Tourism and Its Environmental and Economic Effects

Abstract

The main aim of this study was to explore the economic effects of tourism. In line with this objective, the paper investigated whether tourism contributes to the exploitation of the country’s natural resources, whether tourism corrects the imbalances in both the terms of trade and balances of payment, whether tourism creates many job opportunities and whether tourism contributes to the balanced growth of the economy.

The paper explored elaborately on the various forms of economic impact analysis with regard to tourism. The study relied on primary data using structured questions to explain the main objective, and the data was analyzed using statistical tools like SPSS, ANOVA, Pearson correlation, and regression analysis.

The results of the study portrayed how tourism is beneficial to a country. Apart from being the job creator for a great number of the population, tourism also necessitates the exploitation of natural resources; it corrects the imbalances in terms of trade and the balance of payment. In addition, the tourism sector is effective in growing the economy of a country. Other than the economic effects of tourism, there are also social effects that are drawn from the economic effects.

The social effects include expansion of roads, expansion of airports and building of hotels, construction of schools and hospitals, and development of other social amenities that are associated with tourism.

Introduction

In the next 10 years, as the world’s largest industry, the global tourism industry will grow by more than 4.4 percent annually, the number of international tourists and international tourism revenue is postulated to expand by between 4.3 percent and 6.7 percent annually; this is far much higher than the 3 percent of world’s wealth increasing rate (Burns and Bush 57). By 2020, tourist arrivals worldwide are expected to reach 1.6 billion passengers; the tourism industry revenue will increase to 16 trillion dollars, which is equivalent to 10 percent of the global GDP. At least 300 million jobs will be provided, accounting for 9.2 percent of the total global employment, further strengthening its position as the world’s largest industry (Burns and Bush 57).

According to the World Tourism Organization, the global financial crisis in the US and Europe crippled the tourism market in mature economies; tourism in emerging economies is still developing. The tourism industry has become the first industry to rebound in the international financial crisis. It contributes to reducing the negative impact of the crisis and plays an active role in the global economic recovery (Burns and Bush 57).

Take, for instance, the Chinese economy. Since the occurrence of the global economic crisis, China’s tourism industry continued to maintain the momentum of rapid development. Its international tourism ranked first in Asia in addition to a strong tourism growth domestically (Haley 462). There are at least 20,000 travel agencies, 14,000 star-rated hotels, 18,500 tourist attractions, and 1.350 million practitioners. In 2010, China’s domestic tourism revenue was 1.26 trillion Yuan (equivalent to £ 117.3 billion), increasing by 23.5 percent.

The tourism foreign exchange revenues were $45.8 billion, increasing by 15.5 percent. China’s total tourism income was 1.57 trillion Yuan (equivalent to £146.15 billion), increasing by 21.7 percent, equivalent to 3.94 percent of China’s GDP. The tourism industry, as a new economic growth point, has been further strengthened (Haley 462).

However, the data above only shows that China is a big tourist destination, not a destination with powerful competitiveness. China has a long way to go on the efficiency of resource allocation and competitiveness of tourism enterprises as compared with the other developed countries.

In terms of the overall economic benefits since the 1990s, there were two distinct characteristics: at the macro level, entailing that the industrial system and the size of the market are growing rapidly; at the micro-level, entailing that the total number of enterprises and incomes are increasing, the total profits and profit margins of tourism are declining even to negative profit margins and zero profit, thus, the tourism market as a whole mark a poor performance (Haspeslagh and Jemison 20). China’s tourism market performance is summarized in Table 1.1 below.

Table 1 Performance of China’s tourism market.

Research objectives

The general objective of this study was to determine the economic effects of tourism in China. In line with the general objective, the study examined the following specific objectives:

1. To determine the role of tourism in the utilization of the country’s natural resource;
2. To determine the effect of tourism on the country’s terms of trade;
3. To determine the effect of tourism on the country’s balance of payment;
4. To investigate the role of tourism in employment creation in the country;
5. To explore the role of tourism in the balanced growth of the country’s economy.

