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PART I
AN OVERVIEW
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Chapter 1
OVERVIEW OF TOURISM ECONOMICS
Clement Tisdell
The University of Queensland, Australia
Abstract: This chapter provides an overview of the contributions to this handbook and this is accompanied by some editorial observations. The range of these contributions is wide. They cover the demand for tourism, the supply of tourist services and include studies of particular segments of the tourist industry. Attention is also given to the application of cost- benefit analysis and public economics to tourism economics as well as to the importance of inter-industry analysis and tourism statellite accounts in assessing the economic consequences of tourism. International economic aspects of tourism are analysed as well as tourismās role in economic development. The interconnection between tourism, conservation and the state of the environment is emphasised.
Keywords: Conservation and tourism; cost-benefit analysis; demand for tourism; economic development and tourism; environment and tourism; international economics and tourism; inter-industry analysis; tourism satellite accounts.
1.1. Introduction
The substantial development of tourism economics in recent decades is probably the result of a combination of factors. However, one of the main drivers undoubtedly has been the growing global importance of tourism as an economic activity. Tourism is a composite commodity to which many industries contribute. When this is fully accounted for, tourism is the worldās largest āindustryā in terms of employment and global production. Moreover, it is an industry that continues to expand. On the demand side, its expansion is a reflection of global economic growth. The number of people worldwide obtaining increased per capita income and more leisure-time has risen. Because the demand for tourism is income elastic and tends to increase as available leisure-time grows, this has stimulated the demand for tourism. On the supply side, contributors to the expansion in tourism globally have been a reduction in the real cost of travel, a lowering of the time needed to travel a given distance, greater frequency and density of travel services, and lower transaction costs in arranging tours. Arguably also, despite terrorism, the overall risks associated with touring are fewer than in the past. In addition, knowledge about travel and tourism possibilities is more easily available than in the past, for example, due to advances in information technologies. All of these factors (and most likely others) have contributed to the global growth of tourism and have increased the relevance of tourism economics to the modern world. Furthermore, for at least the foreseeable future, global tourism, despite short-term and cyclical effects (such as those caused by economic recessions), is likely to continue to expand.
Much of the current growth in global tourism is being generated by the economic growth of major Asian economies, such as China and India. As economic growth continues in Asia and in several lower income countries, this will continue to fuel the expansion of global tourism. With economic growth, service industries (of which tourism is a part) increase in relative economic importance whereas many other industries, such as agriculture, decline in their relative importance (Clark, 1957). As a result, comparative interest in tourism economics has increased whereas interest in subjects like agricultural economics has waned to some extent, even though such subjects are not unimportant.
A challenging feature of tourism economics is that it involves the study of composite commodity. This means that a number of economic techniques or methods (such as Tourism Satellite Accounting and its application) have to be developed by tourism economists to ensure that their analyses are applicable. This requires significant innovation because mainstream economics concentrates mostly on economic analysis associated with well-defined singular commodities each of which is associated with a particular industry. However, as observed many years ago by Robert Triffin (1941), it is not really clear in practice (even if products or commodities are not composite ones) where the boundaries of industries are located. This is also true to some extent of the tourism industry or sector. For example, a significant portion of tourism (but not all) is a leisure or recreational activity, and other leisure and recreational activities are partial substitutes for it. However, in some cases these activities are complements. Therefore, in defining the boundaries of the tourism industry or sector, one ought not be inflexible. A flexible approach is followed here.
The purpose of this chapter is to provide an overview of the contributions in this book. These provide a contemporary coverage of the current state of tourism economics by outlining relevant theories, providing applications and case studies. While the coverage of tourism topics in this book is very comprehensive, it does not cover every topic to which tourism economics relates because the range of possible topics is very wide. For example, in the part of the book containing studies of particular segments of the tourism industry, scope exists for considering additional segments such as religious tourism and adventure tourism. Nevertheless, this book outlines and illustrates principles and techniques that can be applied to studying all segments of the tourism industry.
