E X P L O R I N G T H E L E A K A G E E F F E C T I N T O U R I S M I N D E V E L O P I N G C O U N T R IES

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1 DIPLOMA THESIS INTERNATIONAL UNIVERSITY OF APPLIED SCIENCES BAD HONNEF BONN TOURISM MANAGEMENT E X P L O R I N G T H E L E A K A G E E F F E C T I N T O U R I S M I N D E V E L O P I N G C O U N T R IES - I S S U E S A N D I M P L I C A T I ONS- BY LEA LANGE SUPERVISOR: PROF. DR. CLAUDIA SIMONS-KAUFMANN DATE OF SUBMISSION: DECEMBER 28, 2011

2 Acknowledgements A number of people have helped significantly in the realization of this thesis. Firstly, I would like to thank the GIZ for instigating this interesting topic for my diploma thesis. Special thanks go to Manuel Junck for his advice and help. I would also like to thank my tutor, Prof. Dr. Claudia Simons-Kaufmann, who has been of particular assistance. I also appreciate the time and efforts spared by all interview partners particularly Matthias Beyer, who suggested various valuable contributions for the completion of my thesis.

3 Abstract Claims about the minimal economic benefits involved with tourism in developing countries are often backed up with high leakage rates. These claims are particularly centered on forms of mass tourism. However, confusion and incongruence persists whether the term leakage depicts only the profits a destination cannot retain or also those that accrue at earlier stages of the tourism value chain, which never reach the destination. This results in a wide range of incomparable leakage rates. An in-depth analysis of relevant literature and three expert interviews provide clarification and objectification on the subject issue. A case study on two All-Inclusive resorts in the Dominican Republic discloses a relatively low import propensity of food products (< 25%) and strong linkages to the local economy. The overall findings reveal irregularities and problems among and in measuring methods, which are based on different denominators. The significance and relevance of leakage varies with its definitions. Further, insufficient contextualization in terms of the economic capacity of a destination and the lacking comparison of retained tourism revenue to other sources of income, diminish the significance of leakage as a representative indicator for the economic performance of tourism in developing countries. ii

4 Table of Contents 1. INTRODUCTION INTRODUCTION TO THESIS RATIONALE FOR THE TOPIC AIMS AND OBJECTIVES RESEARCH METHODOLOGY DISSERTATION OUTLINE LITERATURE REVIEW INTRODUCTION TO THE LITERATURE REVIEW TOURISM AND ITS ECONOMIC RELEVANCE A Definitional Discussion of the Tourism Industry The Tourism Value Chain The Economic Relevance of Tourism in Developing Countries The Multiplier Effect in Tourism Economic Impacts with Mass and Small Scale Tourism THE LEAKAGE EFFECT IN TOURISM A Definitional Discussion on Leakage Why Leakage Occurs in Tourism in Developing Countries Leakages in Other Economic Sectors Diminishing Leakage by Linking Tourism to the Local Economy Linkages Linkages to Food APPROACHES TO MEASURE LEAKAGES Scale and Methods Tourism Satellite Accounts (TSA) Determining the Tourism Multiplier Input-Output Analysis (I-O Model) The Value Chain Analysis (VCA) So Far Identified Problems with Capturing Leakage The Resulting Lack of Reliable Empirical Data THE SIGNIFICANCE OF LEAKAGE RATES Neglected Aspects in the Interpretation of Leakage Rates The Relevance of Leakage Rates CONCLUSION ON LITERATURE CASE STUDY THE INTERACTION OF ALL-INCLUSIVE RESORTS IN THE DOMINICAN REPUBLIC WITH THE LOCAL ECONOMY TOURISM IN THE DOMINICAN REPUBLIC FINDINGS METHODOLOGY RESEARCH METHODS Secondary Research: Literature and Secondary Data Primary Research: Expert Interviews LIMITATIONS AND BIAS iii

