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1 The Balance of Tourism Payments 6. Foreign exchange dependence on tourism 7. The effects of tourism development 8. Policies for the balance of tourism.

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Presentation on theme: "1 The Balance of Tourism Payments 6. Foreign exchange dependence on tourism 7. The effects of tourism development 8. Policies for the balance of tourism."— Presentation transcript:

1 1 The Balance of Tourism Payments 6. Foreign exchange dependence on tourism 7. The effects of tourism development 8. Policies for the balance of tourism payments

2 2 6. Foreign exchange dependence on tourism Given the difficulties of valuation, it is perhaps only possible to regard published data on tourism payments and earnings as part of its balance of payments. Next table shows the earnings of the “big” tourism destinations

3 3 6. Foreign exchange dependence on tourism The tourism contribution to the balance of payments of major tourism destinations Countrytourismtotal visibletourism % receiptsinvisible receiptsof total USA Italy Spain France UK average 7.2

4 4 6. Foreign exchange dependence on tourism The “top 5” international tourism earners can be seen on average not to be highly dependent on tourism alone for their balance of payments inflows, but (with the exception of Spain ) to have earned less than 10 % from tourism. This is because, on the whole, they are large and diversified economies earning foreign revenue from many sources. Spain is much more dependent on tourism - for over one fifth of its balance of payments revenue -which makes it more sensitive to changes in tourism demand and travel conditions

5 5 6. Foreign exchange dependence on tourism Tourism contribution to the balance of payments in the most highly tourism dependent countries Country Tourism credits as % of Total international credits (1991) Antigua/Barbuda86.8 Bahamas70.0 St Lucia60.5 Barbados56.5 Seychelles46.9 Maldives45.7 Western Samoa41.3 Grenada40.8 Jamaica34.3

6 6 6. Foreign exchange dependence on tourism Such dependence on any single industry is likely to be unhealthy, as a change in market conditions or production difficulties can severely damage a nation’s balance of payments. In many cases, tourism is less sensitive to market problems than are other activities such as primary industries, but over recent years we have seen political or weather problems cause serious disruption to tourism in such countries as Cyprus, Fiji, Portugal and the Seychelles. In these cases, high tourism dependence is very damaging.

7 7 6. Foreign exchange dependence on tourism The level of dependence on a single generator is also crucial. Mexico, for example, is highly dependent on the United States for its visitors; South Korea on Japan; and Denmark on Germany. Changes in economic well-being, or fashions, in the generator, as well as changes in the political and travel links between generator and destination, can then have a significant effect at the destination

8 8 7. The effects of tourism development As tourism developments in destinations have become less sporadic (scattered) and more organised, so their implications for a national economy and its balance of payments have become clearer and more important. In addition, the supply of tourism products designed for international consumers has become the province, to a large extent, of multinational investors and organisations. So to assess the impact of tourism developments on a country’s balance of payments, it is necessary to identify as many items as possible within the tourism external account, rather than just simple visitor foreign exchange receipts. These aspects, for a hypothetical tourism development, are summarised in the table below

9 9 StageInflow to balanceOutflow from of paymentsbalance of payments InvestmentCapital inflowDividends & interest (Capital account)(Current account) Construction Design & consultancy fees Import cost of materials Operation - Receipts from Royalties & technical aid foreign tourists - Souvenir salesImported materials and spares - Taxes on foreign Imported consumer goods operators - Wages received from foreign operators - Saving from supplying domestic tourism product (import substitution) Marketing Overseas promotion Overseas based personnel costs Total Inflow ( I )Total Outflow ( O )

10 10 7. The effects of tourism development The initial capital inflow is likely to come from countries which are strong external investors- mostly rich, developed nations- and to be triggered > either by prospects of higher rates of return in the destination than elsewhere (net taxation or including investment incentives), > or by some need for integration. This inflow is of course a once – and - for -all capital account movement, where the interest “reward” outflows are recurrent

11 11 7. The effects of tourism development Other recurrent outflows will depend on the degree of development and diversification in the destination economy, and hence its ability to supply goods itself to support the tourism industry. Less diversified economies have a higher need or propensity to import, and thus greater outflows

12 12 7. The effects of tourism development Naturally most destination governments hope that the operational inflows will easily pay for all the outflows and leave a net positive balance of I - O. One notable inclusion is the saving from supplying a new domestic tourism product. Whilst this means no actual receipt from abroad, it implies that tourists domestically now have available a more attractive product than one overseas which would otherwise be in demand. This import substitution is analogous to the consumption of home-produced goods to replace imports

13 13 7. The effects of tourism development As further developments take place, destination governments will hope that the I - O surplus ratio increases, as: > the destination attracts an increasing range of inbound (foreign) tourists > local support industries and employment skills become more sophisticated and competitive, there by reducing the need to import > unavoidable overseas expenses (such as NTO overseas promotion) cover an enhanced range of tourism products with little cost increase-that is, increasing returns

14 14 8. Policies for the balance of tourism payments Countries with large balance of payments surplus are net creditors. On the other hand, a very large number of countries have to deal with balance deficits, including, increasingly, the USA. They must therefore embrace policies to reduce deficits or even obtain surpluses. In addition, in those cases where their own currency is not an acceptable form of international payment, they need ways to earn “hard” or convertible currencies which are acceptable forms of international payment.

15 15 8. Policies for the balance of tourism payments Using tourism to improve a balance of payments position in the above circumstances is popular. There are several reasons for this: a) Negative or prohibitionist (protectionist) policies to reduce imports, by such action as quota enforcement or increased tariffs, not only have possible injurious effects on the domestic economy, but may incur retaliatory measures from trading partners

16 16 8. Policies for the balance of tourism payments b) Stimulation of domestic goods producers to increase exports may be a difficult process, especially where a country has few immediately exploitable comparative cost advantages. Also, the lags between stimulatory policies ----> increased production ----> sale of goods ----> shipment of goods ----> payments received may be so long as to be useless in making an immediate correction to a balance of payments deficit.

17 17 8. Policies for the balance of tourism payments c) Tourism is relatively easy to exploit quickly, providing no great infrastructure development is needed. Brief but intensive overseas promotional campaigns, the granting of new transport or taxation rights, or measures to reduce prices (by devaluation, for example) can have almost instant effects in attracting more inbound tourists and their money. It is also relatively simpler and “cleaner” than much new industrial development

18 18 8. Policies for the balance of tourism payments d) Reducing outbound tourism by enforcing special taxation or severe exchange control does not normally attract retaliation, as it is not usually seen as a specific anti-free-trade weapon

19 19 8. Policies for the balance of tourism payments So a number of specific policies have been used to take advantage of these factors, which may group as follows: > Promotional policies: overseas (usually NTO) promotions, special tourist price reductions (e.g. a special tourist exchange rate; cheap “tourist petrol” prices as used for some years in Italy) market repositioning to attract not more, but higher spending, inbound tourists

20 20 8. Policies for the balance of tourism payments > Development policies: grants or tax allowances for business developing products to attract international tourists infrastructure development including transport links with generators > Regulatory policies: devaluation exchange control/currency export prohibition departure taxation for residents strict negotiation in bilateral air agreements to preserve largest share of travel receipts for home carriers visa relaxation Combinations of these policies have been used by almost every country seeking to reduce a balance of payments deficit. They work by a mixture of demand- side and supply-side management 20


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