In order to organise this book systematically, the remaining chapters of this book have been grouped into the following parts:
ā¢ The demand for touring (Part II);
ā¢ The supply of tourist services (Part III);
ā¢ Studies of particular segments of the tourism industry (Part IV);
ā¢ Cost-benefit analysis, public economics and tourism (Part V);
ā¢ Inter-industry features of tourism, tourism satellite accounts (Part VI);
ā¢ International economic issues and tourism (Part VII);
ā¢ Studies of the contribution of tourism to economic development (Part VIII);
ā¢ Environmental and conservation matters involving tourism (Part IX).
It should, however, be noted that these are not exclusive partitions. For example, there are many chapters in parts other than Part VII which include at least some coverage of international economic issues involving tourism.
The nature of each of the contributions in this book will now be outlined and discussed in order to provide an overview. This is a general overview and is not a substitute for the detailed reading of each of the chapters themselves.
1.2. The Demand for Touring
Demand and supply analysis is basic to the economic study of industries and sectors of economies. Consequently, Parts II and III of this book focus on supply and demand analysis involving tourism.
In Chapter 2, Sarath Divisekera provides a comprehensive review of tourism demand models based on mainstream economic concepts and theories. These models rely on the assumptions of standard economic theory and in particular, the neoclassical theory of consumer behaviour which, as Divisekera points out, assumes that consumers are rational and strive to maximise their satisfaction subject to their income constraints. In this chapter, he gives most coverage to tourism demand models which take into account economic changes involving multiple commodities or groups of commodities, that is, system-based models. These models are important building blocks for economic general equilibrium analysis. A number of different functional forms have been suggested for specifying complete demand systems. How should modellers and policy-makers choose between these? Divisekera outlines both theoretical and empirical factors that should be considered in making this choice. He points out that sometimes theoretically appealing functional forms have to be rejected for empirical work because they cannot be applied easily.
In Chapter 3, Divisekera outlines issues that need to be addressed in applying these demand systems and reviews empirical econometric studies of the demand for tourism based on demand systems. The demand elasticities obtained from one such model are specified and discussed in order to illustrate the value of this approach to estimating the demand for tourism.
From the coverage of these two chapters, it is clear that alternatives to neoclassical economic methods of modelling demand have had little impact on mainstream economic studies of tourist demand. Alternative or different theories associated with psychological economics and behavioural economics (Bowles, 2004; Kahneman and Tversky, 2000) for example, seem to have had little influence but have some indirect relevance. Many of these theories assume bounded rationality (Simon, 1957; Tisdell, 1996) in contrast to the basic assumption of neoclassical economics which supposes a very high degree of rationality. Nevertheless, the separability concept of demand which Divisekera discusses in Chapter 2, and which he states plays a major role in applied demand studies, can be associated with the occurrence of bounded rationality. Firstly, this separability approach has similarities to the theory of mental accounting and consumer demand as developed by Thaler (1980). Mental accounting is a part of behavioural economics. Second, the separability assumption may be widely made use of because it makes econometric measurement of demand relationships tractable. Furthermore, to some extent, tourism market segmentation analysis involves separability assumptions about tourist demand and consequently, it may also provide useful clues as to how markets can be reliably separated.
In Chapter 4, Sara Dolnicar provides an up-to-date, practical (yet critical) guide to the application of market segmentation analysis to tourism. Tourist firms often use this type of analysis to determine which segment (or segments) of the tourism market they will target in developing projects and in promoting their offerings. This approach recognises the heterogeneity of tourism markets but treats each identified segment of it as being homogenous. This supposes that a very high degree of substitutability exists within segments but only a very limited degree of substitutability between different segments of the market. Therefore, simplifying assumptions are involved.
One problem is how to identify the relevant segments appropriately. One way is to base market segmentation on ācommon senseā exogenous assumptions about the relevant segments, for example, differentiation of segments by age, gender, income levels of tourists. Another approach is to examine the available data and to see if it highlights factors that appear to be important in delineating the market segments. Dolnicar examines the alternatives and the benefits and drawbacks of these different approaches and argues that practitioners need to be transparent with their clients about the way in which their analysis has been developed. They should be transparent about procedures adopted for the selection of the segments and the possible limitations of the methods used.