5 5. DISCUSSIONS OF PRIMARY AND SECONDARY RESEARCH FINDINGS THE SIGNIFICANCE OF LEAKAGE IN PRACTICAL FIELDS OF WORK DEFINITIONAL PERCEPTIONS OF LEAKAGE WHY LEAKAGE IS SUCH A CRITICAL ISSUE IN TOURISM THE INTERRELATION OF LEAKAGE AND FORMS OF TOURISM LINKAGES AND THE POTENTIAL TO REDUCE THE LEAKAGE EFFECT ISSUES WITH MEASURING LEAKAGE THE INTERPRETATION OF LEAKAGE RATES AND ITS RELEVANCE CONCLUSION REFERENCES APPENDICES APPENDIX A: INTERVIEW QUESTION OUTLINE (GERMAN) APPENDIX B: RAW DATA FOR HOTEL I APPENDIX C: RAW DATA FOR HOTEL II APPENDIX D: INTERVIEW SABINE MINNINGER APPENDIX E: INTERVIEW MATTHIAS BEYER APPENDIX F: INTERVIEW CHRISTIAN CARLÈ List of Tables TABLE 1: OBJECTIVES AND RESEARCH METHODS... 4 TABLE 2: TYPES OF LEAKAGE TABLE 3: ISSUES WITH LOCAL FOOD SOURCING TABLE 4: IRREGULARITIES IN COMPOSING LEAKAGE FIGURES TABLE 5: PROBLEMS WITH THE INTERPRETATION OF LEAKAGE FIGURES TABLE 6: BASIC INFORMATION HOTEL I TABLE 7: BASIC INFORMATION HOTEL II TABLE 8: INTERVIEW QUESTIONS AND LINK TO OBJECTIVES Table of Figures FIGURE 1: THE TOURISM VALUE CHAIN... 9 FIGURE 2: THE TOURISM MULTIPLIER AND LEAKAGE FIGURE 3: CHARACTERISTICS OF MASS AND ALTERNATIVE TOURISM FIGURE 4: LEAKAGES IN TOURISM FIGURE 5: AN OVERVIEW OF RESEARCH APPROACHES IN THE LITERATURE FIGURE 6: LEAKAGE IN RELATION TO DIRECT AND INDIRECT EFFECTS FIGURE 7: IMPORT PROPORTION OF TOTAL ANNUAL EXPENDITURE PER PRODUCT CATEGORY HOTEL I FIGURE 8: PERCENTAGE OF IMPORTS PER PRODUCT CATEGORY HOTEL I FIGURE 9: EXPENDITURE COMPARISON BETWEEN LOCAL AND IMPORTED FOOD AND BEVERAGE HOTEL I FIGURE 10: IMPORT PROPORTION OF TOTAL ANNUAL EXPENDITURE PER PRODUCT CATEGORY HOTEL II FIGURE 11: PERCENTAGE OF IMPORTS PER PRODUCT CATEGORY HOTEL II FIGURE 12: EXPENDITURE COMPARISON BETWEEN LOCAL AND IMPORTED GOODS FOR HOTEL II iv

6 List of Abbreviations CBT EED GIZ LDC ODI OECD UNEP UNSC UNCTAD UNWTO SIDS TSA VCA Community Based Tourism Evangelischer Entwicklungsdienst e.v. Deutsche Gesellschaft für Internationale Zusammenarbeit Least Developed Countries Overseas Development Institute Organization for Economic Co-operation and Development United Nations Environmental Program United Nations Statistical Commission United Nations Conference on Trade and Developments United Nations World Tourism Organization Small Island Developing States Tourism Satellite Accounts Value Chain Analysis v

7 1.1 INTRODUCTION TO THESIS 1. INTRODUCTION Globally, tourism is a $3 billion a day business that all countries at all levels of development can potentially benefit from. With growing developing country participation, tourism has become a major contributor to their development and growth. (UNCTAD, 2010:1) Recent estimates of the United Nations predict the number of international tourists to increase by 43 million tourists per year, equating to an average growth of 3.3% annually (United Nations, 2011). While the majority of international tourists originate from developed countries, 40% of all international trips end in a developing country (UNCTAD, 2010). Unmistakably, tourism continues to grow, particularly in developing countries, and alongside it grows the need to maximize the economic benefits and to minimize the negative impacts for the host regions. This need is reflected in the efforts of engaging in sustainable tourism development and particularly, in developing countries, the lacking sustainability of the tourism industry is a frequently discussed issue. Economic sustainability is concerned with aspects such as local retention of tourism expenditure, high quantity and quality of local employment through tourism (UNEP/UNWTO, 2005) and the integration of the general economy into tourism supply networks (Widmann, 2004). However, criticism suggests that tourism only leaves minimal economic benefits in host countries due to high levels of profit leakage, particularly with forms of mass tourism (Mitchell& Ashley, 2007; Lacher & Nepal, 2010). In this context, developing countries are often represented as the losers, who are exploited by tourism and multinational corporations (Tourism Concern, 2008; Plüss, 2008). In fact, a lot of disapproval on tourism in developing countries is circled around claims that money does not even reach the destination or that most of the profits flow out of the destination again, (Mitchell& Ashley, 2007). Such claims are often backed up with high profit leakages rates. A foregoing definition of the term leakage is required in order to proceed with the introduction to this thesis. However, even in academic and scientific research, there is confusion on what leakage actually comprises. Consequently, diverging definitions of leakage circulate and resulting incongruent approaches to measure leakage lead to confusion in handling leakage figures. Therefore, a substantial part of the investigation on leakage in this research drifts into the debate of a lacking standard definition of leakage. It seems most appropriate to base the underlying definition for this thesis on the few aspects of leakage, 1

