flourish.

Tourism determinants

So which of all these determinants are most important, and can good public policy make a difference with respect to fostering linkages between tourism and other parts of the economy? Analysis based on cross-country data finds that domains that are more amenable to policy interventions in the short term, such as the business environment and trade regulations, indeed matter most for fostering productive linkages between tourism and the general economy (see Lejárraga and Walkenhorst, 2013). In contrast, fixed factors, such as land availability, or longer-terms goals, such as advances in the level of development, have less influence. These findings are encouraging in the sense that good policy can make a difference and help emerging and developing economies diversify their economies through tourism.

Further Reading:

  • Brau, Ricardo, Adriana Di Liberto, and Francesco Pigliaru, 2011, “Tourism and Development: A Recent Phenomenon Built on Old (Institutional) Roots?” World Economy, 34(3), pp. 444-72.
  • Eugenio-Martin, Juan L., Noelia Martin-Morales, and M. Thea Sinclair, 2008, “The Role of Economic Development in Tourism Demand,” Tourism Economics, 14(4), pp. 673-90.
  • Geloso-Grosso, Massimo, Molly Lesher, and Enrico Pinali, 2007, “Services Trade Liberalisation and Tourism Development,” OECD Trade Policy Working Papers: 57-2007.
  • Lejárraga, Iza, and Peter Walkenhorst, 2013. "Economic Policy, Tourism Trade and Productive Diversification." CEPII Working Paper 2013-07; Paris: Centre d'Etudes Prospectives et d'Informations Internationales; 24 pp.
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