Research Hypotheses

In order to meet the above objectives, the following hypotheses were tested:

1. Ho₁: Tourism does not utilize the country’s natural resources;
2. Ho₂: Tourism cannot develop a country’s terms of trade;
3. Ho₃: Tourism has no effect on the country’s balance of payment;
4. Ho₄: Tourism will not create employment opportunities;
5. Ho₅: Tourism does not contribute to the balanced growth of the country’s economy.

Literature review

This section reviews the theories, both empirical and theoretical, that are closely linked to the economic effects of tourism.

The conceptual foundation of the analysis of the economic impacts of tourism

The analysis of the economic impacts of tourism is concerned with the approximation of the transformations of the economic activities in a particular region as a result of tourism activities. To various scholars in the field of tourism, economic impact analysis deals with the estimation of government revenue, the level of income, the level of employment, and the revenue generated from the import of the tourists’ expenditure.

The direct economic effects of tourism are the transformations that occur in the line-industries that are connected to the tourists’ activities; for instance, if a visitor checks him/herself in a hotel and pays $200, the payment is bound to directly increase the volume of sales in the hotel for that day. In this way, a direct sales effect is achieved as a result of the expenditure of the visitors. This payment will enable the hotel to hire more employees and pay them well (Haspeslagh and Jemison 22).

When the hotel makes purchases from suppliers who mainly are from industries that are connected to the activities of the hotel, an indirect economic effect of tourism is achieved, as the purchases made by the hotel will increase the volume of sales to the suppliers and also enable the suppliers to employ more attendants and give them nice remunerations (Kent 85). For instance, the hotel can buy bed sheets or blankets or foodstuffs from various industries so that they can provide quality services to their customers. The incomes gained or the jobs created from the sales of these products by the linked companies are the indirect economic effects generated from tourism.

Apart from direct and indirect economic effects, there are also induced economic effects. The induced effects are connected to the sales or the earnings received from the direct or indirect spending by the tourists. The induced economic effect of tourism is, in most cases, evident from the activities of the hotel employees or employees of catering companies, for instance, when they spend their salaries; they create more sales, jobs, and incomes. The induced expenditure can be lost partly through savings or through the importation of goods or services; when the losses occur, they are termed as leakages (Haspeslagh and Jemison 22).

The expenditure by tourists creates extra-economic effects to other sectors of the economy; as a result of this, the level of income and expenditure of the various households increases and a chain of spending and re-spending is initiated; this is referred to as the ‘multiplier effect.’ Multiplier effect depicts the ultimate output change in the economy in relation to the original visitor’s expenditure change; in addition, the multiplier effect is important to the assessment of the economic effects of tourism in the economy. When the multiplier effect is so large, it means that the impact of the visitors’ expenditure on the economy is also great (Neaime 19).

The multipliers entail the magnitude of all effects; it is more often than not the ratio of the total effects of tourism on the economy to the direct effects of tourism on the economy. For example, suppose the sales multiplier for an accommodation industry is 1.5 in a certain region, any visitor who spends $100 on accommodation will generate a total effect of $150 with regard to sales in that region; this translates to $100 direct sales effect to the accommodation industry and $50 secondary effect to the related industries that are in the region. Hence, the real economic impact of tourism lies on the expenditure of the visitors (Haspeslagh and Jemison 22).

Economic impact analysis

This analysis is important because it explores the long-term effect of tourism in the economic development of a country. These forms of economic analysis are related to each other and in many occasions, they tend to be confused with each other; thus, every kind of economic analysis is recognized by the issues it addresses and the type of model it is based on.

Various forms of economic impact analysis

Financial effect analysis

This type of analysis focuses on how tourism is effective in elevating the financial position of a country. It mainly checks out the patterns of expenditure related to tourism activities based in the region so as to point out the changes with regard to sales, incomes and tax remittances that come about as a result of tourism activities. The important methods that are used in this kind of analysis include a survey involving the expenditure of the visitors, a survey of the government economic statistics, a survey of the region’s economic models, a survey of the input-output models and a survey of the multipliers (Lundberg 19).

