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Financial Leakages in TourismMinu Hemmati & Nina Koehler Published in: Sustainable Travel & Tourism. pp25-29, 2000
Abstract This paper aims to provide information about financial leakages in tourism starting with a general assessment of the information available. We then focus on highlighting some of the problem areas, giving examples from various parts of the developing world. Some brief recommendations are based on our belief that all stakeholders need to be involved in order to develop strategies reducing leakages and increasing linkages into local economies, thereby maximising benefits of tourism for local communities.
What are financial leakages? Financial leakages in tourism occur when revenue arising from tourism-related economic activities in destination countries are not available for (re-)investment or consumption of goods and services in the same countries: Financial resources "leak away" from the destination country to another country, particularly when the tourism company is based abroad and when tourism-related goods & services are being imported to the destination country. (1) Financial leakages occur in many economic sectors, not only in tourism. However, the issue should be addressed as tourism development is being portrayed as one of the few profitable economic sectors for developing countries. The figures suggest that this can only be the case if tourism development is planned and implemented appropriately. The tourism industry is one of the fastest growing industries and creates more than 10% of global economic output and one in nine jobs with estimated annual revenues of US$ 1,550 billion (World Tourism Organisation) by the year 2010. Unfortunately, these figures do not inform us on how much of the benefits of tourism are actually benefiting the country where the holiday is spent. The economic benefits of tourism development to developing countries are limited. (2) A significant percentage of the revenues arising from tourism, common estimates state that approximately 60 to 75% (eg Wheat 1998; Kersten 1997; Sinclair 1991), leaks away from developing countries because of foreign ownership of the industry, imported resources, foreign tour operators and airlines and other reasons.. And: “The poorer a developing country, the higher the probability that the gross expenditures for tourism are greater than the earnings out of it” (Scherrer 1986, p160, translation by the authors). “Furthermore, the more a developing country relies on luxury tourism, the greater is the danger of high expenditures for imported luxury goods” (Maurer et al. 1992, p58, translation by the authors). It is also stated that the more established a country becomes as a tourism destination, the greater the proportion of revenue which leak away (Wheat 1998, p27). According to Vorlaufer (1984), 35% of tourism earnings are lost due to investment in imported goods in countries which are big and economically developed, whereas especially in small island developing states the leakage is about 40% to 60%. The leakage can even be up to 90% in remote and scarcely developed counties (German Forum 1999).
Box 1 In 1988 the Institute for Research in Leisure and Tourism of the University of Bern, Switzerland, undertook an excursion to Kenya. Out of 2,530 SF spent per person, about 1,500 Swiss Franks never reached the destination country or leaked away through foreign exchange expenditures. Only 850 out of 2,530 SF (33,5 %) became part Kenya's GDP. Most of leakage occured because the trip was package deal; the flight, operated by a non-Kenyan airline, accounted for 1000 SF. 220 SF were spent for foreign exchange and 260 SF on taxes and depreciation.
Linkages between the tourism industry and other sectors of local economies is an under-researched area. Issues like package tourism, imported food or linkages to agriculture are more frequently being addressed than foreign direct investment or education and training of local and indigenous communities. Comparable statistics are rare as there are various units based on which tourisms contribution to the economy can be measured. Different countries have different ways of estimating GDP, export expenditures, and so on. Measuring leakages is another problem; for many countries, there are no such data. Travel receipts are commonly used as a proxy for tourism earnings (Sinclair, 1991) but it is sometimes unclear if only direct earnings from the tourism sector are taken into account or if earnings from indirectly related sectors are being included. However, though based on different sets of data, authors' estamates of average percentages of leakages are fairly similar. A new way to overcome these problems is satellite accounting. A Tourism Satellite Account (TSA) can is a set of economic accounts which are being integrated with each other and with an overall system of national accounts (UN & WTO 1994, Frechtling 1999). The WTO, the WTTC and other organizations are developing this method to obtain information about the economic effects of tourism (WTTC 1999).
Various Causes Financial leakages in tourism have various causes, depending the country and the kind of tourism involved. Some of these issues which need to be looked at when aiming to decrease financial leakages are outlined below.
Foreign direct investment is crucial for developing countries, also in the tourism sector. Yet investment from local sources is a very important prerequisite to avoid revenue leaking away; lack of local resources is a significant reason for financial leakage. For example, foreign investment has been welcomed in Kenya although there was an official encouragement of greater local ownership. “By 1988 there was foreign direct investment (in Kenya) in approximately 78% of major hotels in coastal areas, 67% of hotels in Nairobi and 66 % of lodges in national parks and reserves, the percentage of coastal and city hotels and wildlife lodges which were entirely foreign-owned being 16%, 17% and 11% respectively” (Sinclair, 1991).
