Don’t belittle tourism

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Sophistry is not the method of economists. In a recent press conference, finance minister Renganaden Padayachy appeared to belittle tourism when he pointed out that it represents 8% of the national output (as indicated in the national accounts), from which he inferred that “90% of the economy is operating.” The reasoning may seem correct to the layman but is actually misleading. Economists know that the multiplier effect works out symmetrically as expenditure increases or decreases. The Mauritius Investment Corporation would not bail out hotel groups if it did not consider them as “systemic operators”. 

True, tourism is not only about the hotel industry, but also covers food and beverage serving services, road, air and sea passenger transport services, transport equipment rental services, travel agencies and other reservation services, recreational, cultural and sporting services, and retail trade of country specific tourism characteristic goods and services. Still, the contribution of accommodation services to tourism is significant: in 2018, they generated 57% of the total tourism direct Gross Value Added, and employed 31% of those working in the tourism sector. Direct tourism employment stood at 75,934, accounting for 13% of total employment. 

These figures are published by Statistics Mauritius in its latest Tourism Satellite Account. Satellite accounts extract tourism-related activity from the national accounts to give an estimate of the contribution of tourism activity to the national economy. The advantage of satellite accounting approach is that it uses existing economic data and embeds tourism in an accepted system of accounts. The drawback is that the latter cannot distinguish tourists from local residents (both are served by hotels), and while national accounts are organised around a set of industries, tourism is more a type of customer than an industry. Also, the information collected may not be complete or consistently gathered: jobs are generally not reported as full time equivalents since they include part time and seasonal jobs, which makes comparisons between industries problematic. 

Satellite accounts demonstrate the importance of tourism activities, but not their economic impacts. This is because satellite accounts are limited to the direct effects of tourist spending. They do not cover the secondary effects which are of two types: indirect effects, which are the changes in income or jobs in sectors that supply goods and services to the tourism industry, and induced effects, which are the increased sales from household spending of the income earned in the tourism industry. 

The method used to estimate economic impacts (the total direct, indirect and induced effects) is the inputoutput model which is a representation of the flows of economic activity within a country. The flows associated with any change in spending are traced either forwards – spending generates income that induces further spending – or backwards (purchases of meals by visitors lead restaurants to buy additional inputs). The model thus captures what each sector purchases from every other sector so as to produce a rupee’s worth of goods or services. 

It is said in some quarters that tourism contributes to 24% of gross domestic product, which means that for every rupee received directly from a visitor, two rupees in sales are created inside the country through indirect and induced effects. However, a sales multiplier of 3.0 (3 times 8%) is far-fetched because tourists (and Mauritians) buy also imported products, and so all visitor spending does not accrue to Mauritius as final demand. For imported goods, only the retail or wholesale margins show up as final demand for the country, while the cost to the retailer of the good leaks out of the local economy. If a tourist buys a good for Rs 100, and the retail margin is 25%, the direct effect on final demand is only Rs 25. Overall, the economic impact equals the number of visitors times average spending per visitor times the capture rate (the spending that is captured by the local economy) times the multiplier. 

A 15% contribution of tourism to GDP would be a reasonable guess. Besides, economic impacts are assessed not only in terms of spending and sales, but also of foreign exchange income, tax revenues, capital expenditures (hotel development) and jobs. According to the Bank of Mauritius, tourism earnings for 2019 were 63 billion rupees, equivalent to 1.6 billion euros, representing 3.8 months of imports of goods. In 2018, tourists generated Rs 7 billion in revenue from taxes on products, one tenth of indirect tax receipts, over and above taxes paid by tourism operators and their employees. And for the past 10 years, gross fixed capital formation in accommodation and food service activities totalled Rs 65 billion. 

Edmund Burke once remarked that “the age of economists, sophists and calculators has arrived.” Yet, despite Covid-19, the age of tourism has not gone.

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