Fiscal impact analysis

This type of analysis focuses on whether the revenue that the government generates from activities related to tourism, taxes, or other sources will sufficiently finance the government’s expenditure. Therefore, fiscal impact analysis points out the various changes with regard to the government’s expenditure in connection to the amount of revenue collected or received from the government’s services (Lundberg 19).

Financial analysis

This type of analysis focuses on whether any extra profit can be realized from the tourism activities; for instance, it analyzes whether the revenue generated from the tourism activities will surpass the total cost used in those activities so as to make a substantial amount of profits. Financial analysis always covers the availability of capital to start up and also the availability of funds to finance the operating cost and other overhead costs. The analysis of finance for a small private enterprise is equivalent to the fiscal analysis of the impacts of tourism in the economy (Haspeslagh and Jemison 22).

Need analysis

This explores the changes in the number of tourists and also the changes in the determinants of tourism. It is very important as it ascertains whether the shifts in demand and supply will have an overall effect in the tourism sector. Using the demand analysis, it is possible to make a forecast concerning the qualitative or quantitative aspects of the visiting tourists through estimations. These forecasts are usually made paying attention to the past and current trends of tourist activities in the region.

In addition, these predictions are made through the use of a model that analyzes the various determinants that affect patterns of tourists’ visits and expenditure. These determinants include the size of the population, the levels of income, the nature of competition and the distance between the market and the accommodation area (Haspeslagh and Jemison 23).

Cost-benefit analysis

This kind of analysis focuses on the assessment of whether there exist other optional policies that provide the society with the largest package of benefits during a certain period of time. Therefore, a cost-benefit analysis plays the role of approximating the competence of the other optional policies by weighing their benefits in terms of cost over a period of time, so as to point out the best policy in overall. In order to achieve this, the cost-benefit analysis approach employs a wide array of methods; such methods include the travel cost technique and also the contingent valuation technique (Samuel and Douglas 78).

Feasibility study

This kind of analysis evaluates whether the selected project should be embarked on. In other words, it aims to point out whether the selected policy has good chances of succeeding once it is commenced. In many cases, feasibility study involves carrying out the financial analysis in order to investigate whether there are chances of success. A feasibility study that is conducted by the private sector is equivalent to conducting the cost-benefit analysis in the sector. The main difference between feasibility study and cost-benefit analysis is that in feasibility study the benefits and the cost go to individual people or individual business organization while in cost-benefit analysis, the benefits and the costs mainly go to the society as a whole (Samuel and Douglas 78).

Environmental impact analysis

This kind of analysis focuses on the assessment of the effects of the projects or policies selected on the environment. The projects or policies can affect the environment in various ways, for instance, cultural changes, physical changes, changes in the ecological system, social changes, etc.

The tourism industry

The tourism industry is majorly concerned with setting up enterprises or organizations that make it easy for people to travel from their normal environment to a different environment. The business of tourism can be divided into two levels, i.e. level one encompasses enterprises or organizations that cannot survive without the existence of tourism e.g. hotels, travel agencies, and airlines. Level two encompasses enterprises or organizations that would still thrive even without tourism existing; however, their presence would be of a diminishing form. Some examples of these enterprises include gift shops, taxis, rental car agencies, etc. (Samuel and Douglas 78).

Ecotourism is the most recent style in the tourism industry. It entails traveling that consists of both conservations of the natural environment and maintaining the interests of the people who live in that environment. There are significant differences between ecotourism and traditional tourism. Ecotourism focuses on measures that guarantee that the visitors do not engage in any activity that endangers the natural environment; in addition, ecotourism encourages sustainable tourism. Thus, any tourism activity that causes harm to the environment or diminishes the local cultures of the people in the environment is not attuned to ecotourism.