Package tours which are offered and sold by one wholesaler tend to imply little revenue remaining in destination countries. Package holidays are increasingly all-inclusive deals, making it unnecessary for tourists to spend money outside the resort. "The tourist purchases a cheap package holiday to The Gambia, for roughly £300 and sometimes less for a week's stay in luxury," says Monica Morris-Jarra, who works with African Heritage - a locally-owned hotel in The Gambia, "But by far the greater part of the money stays in the country where the ticket was bought, and as little as £4 per night goes to the hotels. There is no economic sense in this sort of tourism for our country" (Wheat 1997). Many local tour operators cannot compete with the financial back-up, marketing, and logistics of internationally operating tourism companies based in developed countries. Local operators lack access to and information about the developed countries markets, marketing expertise and infrastructure such as internet access and foreign language capacities. Dealing with remittances from overseas can also cause problems for local tour operators. Regulations such as the European Package Travel Directive provide consumer protection measures which simplify travel to developing countries and hence increase the market size. However, due to package travel arrangements dominated by developed country based businesses, developing countries do not benefit as much as they could. Local suppliers can suffer enormously as international operators tend to work with established international businesses for car rentals, food supply etc. and/or buy local businesses wheras through direct sale local operators are able to negotiate prices.
Box 2 Comparing a package tour sold locally by a local tour operator in Thailand with one sold to a local wholesaler selling it to an overseas travel agent (Shepherd, 1998): Operator 1 sells a tour (sea-kayaking in Thailand) locally, retaining all revenue in-country. Operator 2 sells cheaply to a local wholesaler, who, after adding on his mark-up, sells the product to an overseas agent, who charges the end user 30% more than operator 1 (in Taiwan).
Box 3 Data for 235 package holidays in Kenya was obtained from brochures supplied by major tour operators, available in travel agencies in the UK to analyse financial leakages in package travel tourism (Sinclair, 1991). The brochure prices of 7 and 14 night holidays (beach; safari; city; city & beach; safari & beach) were examined for the months of April, July and December 1990. Prices for the same type of holiday varied significantly between different tour operators. It was found that considerable percentages (often 30 - 50%) of the total prices charged for accommodation and food were retained by tour operators to cover their overseas costs and profits. Concerning 14-night beach-only holidays, the total foreign exchange leakage going back to the overseas tour operator and airline ranged between 62% and 78%. The leakage from Kenya is significantly lower in the case of safari or safari & beach holidays as travel by air within Kenya requires to use the state airline. However, the leakage still ranges between 34 and 45 %, so that for every £1,000 spent on a 14-night safari & beach holiday, Kenya receives between £550 and £660 if the tourist travels from and to Kenya with an overseas carrier. The leakage percentages for Kenya are considerably lower if Kenya Airways provides the international air transport, decreasing to 12 - 33% for a 14-night beach holiday, and 12 - 20 % for a 14-night beach & safari holiday sold to a UK resident.
Food accounts for about 30% of all tourist expenditures. Import of food decreases foreign exchange earnings, thus reducing opportunities for development of local production. Regional impact depends on varying availability of resources in different regions. For example, in many Small Island Developing States there has been no increase of agricultural production in relation to increasing tourism development. Usually food imports increase and market prices, also for domestic products, rise extremely in these states (Vorlaufer 1984). Among the barriers towards stronger linkages into the local economies are strong linkages between foreign-owned hotels and overseas suppliers, particularly in the form hierachical monopolies in the tourism sector. Other barriers are tourists’ preference for similar food as at home; imported food being cheaper; imported food being of better and more consistent quality; and more reliable supplies by imports. Barriers of communication and understanding between foreign tourism companies and local producers are also named as causing large amount of imports. In addition, tourism development has caused decreases of agriculture and greater dependencies on imports of agricultural products in many cases. Tourism developments compete with agriculture in terms of land and labour and can increase the local consumption of imported food as well as inflate the food prices (Maurer et al. 1992), which creates particular burdens for women (Hemmati 1999).