As with all demand analysis, it is also important to take into account dynamic factors. The past is often an incomplete guide to the future. Therefore, changing trends in demand and possible alterations in market segments with the passage of time must also be considered.
In Chapter 5, Habibullah Khan and Francis Tan present the results of an econometric study designed to determine the extent to which tourism demand in Singapore is complemented by demand for tourism in the ASEAN region, particularly by demand for tourism in its nearby countries ā Malaysia, Indonesia and Thailand and also consider the influence on tourist demand of traditional explanatory variables such as income levels of tourists and prices. This enables them to draw interesting conclusions about the type of tourism policies that Singapore should pursue. The results have important implications for regional policies for promoting tourism and involve the first formal modelling of the influence of āneighbourhood effectsā on tourist demand in countries in the same neighbourhood.
Terrorism has a major negative impact on the demand for tourism. Initially in Chapter 6, Kunal Chattopadhyay reviews the relevant literature about the impact of terrorism and violent political unrest on tourism and the costs involved. He then focuses on the consequences for tourism in India of political violence there giving particular attention to its effects on tourist demand within India. The adverse tourism consequences of the activities of Indiaās Maoist rebels are given particular attention. His exposition also provides some interesting information about domestic tourism in India. For example, he outlines the motives for domestic tourism in India and provides data on the spatial distribution of tourism in India.
1.3. The Supply of Tourist Services
Most of the contributions in Part III of this book focus on international aspects of the supply of tourism services. Topics include the internationalisation of the hotel sector, a case study set within a global context of the development of the lodging sector in China; changes in the role of tourism and travel intermediaries in recent times, primarily as a result of advances in information technology; the significance of air transport for tourism, and the consequences for the geographical distribution of tourism of technological advances in transport. It is argued that these advances influence the nature of the tourism area life-cycle.
It is well-known that the tourism sector is becoming increasingly globalised. ZĆ©lia Breda and Carlos Costa (in Chapter 7) outline and review a range of modern theories about why and how firms have become more international in their operations. They argue convincingly that significant differences exist between the reasons for and patterns of internationalisation of manufacturing firms and those in the service industry, such as in the hotel sector. To date, most theories of the internationalisation of business firms have been based on the behaviour of manufacturing firms. After outlining general theories of factors leading to international operations by firms, Breda and Costa focus on the behaviours of firms in the hotel sector. They find that the most common practice is for hotels to begin international operations by means of management contracts with overseas organisations and businesses. Franchising and foreign investment is less common. However, the situation is not static. They suggest that patterns of internationalisation in the hotel sector could be changing and that as hotel groups obtain more experience in overseas markets, the vehicle for their involvement is liable to alter, for example, they may be more inclined to undertake direct investment.
The development of Chinaās hotel industry provides some support for the above observation of Breda and Costa. Larry Yu and Huimin Gu (in Chapter 8) outline the way in which Chinaās hotel industry has evolved in an international setting and has adapted to, and reflected changes in the structure of the Chinese economy since China began its reforms in 1978. First, with foreign involvement, Chinaās lodging sectors catered mainly for inbound tourists, then increasingly for domestic tourists, and now it has a focus on outbound Chinese tourists. Yu and Gu analyse how international involvement in the Chinese hotel industry has helped China catch up with more developed economies in managing its hotel industry and how in the latest phase, some Chinese hotel companies are investing abroad. Both supply and demand side features of Chinaās lodging sector are explored. These include changes in the productivity of Chinaās hotel industry and its adaptation to change in the demand for lodging services.
Aspects of the internationalisation of the tourist industry are also covered in the contribution of Nevenka Äavlek in Chapter 9. She examines the changing role of travel and tourism intermediaries giving particular attention to the effect on travel and tourist agents of advances in information and communication technology (ICT). Some āfuturistsā predicted that the services provided by travel and tourist agents would be little demanded given advances in ICT. According to the research results reported by Äavlek, the fact of the matter is, nevertheless, that travel agents still account for most of the holiday bookings in Europe and USA. However, th...