8 which all researchers agree on. This depicts leakage as the part of foreign exchange earnings that fails to be retained in the tourist receiving destinations, because of costs arising for tourism-related imported goods and services and the repatriation of profits due to the operation of foreign enterprises (UNWTO, 1995; Gollub et al., 2003; Lejarraja& Walkenhorst, 2007; Mitchell& Faal, 2008; UNCTAD, 2010). This definition only contains elements that are considered in all definitions and neglects various other factors the above cited authors consider as part of leakage. As a result, literature suggests that the real significance of leakage rates in tourism is yet to be discovered (Sandbrook, 2010) and this thesis aims to address this very research gap. 1.2 RATIONALE FOR THE TOPIC Since the GIZ instigated the topic for this thesis and supports the research in terms of data, the enterprise will be introduced shortly in the following. The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH (formerly GTZ) is a federal enterprise supporting the German Government in the field of international cooperation for sustainable development. Its aim is fostering capacity development to improve the living conditions in developing countries sustainably. To achieve this aim, the GIZ engages in the cooperation with developing countries covering issues regarding political, ecological, economic and social development. (GIZ, 2011). The sector project Tourism and sustainable Development engages in development cooperation in tourism with the aim to create awareness on the importance of tourism as major driver for poverty reduction, local economic development and environmental protection, among development agencies, the public and the private sector (Lengefeld, 2007). The GIZ sector project Tourism and sustainable Development has engaged in research regarding the economic performance of various forms of tourism (ranging from All-Inclusive tourism (AI tourism) to Community-Based Tourism (CBT)). The main aim of the GIZ in this regard is to come up with reliable facts and data in order to reach an objectification of the discussion on leakage. The discussions on this topic are highly controversial and in line with the aim of the GIZ, this thesis shall investigate the core of the leakage effect in an objective manner to provide clarification in the muddled claims on leakages from tourism in developing countries. 2

9 1.3 AIMS AND OBJECTIVES This thesis aims to explore the leakage effect in tourism in developing countries by elaborating the problems in defining, capturing and interpreting leakage rates in order to finally draw conclusions on the relevance of leakage. In short, the resulting underlying research question of this paper is: How representative are leakage rates as an indicator for the economic performance of tourism in developing countries? The following objectives have been set in order to achieve the research aim. 1 st Objective: To examine different definitions of leakage 2 nd Objective: To determine reasons for the occurrence of leakage and stereotypical perceptions on the interrelation between different forms of tourism and leakage 3 rd Objective: To investigate the potential to diminish the leakage effect with particular emphasis on linkages to food sectors by examining the import propensity of two exemplary hotels 4 th Objective: To expose the irregularities and problems regarding the measurement, comparison and interpretation of leakage rates 5 th Objective: To develop a set of conclusions on the relevance of leakage rates as an indicator for the economic performance of tourism and recommendations for the handling of leakage rates 3

10 1.4 RESEARCH METHODOLOGY Primary and secondary research was conducted in order to achieve the aim and meet the objectives of this thesis. The table below (Table 1) describes the research methods used to meet the respective objectives. TABLE 1: OBJECTIVES AND RESEARCH METHODS OBJECTIVE Objective 1 Objective 2 Objective 3 Objective 4 Objective 5 RESEARCH METHOD By secondary research: reviewing relevant literature By primary research: employing the results of three expert interviews By secondary research: reviewing relevant literature By primary research: employing the results of three expert interviews Partially by including a case study based on secondary data By secondary research: reviewing relevant literature By primary research: employing the results of three expert interviews By including a case study based on secondary data Mainly by secondary research: reviewing relevant literature Partially by primary research: employing the results of three expert interviews By critically analyzing and comparing primary and secondary research findings Source: Author 4