Box 4 In the early 1970's FONATUR, the Mexican tourism development authority, declared the regional development of agriculture as one of its goals associated with the creation of a new international tourism resort in Cancun. The intention was to create a local economy interdependent with tourism, where local farms would increasingly provide a cheaper source of food for hotels than food imports. To stimulate production for tourism the government has attempted to provide credit and aid packages to ejidos for tourism-related production; to set up a regional school for agricultural workers; and to organize municipal-level hydroponic farming and other agricultural experiments. Despite these initial government efforts to stimulate local agricultural production for tourism, the linkages between the two sectors remain weak. Most food supplied to the tourism industry is brought in from outside the region, with the exception of some local chicken, eggs, pork, seafood and a few fruits and vegetables. A wide variety of production, structural, policy, financial, information and infrastructure constraints are put forward as contributing to the continuing weak linkages between tourism and agriculture in Quintana Roo. One problem is the inability of small farmers to produce consistently high quality fresh produce on the thin rocky soils prevalent in Quintana Roo. Another problem lies in the preferences of tourists: Early 'explorer' tourists are more willing to experiment with indigenous foods and dishes than are late stage mass tourists intent both on minimising costs and consuming familiar foods. North Americans, who represent 55% of Cancun's tourists, are notorious for conservative food preferences, demanding foods similar to that in their home country and resisting indigenous dishes based on locally produced food. This trend is increasingly evident in Cancun with the rapid growth of US franchise outlets, such as McDonalds, Pizza Hut and Kentucky Fried Chicken, which emphasize consistency of ingredients and are very cost sensitive. (From a study by Torres 1996)
Importing luxury goods for tourist consumption is another significant cause of financial leakage because the amount of imported goods is high and it is necessary to maintain a sophisticated infrastructure (German Forum on Environment & Development, 1999). For example, Belisle (1984) found that Jamaican hotels imported three quarters of shrimp consumed (Wall & Telfer 1996). According to a Bangkok University study imported luxury goods are responsible for a loss of income of about 56% in the tourism sector and related industry sectors in Thailand in 1987 (Maurer et al. 1992). Many employees in the tourism sector need specific qualifications, such as foreign language abilities. However, local people in destination areas often don't have such qualifications and education and training facilities are not present in many areas. For example, the Sheraton Hotel in Santa Cruz (Mexico) required 100 % English fluency for front desk applicants and 80% fluency for maids which was not met by the majority of community members (Long 1991). Highly qualified and well paid positions are usually occupied by managers from developed nations, particularly with international hotel chains, whereas unqualified and low paid jobs are offered to local people. Gender segregation of the labour market prevails, with women in unqualified and low-paid jobs. Under these circumstances, income of employed foreigners will largely leak away (indirect economic impact), and tourism development will over time not increase the living standards of local people and development levels of their communities.
Box 5 “In 1990, the State of Hawaii developed an innovative economic diversification policy based on the concept of “one job / one room”. This policy dictates that hotel developers create one non-tourism job in the economy in order to obtain state permission to build one hotel room in resort developments that involve the reclassification of land from agricultural, rural, or conservation categories to urban land. The developer is also allowed (alternatively?) to make a payment of $25,000 per proposed hotel room for the financing of job training, business loans, or other incentive programs to promote economic diversification. This policy is seen as a method of extracting rents form “largely non-resident hotel developers” to finance other projects which the state desires” (Telfer & Wall 1996).
Participation can be defined as "giving people more opportunities to participate effectively in development activities...empowering people to mobilize their own capacities, be social actors rather than passive subjects, manage the resources, make decisions and control the activities that affect their lives" (Sproule 1996). However, tourism industry planners usually design projects far away from the actual resort site. "A community approach to tourism suggests the development of a community as a core component of a tourism destination area or tourism product. At the same time it suggests some control by residents over tourism development and management" (Kersten 1997). A lack of transparent, democratic and gender-balanced participation processes prevent real involvement and histories of non-involvement create understandable mistrust from local and indigenous communities. This is in stark contrast to the right to self-determination of development (CONVENTIONS). There are hardly any Local Agenda 2I processes which include tourism planing and management (Hemmati 1999). In many cases, there is no early information about tourism development plans made available for local communities in the first place. Without information and participation, linkages into local economies will be more difficult to establish as investors don't know qualifications and capacities of local communities, local investors cannot become involved, and tourism development cannot include local attractions provided by communities.