Effects of tourism on monetary and business expansion

Tourism is a source of foreign revenue for many economies. Many citizens also derive their wealth and earnings directly or indirectly from the tourism business. Therefore, for these countries to continue earning from tourism activities, they should ensure that the tourism activities should be friendly to the environment and sustainable. For other developing countries, tourism is quickly replacing agriculture as the main foreign exchange earner; hence, fostering for the diversification of their financial systems. The main motivation for a country to have a well-developed tourism sector is to maximize their foreign exchange earnings in order to maintain an efficient balance of payment (Burns and Bush 32).

The tourism sector is a sector that grows continuously, thus, it is always viewed as a sector that enables the country to earn much through the foreign exchange for over many years. International tourism experienced a major shock when the United States was attacked by terrorists on September 11, 2001. This affected international tourism both in the short run and in the long run. When terrorism is not controlled, international tourism is highly affected as the travelers have a minimal confidence to travel around and tour the world. The risks involved cannot be measured; hence, it becomes so difficult to quantify the effect of terrorism on tourism (Burns and Bush 32).

The model

The study used the linear regression model to estimate the variables for the linear regression. The multiple linear regression model measures the relationship between a dependent variable and many independent variables (Wagner 126).The variables included, exploitation of natural resources, improving terms of trade, improving the balance of payment, employment creation, and balanced economic growth. The researcher had the end goal of minimizing the deviations that occurred in the responses. The model took the following format:

Yi = β₁NR + β₂ToT + β₃BoP + β₄Emp + β₄EG + ε

• Where NR = exploitation of natural resources,
• ToT = improving terms of trade,
• BoP = improving the balance of payment,
• Emp = employment creation, and balanced economic growth, and
• EG = balanced economic growth, and
• ε = error term.

The variable ‘exploitation of natural resources’ is important to the study because it defines the direct benefit of tourism as depicted by the literature review. All the other variables (improving terms of trade, improving the balance of payment, employment creation, and balanced economic growth, and balanced economic growth) are relevant as they are the economic pointers of tourism. The signs of the coefficients of the variables in the linear regression model are expected to be positive as the literature review points out that they have a direct effect on the variables.

The data

The data and the results are summarized in the following section.

Results for economic effects of tourism

Respondents who were majorly employees in the tourism industry were issued with questionnaires in order to express their responses regarding the role of inbound tourism in China’s economy. The summary of the results is in Table 2. The results show that from the sample of 237 respondents, the mean for tourism’s role in the exploitation of natural resources is 113.20 with a standard deviation of 14.30.

From this computation, it can be deduced that many employees believe that tourism contributes to the exploitation of the county’s natural resources; this is indicated by the higher value of the standard deviation. In addition, the calculated arithmetic means for the role of tourism in improving terms of trade, the balance of payment and balanced economic growth are less than the calculated arithmetic mean for the role of tourism in creating employment. It is, therefore, evident that tourism is a major employment creator. Tourism creates employment (Mean=127.20, SD=15.30) than balancing the economic growth (Mean=114.35, SD=14.22), improving balance of payment (Mean=103.10, SD=10.80), and improving terms of trade (Mean=102.12, SD=11.30).

Table 2 Descriptive statistics for economic effects of inbound tourism.

Results of the economic impact analysis

Respondents who were majorly employees in the tourism industry were issued with questionnaires in order to express their responses regarding the role of tourism in the economy. The summary of the results is in Table 3.

The results show that the total environmental impact of tourism had a mean of 65.43 and a standard deviation of 19.24. With regard to the fact that an average level of impact is represented by a mean of 60, it is evident that tourism impacts the environment effectively. In addition, economic impact (mean=60.12, SD=13.02) stipulates that the tourism sector is full of great economic benefits. Fiscal impact (mean=62.41, SD=15.02) stipulates that tourism had an effect on the country’s expenditure or spending. Financial impact (mean=67.02, SD=17.41) stipulates that there are financial benefits associated with tourism.