11 1.5 DISSERTATION OUTLINE In order to reach the main research aim, this dissertation deals with various contents and methods. Building on this, the six different chapters have been arranged as follows: Chapter 1 introduces and justifies the topic and outlines the aim and objectives and the research methods chosen to achieve them. Chapter 2 reviews and critically analyses relevant literature comprising the leakage effect in tourism. Chapter 3 presents a case study based on secondary data supplied by the GIZ screening the linkages of two All-Inclusive hotels in the Dominican Republic to the local economy in particular regards to food. Chapter 4 explains the research methods employed to achieve the aim and objectives and exposes limitations to the findings of this thesis. Chapter 5 critically contrasts secondary and primary research findings. Chapter 6 draws conclusions from the preceding analysis and deducts relevant recommendations for the handling of leakage rates. 5

12 2. LITERATURE REVIEW 2.1 INTRODUCTION TO THE LITERATURE REVIEW This literature review provides a detailed and critical analysis of the literature embracing the leakage effect in tourism. The literature review aims to position the chosen research question into its wider context and demonstrates the theoretical framework for this study as key findings serve as a foundation for the primary research. The literature review covers four main themes: tourism and its economic relevance in developing countries, the leakage effect in tourism, approaches to measure leakage and the significance of leakage figures. The leakage effect is a complex phenomenon and in order to examine its relevance, various underlying subject areas need to be elaborated in advance. A discussion on the scope of the tourism industry and the structure of the tourism value chain is followed by the elaboration of the economic relevance of tourism in developing countries and the tourism multiplier effect. Additionally, relevant stereotypical assumptions on the correlation of small and mass scale tourism and economic impacts are reviewed. The first chapter (Chapter 2.2) thereby serves to establish a contextual basis for the following chapters on leakage. Subsequently, the leakage effect in tourism is investigated comprehensively. The leakage effect in tourism is approached by a definitional discussion on leakage and a summary of the reasons for its occurrence. This is followed by the discussion on the potential to link tourism to the general economy to diminish leakages, with particular emphasis on linkages to food sectors. Approaches to measure leakages are critically reviewed and problems with capturing leakage are deducted from the discussed aspects. The resulting lack of reliable empirical data is illustrated followed by neglected aspects in the interpretation of leakage rates. Finally, first conclusions on the relevance of leakage rates as an indicator for the economic performance of tourism in developing countries will be drawn from the reviewed literature. 2.2 TOURISM AND ITS ECONOMIC RELEVANCE A Definitional Discussion of the Tourism Industry The tourism industry demonstrates the framework for this thesis and in order to explore tourism s economic impacts and its measurement, the discussion on the extent of the tourism industry is picked up introductorily. Tourism is a global economic activity and a 6

13 multidisciplinary subject embracing disciplines ranging from geography and ecology to economics, transport studies and hotel and restaurant administration to even more abstract subjects such as psychology and anthropology (Page& Connell, 2006:8). There is no universally agreed tourism perspective and the nature and core of tourism still remains a disputed subject (Smith, 1994; Theobald, 2005; Page& Connell, 2006). Whether tourism is a business, an industry, a service or just a phenomenon depends on the point of view from which tourism is examined and defined (Weaver& Lawton, 2002; Page& Connell, 2006; Mitchell& Ashley, 2010). Often, tourism is referred to as an invisible export industry with no tangible product (Page& Connell, 2006; Sadler& Archer, 1975) or a multi-product industry that encompasses a number of different economic activities (Wall& Mathieson, 2006:119). An industry in turn is distinguished by a generic product and production process. For agriculture, for example, the generic products are food and fiber; for the automobile industry it is personal transportation (Smith, 1994:582). As tourism lacks a single production process, a generic product and a locationally confined market, it cannot be depicted as an industry in the conventional sense (Tucker and Sundberg, 1988 cited in Smith, 1994:583). Lejárraga and Walkenhorst (2007:3) provide a more suitable definition by describing tourism as an economic sector that is not defined by a single commodity, but more a cluster of interrelated industries. In the 1993 international standard system of national accounts (SNA) tourism is not recognized as a clearly identifiable sector of the economy (Mitchell& Ashley, 2010:8). Resulting from the definitional issue above, there are also incongruent opinions on how far tourism ranges. According to Weaver and Lawton (2002:47) the tourism industry may be defined as the sum of the industrial and commercial activities that produce goods and services wholly or mainly for tourist consumption. However, this definition neglects the purchase of goods and services, which are not produced wholly or mainly for tourists, because tourists also consume goods and services that are not designed for their consumption. Smith (1994:592) provides a helpful example illustrating the difficulties of defining the scope of the tourism industry: At holiday destinations meals produced in restaurants are consumed by both, locals and tourists. Tourists thereby turn a restaurant meal into a tourism product and it becomes part of their tourism experience. From an empirical and statistical perspective the value of the prepared meals accounts as an output of the foodservices industry. However, as a share of the foodservices output is converted into a tourism product, parts of the sales would need to be allocated to the tourism industry. Consequently, from a broader perspective tourism 7

