The Economic Impact of Tourism

Abstract

The purpose of this study is to define the positive and negative implications of tourism. In particular, it explores the primary and secondary effects of today’s tourism segment. Given that the greatest part of tourism growth occurs in developing states, this study heavily relies on the patterns of tourism advancement in developing economies. It is qualitative research. The design of this survey is analyzing academic articles dedicated to the impact of tourism in developing countries. The findings reveal that the negative direct, indirect, and induced effects of tourism are more prominent than the positive ones. Moreover, this tendency grows stronger within time. In particular, in the short run, the implications of tourism are expected to be more positive than negative; however, while being observed from a long-run perspective, the situation may change the other way round. This insight and supportive patterns underlie a set of recommendations revealed at the end of the present paper. The findings and recommendations possess significant value for individuals/businesses that benefit from the growth of the positive effects of tourism in the states with developing and developed economies.

The Impact of Tourism

Introduction

Striving to identify the economic impact of tourism, one should comprehend that this sphere is not an industry in itself. Instead, tourism can be defined as “a collection of interrelated industries, which sell products to tourists as well as to a range of other customers: hotels, tour operators and travel agents, airlines, etc.” (Ardahaey, 2011, p. 206). This definition implies that the services and products that constitute this plane co-exist in the fixed proportions (Ardahaey, 2011). Therefore, it is natural to suggest that economic costs and benefits are also fixated. In other words, tourism can be, simultaneously, greatly favorable, moderately advantageous, or unfavorable for the members of community and government. Moreover, one should stress that the economic impact of tourism can be divided into “direct, indirect, and induced economic effects” (Ardahaey, 2011, p. 209). Direct effects are also known as primary factors, whereas indirect and induced ones are attributed to secondary effects (Ardahaey, 2011, p. 209). Scholars accentuate that tourism manifests itself through three major characteristics; these are “a superior capacity to distribute wealth and promote regional development”, “a high multiplier effect”, and “a varying consumption of goods and services” (Bac, 2012, p. 500). Tourism can be perceived as “an important form of economic development in developing countries, contributing to foreign exchange earnings, gross domestic product and employment opportunities” (Marzuki, 2012, p. 199). Consider the statistics: according to the World Health Organization “among the world’s top 40 tourism earners about 18 were developing countries” (Padure & Turtureanu, 2005, p. 130). In other words, developing countries constitute about a half of the states that take a leading position in the sphere of tourism. Without a doubt, tourism is a significant remedy of economic growth in developed states as well, but its outcomes are less tangible in the developed world (Padure & Turtureanu, 2005). This insight means that the present study will heavily rely on the peculiarities of the economics of tourism in these countries. This study surveys primary and secondary, negative and positive economic implications of tourism at a state level with the purpose of elaborating recommendations to increase favorable outcomes and reduce the adverse ones.

Purpose of the Study

This paper aims to verify the premise that tourism consumption stipulates the increase of profits for businesses/individuals who operate in this field. Besides, it is suggested that, in contrast, other members of community are doomed to suffer because of the enhanced wages and prices in the industries related to tourism. In other words, the goal is to explore the patterns of the influence of growing tourism consumption. Furthermore, the purpose of this research is to verify the supposition that the economic impact of tourism is considerably stronger in developing states.

Discussions and Recommendations

Positive Economic Impact of Tourism

Taxes as the way of economic supply of government. Taxes constitute a considerable source of income that enriches the governments. Therefore, increasing the number of tourists is an effective approach for enriching the state (Table 1). Tourists are obligated to pay taxes for consuming the goods and services of the location they visit (Ardahaey, 2011). Besides, the businesses that operate in the tourism-related industries also pay taxes; more visitors bring in more profit, consequently, more money can be given to the government in the way of taxes. Thus, the state benefits from the direct positive impact of tourism, whereas the other domains enjoy the secondary positive effects.

Advanced infrastructure. Developing the sphere of tourism is impossible without improving the infrastructure of the region. To meet and exceed customers’ expectations, tourism-related businesses strive to provide more attractive amenities and implement eco-friendly technologies to decrease the negative externalities of production (Ardahaey, 2011). Moreover, public sector is also being advanced due to the demand created by the visitors. Scholars detected that “tourism development also contributes to infrastructure improvements in destination areas, e.g. road and rail improvements, airport developments, improvements in telecommunications and utilities such as water and power supply” (Kumar, Hussain, & Kannan, 2015, p. 406). In this way, the resources are turned into capital to enrich the state, businesses, and citizens. Therefore, the development of the infrastructure can be rightfully considered a positive economic impact of the growing tourism, which directly affects private and public sectors.

Cultural exchange. Tourism encourages cultural penetration. This phenomenon reveals positive tendencies towards strengthening cultural sensitivity and constructing fruitful relations with other nations (Ardahaey, 2011). Undoubtedly, in terms of social interactions, tourism possesses indirect and induced economic outcomes that are advantageous for a resort spot and its dwellers.