Possible solutions To decrease financial leakages in tourism, it would be important to increase local ownership of tourism-related businesses, build up tourism infrastructure using local investors and avoid purely foreign investment. It would also be important to decrease imports for tourism development and tourists consumption, using local materials for buildings and infrastructure, and increasing usage of local food production, where appropriate. There is also a need to support community based tourism business initiatives and to increase their access to the market, an issue where tourism boards have a key role to play. Consumer awareness is another important aspect - encouraging consumers to book and buy locally, and raising awareness of the impact of their choices. Package tourism poses a particular problem for many developing countries who are, in some cases, starting to regulate against it. Another important component is to invest in education and training to enable local people to pursue careers in tourism if they so choose. Partnerships between industry, NGOs and government departments can play an important role. Education and training should focus on marketing, financial management, literacy and foreign languages. Training should also provided to promote activities that are indirectly linked to tourism, such as printing, dying and folk-arts. Training and education programmes should particularly aim at encouraging women to move into non-traditional occupations which require more skills and are better paid and at encouraging women to aim at rising into key managerial positions. The most important overall strategy to achieve these goals is to engage in transparent, democratic and gender-balanced consultation and decision-making processes at the local level in destination areas. Among organisations and groups to be involved in tourism development - stakeholder groups - are national, provincial and local governments, tourism boards, the tourism industry, local communities and the diversity of their member groups, trade unions, non-government organisations (NGOs), community based organisations (CBOs), women, Indigenous Peoples, faith communities, and others. An appropriate planning and management approach needs to involve all stakeholders, as outlined in Agenda 21 (LA21) and in the CSD-7 decision (SEE CHAPTER XYZ). To allow for meaningful participation, there is a great need to improve information availability and capacity-building for participation. Different member groups of local communities, eg women, may need specific measures of capacity building for participation. Systematic processes to promote community participation in tourism should become an important part of all externally aided tourism projects, national tourist policies and strategies and, where relevant, in conservation, forestry and coastal zone management projects. Foreign investors need to seek the engagement with all stakeholders from the beginning, and seek the linkages into local economies wherever possible. The tourism industry should collaborate with community based initiatives on the basis of their shared concern about conserving natural resources on which both their market shares depend upon. National and local governments, the industry and trade unions have a key role to play in disseminating information to local communities about tourism-related development plans to enable community members to create successful income generating activities. Government policies to encourage a mix foreign and local investment and joint ventures, to imporve access to credit for tourism-related local businesses, to increase government assistance of the agricultural sector, to allocate preferential landing and take-off slots to national carriers, and to engage in appropriate promotion activities should also be considered.
Box 6 The Government of South Africa / Ministry of Environmental Affairs and Tourism has, on the basis of wide consultations, produced a Tourism White Paper, providing a policy framework and guidelines for tourism development. The White Paper proposes Responsible Tourism as the key guiding principle for tourism development, implying a pro-active approach by tourism industry partners to develop, market and manage the tourism industry in a responsible manner so as to create a competitive advantage. The White Paper is taking a multi-stakeholder approach to implementation which can serve as an example of a strategy to minimise financial leakages. The roles and responsibilities of all relevant stakeholders are listed in detail (Government of South Africa, 1996).
Box In St.Lucia, the Sunshine Harvest Fruit & Vegetable Farmers’ Cooperative, comprising 66 farmers, co-ordinates production and marketing to ensure regular supplies to hotels. In 1994, the St.Lucia Hotel Association and the Ministry of Agriculture launched an “adopt a farmer” pilot scheme, in which hoteliers buy produce from a specified farmer at a contract price agreed before planting. Smallholders are encouraged to produce a range of fruit and vegetables. Loans from local banks are available to farmers at favourable rates to allow them to buy seeds and fertilisers. This has greatly improved the potential for retaining revenue on the island (Wheat 1998a, p8).
National governments should create legislative mandates in favour of the devolution of power to local authorities which can be crucial for the success of community based tourism initiatives. Local governments should ensure that feasibility studies looking at the environmental, social and economic impact of tourism development, including the carrying capacity of tourism destinations, are carried out involving all stakeholders prior to further planning and decision-making. NGOs should support community based tourism initiatives to form associations and collectively assess the markets; provide legal assistance; advice on community based resource management programmes; gender awareness training; assistance with administrative arrangements; scientific assistance in feasibility studies using participatory and action research methods; improve the links between groups. Finally, there is definitely a a lack of research on financial leakages in tourism. More knowledge would allow for more targeted approaches to creating income-earning opportunities to those who are not directly involved in tourism through backward and forward linkages. Sharing good practice experiences, based on analyses of statistical data and case studies, would be an important tool.
Footnotes (1) The percentage of tourist expenditure remaining abroad (in the tourists’ countries of origin) has sometimes been termed "foreign exchange leakage”, although the term is also used to define the percentage of tourists’ expenditure within the destination country which is lost in the form of payments for imported inputs, or to refer to the evasion of foreign currency controls (Sinclair, 1991). (2) Acknowledging that this is a serious problem, the multi-stakeholder working group established on the basis of the UN CSD-7 decision has decided to work on "assessing financial leakages from tourism" as part of its work programme 2000-2002.
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