14 encompasses a multiplicity of economic activities spanning the agricultural, manufacturing, and services sectors including foods and beverages, furniture and textiles, jewellery and cosmetics, and transportation and communication services, among many others (Lejárraga& Walkenhorst, 2007:3). Evidently, tourism is an economic activity which is a composite of goods and services surrounded by rather unclear boundaries and therefore, a lot of spending of tourists cannot be traced and recorded (Mitchell& Ashley, 2010:8). This issue of lacking universal definitions and indistinct limitations of the scope of tourism is where the impreciseness of defining and measuring leakage rates starts. Since tourism, as an industry, is not consistently bounded, official tourism statistics remain contested (Theobald, 2005) and as these represent the basis to measure economic impacts, the results may be inconsistently based on different denominators. In order to systematically grasp tourism s economic scope, the tourism value chain needs to be examined THE TOURISM VALUE CHAIN The tourism value chain can be described as a continuum of related economic activities associated with tourists taking place in the tourist-generating as well as the tourist destination region (Gollub et al., 2003:25). The tourism value chain also illustrates how benefits outside the tourism sector are created through linked products, supporting industries, complementary markets and distribution channels (Gollub et al., 2003). Therefore, the flow of tourist expenditure can be traced along the value chain and helps identifying at which stages money flows outside or out of the local economy. This explains why the tourism value chain is a relevant framework for examining the leakage effect. As tourism is a global industry, it is in the nature of the tourism value chain that tourism components are spread across different regions, countries and continents and consequently, profits accrue at various stages. Yet, the allocation of profits amongst the geographic regions is repeatedly discussed, especially since it is often unevenly distributed amongst poor and rich countries along the value chain (UNCTAD, 2010). The portion of profits accruing outside the destination region is depicted as leakage by various researchers (Diaz, 2001; Gollub et al., 2003; UNCTAD, 2010). However, this facet of leakage is controversially discussed and will be investigated in more detail at a later stage of this thesis. Figure 1 shows an exemplary tourism value chain aligned along consequent economic activities of a tourist consumer. 8