Alterations in consumerism. Development of tourism predefines the “changes in the quality and quantity of goods and services” (Ardahaey, 2011, p. 208). The change may be either positive or negative, or simultaneously, positive and negative depending on the group of individuals/business it affects. Defining the positive implications of these phenomena, it is appropriate to point to the enhanced ratio of work places due to the increase of consumerism. Moreover, the patterns of consumption construct particular geographic brand image of the resort locale, which may be utilized as a strong competitive advantage, which serves to differentiate one destination from the rest of tourism spots. Simultaneously, one can assume that the alterations in the tourism-related products and services are expected to improve the quality. Undoubtedly, it is a positive change since it influences both primary and secondary economic effects on the state, businesses, and communities.

Enhanced opportunities for deployment. Without a doubt, the growth of tourism segment creates many new job positions, which is favorable for the local economy. Hence, the merits of this tendency are debatable because of the ambiguity of its impacts. Consider the rationale, most employees receive moderate or low wages because tourism requires many unskilled or low-skilled workers. In addition, it is a common tendency to seek the employees ready to work in this field for modest compensation either from a domestic country or abroad (Ardahaey, 2011). This insight implies that it is possible to observe the improvement of the economic situation of the households situated in the tourism locales; however, the level of this advancement is limited for most dwellers.

The fact is that most people cannot significantly improve their financial well-being by serving in tourism-related industries. This perspective is possible only for the owners of businesses and those enterprises/entrepreneurs who have rare but required skills. What makes the things even worse is that these job positions entrap employees in the threshold of minimal wages. In other words, the increase of deployment stipulated by the growth of tourism creates more blue collar positions, which are definitely valuable for the local and state economy but do not possess perspectives for career and the rise of salaries.

Investments. Investments are beneficial to the economic growth of the tourism locale. Capital inflow may come either from other regions of the same state or from abroad. Ardahaey (2011) emphasizes “the encouragement of foreign investment in early tourism development” (p. 201). This tendency makes a direct positive economic impact on the country and businesses. The natives may benefit from the secondary favorable effects of offshore investments in tourism-related industries.

Most of the above-described positive economics of tourism possesses the dark side of the coin. In other words, positive effects are accompanied by the negative implications that will be discussed in detail below.

Negative Economic Impact of Tourism

Increased possibility of terrorists’ attacks. In the modern world, terrorism is the source of the primary and secondary negative economic effects. Consider the rationale, year after year “danger that accompanies terrorism tends to intimidate potential tourists more severely” (Baker, 2014, p. 58). This challenge evokes many socio-economic considerations. First and foremost, it hinders the development of fruitful international relations, which is highly advisable in today’s world of economic and social globalization. Secondly, the growth of a tourism segment increases a direct threat of attacks committed either against or by coming tourists. Undoubtedly, financial losses connected to anticipating terrorism and dealing with its outcomes are immense. In this regard, the growth of tourism-related industries makes direct effects on the state and its citizens.

Terrorism hinders economic development and affects the well-being of humans, by making a multidirectional influence on the communities. In particular, according to Baker (2014), “seven different types of risks can be identified: a) financial, b) social, c) psychological, d) physical, e) functional, f) situational and finally g) travel risks” (p. 59). The connection between intensified terrorism and the rapid development of the tourism industries stipulates much psychological and, thus, functional distress to people who live in the resort areas. In addition, this adverse effect is spread far across the borders of these regions. Firstly, people are empathic towards the threats to which their compatriots are exposed. Secondly, dealing with the financial, social, physical, and travel risks involves the resources of a state. This means that even those citizens who live far away from resort areas are involved and, therefore, experience secondary negative consequences of tourism. In sum, strong positive connection between terrorism and tourism is one the greatest issues in economic and other terms; thus, it has to be given a priority.

Inflation. Another significant economic problem is a high likelihood of inflation caused by the increase of prices and incomes in the resort locations. Scholars accentuate that “tourism can sometimes inflate the cost of housing and retail prices in the area, frequently on a seasonal basis” (Ardahaey, 2011, p. 208). Without a doubt, inflation is adverse for economic growth. The above-mentioned misbalance is dangerous not only for tourism region(s); it makes a negative influence on the entire state. As a result, tourism consumption becomes less affordable for the natives. Thus, one may rightfully deduce that inflation, which stems from the evolvement of tourism, is a significant negative economic implication.