Table 3 Descriptive statistics for economic impact analysis.

Regression results

The results in Table 4 are for the economic variables regressed against inbound tourism. The result found out that the multiple R-value is 0.602. The R-Square value of 0.361 indicates that 36.1% of the variables explained the dependent variable. The F-statistic (5.295) is statistically significant at 0.01 level; meaning that the economic variables significantly enlighten 36.1% of the variance in inbound tourism. Improvement of the balance of payment is the best predictor of inbound tourism as it has a beta coefficient value of -0.3189 and is statistically significant at the 0.01 level.

In addition, improvement of terms of trade, exploitation of natural resources and balanced economic growth are statistically significant at 0.05. The negative value of the beta coefficient of balanced economic growth indicates that inbound tourism has a higher effect in terms of economic growth in developed countries than in the developing countries. In the same manner, the negative beta value of the exploitation of natural resources coefficient shows that the natural resources are very important for inbound tourism.

Table 4 Regression results.

NOTE:

1. * = p<0.05
2. ** = p<0.01

Summary and conclusions

The general objective of this study was to determine the economic effects of tourism in an economy. In line with the general objective, the study examined the following specific objectives: to determine the role of tourism in exploitation of the country’s natural resource; to determine the effect of tourism on the country’s terms of trade, to determine the effect of tourism on the country’s balance of payment, to investigate the role of tourism in employment creation in the country, and to explore the role of tourism in the balanced growth of the country’s economy.

The objectives were satisfied by collecting and analyzing pertinent data using various statistical techniques. In line with the objectives, the following hypotheses were tested: tourism does not exploit the country’s natural resources; tourism has no impact on the country’s terms of trade, tourism cannot affect the country’s balance of payment, tourism does not create employment opportunities, and inbound tourism does not contribute to the balanced growth of the country’s economy.

With regard to the questionnaires issued to the respondents, the results revealed that tourism holds a significant weight in an economy. In addition, tourism promotes the utilization of the country’s natural assets.

All the various sectors of the economy develop and grow as a result of tourism related activities. It does this by facilitating the flow of income and resources between the sectors of the economy; combined with the multiplier effect, increased revenue, expansion of employment opportunities and increase in foreign direct investment and earnings from foreign exchange. All over the world, there is a wide perception that tourism contributes highly to the economic growth of a country; thus, making it play a significant role in the economy of the country. A well-developed tourism sector will boost the public pride of the residents of the country, improve the education system and professionalism, and improve earnings for the country.

The expenditure by tourists creates extra economic effects to other sectors of the economy; as a result of this, the level of income and expenditure of the various households increase. Due to this, a chain of spending and re-spending is initiated; this is referred to as the ‘multiplier effect’. Multiplier effect depicts the ultimate output change in the economy in relation to the original visitor’s expenditure change; in addition, the multiplier effect is important to the assessment of the economic effects of tourism in the economy. A greater multiplier effect means that the impact of the visitors’ expenditure to the economy is also great.

Experts in the industry thought that capital is the key to the success of Chinese tourism conglomeration. That means that capital management should be a mode of operation to form tourism groups. In order to develop tourism groups according to the market-oriented standards, the expansion ought to follow the market laws. First, conglomerate groups should implement an internal management strategy to improve management and enhance the effectiveness of internal allocation of resources. By expanding markets, companies can develop new products; adjust the organizational structure; improve management; increase productivity and control costs to integrate the internal resources under the capital structure.

Appendices

Appendix 1: Pearson correlation matrix for economic effects of tourism

NOTE:

1. * = p<0.05
2. ** = p<0.01

Appendix 2: Pearson correlation for economic impact analysis

NOTE:

1. * = p<0.05
2. ** = p<0.01

Appendix 3: Multiple regression results: tourism and economic variables

NOTE:

1. * = p<0.05
2. ** = p<0.01

Appendix 7: ANOVA Analysis results: tourism and economic variables

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