A leakage of money. The leakage of money from the resort areas is the other side of capital inflow. The fact is that attracting foreign investors means that one day they may be willing to withdraw the profits created by their finances. This adverse economic phenomenon often occurs in a tourism sector when foreign individuals and multinationals invest money in tourism to purchase the land, buildings, and other items of the infrastructure of the tourism region (Kumar et al., 2015). As a result, the obtained profits belong to the offshore owners, which means that capital may outflow instead of being left in the resort place for its further advancement. This perspective becomes more probable with the consolidation of companies and creation of large corporations whose interests may be shifted to other areas when the macroenvironment becomes more threatening or other locales promise better profits. Undoubtedly, it is a serious negative economic outcome of tourism that may affect public and private sectors both directly and indirectly.

Misbalance of Payments. The enhancement of deployment and fixated low wages of the blue color positions predefine misbalance of payments. Specifically, the few accumulate capital rapidly, whereas the rest of the individuals are doomed to work in the low-paid positions. This phenomenon is similar in other industries; however, discussing the negative economic impact of the growing tourism sector, it is appropriate to stress that it contributes to income disparity. Reinforcing this social problem, tourism makes a secondary effect on the deterioration of income polarization.

The negative socio-cultural relations. The downside of the benevolent cultural interactions is the negative relationship between the visitors and the locals. For example, the natives may start feeling discomfort when they are doomed to excessively interact with the strangers. Bac (2012) reveals that “reaching saturation with the tourism industry, the community starts to change its attitude towards tourism (p. 502). This negative implication does not threaten developing economies that are at the stage of promoting tourism-related industries. Nevertheless, they are at risk of facing this issue once reaching market saturation. Moreover, one should consider that the negative socio-cultural relations may lead to a form of animosity known as antagonism that is characterized by the irritation of the locals revealed towards the tourists (Bac, 2012). In economic terms, this tendency can increase and intensify the open confrontation between the natives and the strangers, which may lead to the rise of financial expenditure for ensuring the safety of the communities. Therefore, it is possible to conclude that adverse socio-cultural interactions impact directly the dwellers of the resorts and, simultaneously, indirectly affect the entire state.

Seasonality. As it is known, the profitability of tourism-related industries greatly depends on the weather. This particularity creates a number of economic problems. Consider an example, “local people may have to pay higher prices for food, drinks, entertainment, transport, events, etc.” due to the extreme increase of prices during high season (Kumar et al., 2015, p. 407). What makes the things even worse is that seasonality creates season unemployment (Kumar et al., 2015). Given that most workers of the tourism industry receive the lowest wages and/or are deprived of proper social benefits, it is possible to deduce that these individuals are left without social protection during low season when they are unemployed.

Human development and health considerations. The promotion of tourism-related activities implies that time and resources are derived from other activities/market segments. This issue is more tangible at an individual level because it affects a person’s developmental patterns (personal growth, health). For example, “when consumers spend on new activities they divert spending away from other goods” (Klijs, Heijman, Maris, K & Bryon, 2012, p. 1192). In particular, being engaged to spend money for entertainment, sight-seeing, shopping, and other hedonic areas of consumerism, individuals may neglect their health or household issues. Without a doubt, tourism is often a source of self-education and health improvements; however, in many cases, people concentrate on the matters that are not related to these acquisitions. Simply put, the excessive consumption of useless goods and services that is promoted by tourism industries may have a negative influence on people. In a word, in economic terms, intensified consumerism of tourism may be expensive (sometimes unreasonably) for individuals. Therefore, it is natural to assume that the aforementioned factor makes a direct effect at a personal level and an induced negative effect at a state level.

Environmental impact. Enhanced consumption of tourism increases the likelihood and magnitude of ecological issues in the tourism locales. The direct environmental effects can hardly be calculated (Ardahaey, 2011). Bac (2012) states that “it’s not always clear if the environmental degradation is caused by tourist activity or other human activities” (p. 57). This peculiarity makes the issues more dangerous because no adequate reaction is given to estimating and controlling the level of pollution caused by the externalities of production and consumption. It happens because scientists “lack references to measure the consequences of tourism on the environment” (Bac, 2012, p. 57). Furthermore, many scholars argue that this impact is indirect and, thus, is not significant (Bac, 2012).

Apart from that, there is a time variable involved in this process since the outcomes of tourism on the local ecology and, respectfully, on the state economy in general, cannot be observed immediately. Hence, the costs of mitigating ecological problems become higher when the issue has already occurred. In a word, encouraging the increase of tourism, a state should remember about considerable negative ecological and economic outcomes of tourism consumption. The economic impact of environmental factors is primary for a state, and secondary for businesses and the public sector (unless the growth of tourism stipulates the occurrence of natural disasters).

Proceeding to discuss the economics of tourism in the environmental terms, it is necessary to stress that “tourism still tends to be mostly connected to coastal regions” (Hajdinjak, 2014, p. 37). This fact evokes environmental concerns connected to the global warming effect that is positively related to the sea level rise. To be more precise, melting glaciers enhance the level of water, which means that the amount of coastal area is being reduced. As it is known, this effect is expected to intensify in the next 50 years. Therefore, people who currently benefit from the tourism sector may endure heavy losses in the future.

This insight stresses the necessity of cooperation between the government, public, and private sectors. Hence, even in the case of cooperation of all major state domains, the above-described market failure is probable, and this likelihood is especially strong for countries that benefit from tourism as one of the main sources of economic growth. Consider the rationale, “governments can spend money, but to do so they must raise taxes (or debt) meaning that other actors in the economy can spend less” (Klijs et al., 2012, p. 1192). This rationale supports the above-revealed claim that ecological problems in the tourism locales affect the well-being of the rest of the state.

In this regard, developing states are at greater risk of the market failure inflicted by unresolved ecological issues. Specifically, they lack the policies of regulating the proper amount of tourists and businesses that provide services to these visitors. In addition, developing economy is more unstable in terms of the changes in payments, inflation, and other aforementioned issues. Therefore, developing states that are greatly oriented to the advancement and promotion of their resort regions should be capable of anticipating and addressing the inevitable and potential economic losses stipulated by rapid climate change.

What is more, the investors and offshore businesses may be either averse to continue operating in this segment or build short-term oriented plans. Thus, it is appropriate to stress that “high dependency on tourism is perhaps not the optimal way for development” (Hajdinjak, 2014, p. 42). Considering the significance and magnitude of the above-discussed negative economic implications of tourism, one may conclude that despite being a greatly profitable way of enrichment in a short-term perspective, this remedy of economic development possesses significant challenges in the medium and long run. The next section is aimed at revealing advice that should be taken into account to mitigate the adverse outcomes of the growing tourism sector.

Recommendations

To begin with, it is appropriate to emphasize that “tourism coordination requires substantial capacities since it requires cooperation of private, public and state institutions” (Hajdinjak, 2014, p. 37). In this regard, scholars accentuate that expansion of the resort spots without a detailed plan of the development of the tourism sector must not occur. In this case, the lack of state policies may increase primary and secondary negative effects of tourism consumption. Moreover, it is advised to balance spending between several leading industries, instead of prioritizing advancement of tourism-related industries. For example, Hajdinjak (2014) presumes that developing states, which are presently strongly oriented towards fostering their resort regions, instead, should focus on technological and financial sectors.

Moreover, taxes for tourists and businesses that operate in this field should be increased. Undoubtedly, there is a concern that this approach may lessen the amount of visitors and profits. Hence, on the other hand, enhancing taxes is an effective way to increase financing of the eco-friendly technologies that would function to anticipate and mitigate the negative environmental outcomes of the increased tourism. In addition, this strategy is expected to enrich the government, which means that the positive economic implications of tourism will increase. For instance, enhanced taxes will mitigate the leakage of money because the state will receive considerable profits even in the case of money outflow.

Besides, increased taxes may serve to prevent the further rise of salary disparity and income polarization.

What is more, for the same purpose, it is necessary to raise minimal wages and ensure social benefits for blue collar workers who operate in tourism sector. The rise of salary will automatically improve financial well-being of the households and communities in the resort territories. Strengthening control over social benefits and salaries is expected to mitigate the negative action of seasonality. Apart from that, the rapid enrichment of entrepreneurship will be taken under control. Although this step increases the disadvantages of political environment, in case of the gradual rise of minimal salaries, the well-developed infrastructure can hardly discourage multinationals and domestic businesses from operating in the area.

Furthermore, to mitigate the likelihood of terroristic attacks, developing and developed states, that heavily rely on tourism, must continue improving their domestic security. To succeed with this goal, one should consider the importance of international collaboration. Specifically, the creation of the international anti-terrorism programs may be a valid option to address the threats of terrorism.

Conclusion

Summing up the above-mentioned, one should point out the positive economic effects of tourism, which are favorable cultural interactions, beneficial patterns of the intensified consumerism, enhanced deployment, offshore capital inflow, and increased taxes. These factors contribute to the state’s economic growth. At the same time, they are accompanied by the negative implications of tourism. In economic terms, tourism negatively affects the state with the growing threats of terrorism, inflation, a leakage of money, misbalance of payments, negative outcomes of consumerism, adverse social interactions between the locals and visitors, seasonality, and environmental problems. It is necessary to stress that, in a long-run perspective, the negative economic implications of the growing tourism industry are stronger than the positive ones. This finding is unexpected; it can be explained by the time variable, in particular, the real magnitude of increased tourism consumption is not as prominent in a short-run as it becomes in a medium and long-run perspective. Moreover, it is detected that both primary and secondary negative effects of the economics of tourism are significant and, thus, must be considered while elaborating the state policies for the tourism sector. Besides, it is proven that the adverse economic impacts are stronger for developing states that heavily rely on this remedy of economic growth.

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