15 FIGURE 1: THE TOURISM VALUE CHAIN Source: Gollub et al., 2003:23 9

16 As apparent in Figure 1, holiday planning only involves goods and services from the tourism generating region. However, the figure does not directly indicate that parts of the payments to travel agencies go to the destinations. The UNCTAD (2010) explains the procedures and transactions in the tourism value chain: Prospect tourists buy at least one component -inevitably the transport to the chosen destination- prior to their departure. Often, entire holiday packages are purchased at home including accommodation and excursions. These packages are sold through travel agents and tour operators, which act as intermediaries in selling holidays to other countries. In the natural course of doing business like any intermediary, tour operators and travel agencies retain a part of the customer s payment, which never reaches the destination s economy. A portion of the profit may also go to international airlines and international hotel chains. Generalizations are difficult to draw, but more advanced economies usually retain more income than less developed ones (UNCTAD, 2010). However, considering that production and trade are globalized processes, no destination could capture the entire benefits of the tourism value chain (Gollub et al., 2003; Mitchell& Ashley, 2007; Mitchell& Faal, 2008). Since the leakage effect, the core of this research, is exclusively criticized in the context of tourism in developing countries, the economic relevance of tourism in developing countries will be examined in the following THE ECONOMIC RELEVANCE OF TOURISM IN DEVELOPING COUNTRIES Tourism is a major contributor to the world economy (Huybers, 2007) and accounts to the top five export earners in 150 countries of the world; in 60 countries, tourism even ranks highest (UNCTAD, 2010:2). It can bring impending economic benefits such as foreign exchange, employment and local economic and social progress. In order to discuss the impacts of tourism in developing countries, some definitions have to be clarified in advance. Developed, developing and least developed countries classify as the following: Developing countries are, according to the World Bank classification, countries with low or middle levels of GNP per capita (with the exception of 5 high-income developing economies) (Soubbotina, 2004). Least developed countries can be classified as low-income countries where, according to the United Nations, economic growth faces long term impediments - such as low human resources development (Subboutina, 2004: 69). Opposed to developing countries developed countries are industrially advanced, with and a high standard of living. However, only 20% of the world s population lives in developed countries (Soubbotina, 2004). A distinctive differentiation between 10

17 developing, less or least developed countries would obscure the handling of literature employed. Therefore, for this dissertation, the expression developing countries, as termed by Soubbotina (2004), refers to all nations not considered as developed. In 2008, 40% of all international trips ended in a developing country (Mitchell& Ashley, 2010). The UNWTO believes tourism to be of extreme importance in economic growth, foreign exchange, investment and job creating sectors in developing countries (Torres, 2002; Lipman, 2005:69; UNCTAD, 2010). As the UNCTAD (2010:4) states tourism accounts for 7 per cent of their goods and services exports and 45 per cent of their commercial services exports, making it developing countries largest single services export. For LDCs only, both of these figures were higher, at 9 and 65 per cent respectively. [ ]. In 23 of the 49 of the LDCs, international tourism is among the top three foreign exchange earners, and for 7 it is their single largest revenue earner, inducing significant incomemultiplier effects and progress in terms of national income. By boosting per capita income and human capital, tourism has been a decisive factor supporting graduation from LDC status for countries such as Cape Verde, Maldives and Samoa. The Caribbean countries, for instance, predominantly live from international tourism (Clayton, 2009) and Africa s share in global tourism is much larger than its average share of world trade (Mitchell& Ashley, 2010:7). Taleb Rifai, the UNWTO secretary depicts tourism as the most effective tool to combat poverty and advance development (Imlinger, 2009). Tax revenue from tourism benefits the country at national and local level as the government can use it to invest in health, education and infrastructure development (WTO, 2002). Furthermore, tourism brings the consumers to the product and thereby, opens up significant export opportunities for developing countries (Roe et al., 2004). At the same time, there are also significant amount of drawbacks with tourism-lead economic development and in order to get a true picture on tourism s economic impacts the positive and the negative sides have to be considered. Wall and Mathieson (2006:118) derived from several studies from multiple authors that there is no linear relationship between the growth of tourism and the economic benefits to the destination. In the Dominican Republic, for example, the amount of people living below the poverty line increased while tourism experienced noteworthy growth (Suchanek, 2000). A common criticism on tourism is that a great proportion of the benefits derived from tourism leaks to foreign countries (Hemmati& Koehler, 2000; Telfer& Wall, 2000; Page& Connell, 2006; Sandbrook, 2010), which leaves insignificant profits with the host community and only reaches a small number of people (Britton, 1982). Evidently, there are very adverse opinions on 11

18 tourism and its contribution to economic development. Sandbrook (2010) summarizes a number of widely used arguments in opposition to tourism-lead economic development, which are all closely linked to each other. Tourism is criticized to involve a high level of external control and consequently, local communities lack influence on tourism development (Scheyvens, 1999; Tosun, 2000). Concurrent to the lack of involvement and control, economic dependency on richer nations persists, which undermines the autonomy of the poorer countries (Britton, 1982; Maurer, 1992; Page& Connell, 2006). This is also referred to as the dependency theory, which roots back to colonial power structures (Lehman, 1979 cited in Britton, 1982). The intrusion of industrialized nations in the tourism industries of developing countries is also resentfully referred to as neocolonial domination (Wall& Mathieson, 2006:138). Economic dependency on tourism is also a frequently criticized aspect in the context of tourism being highly vulnerable to change. For countries, to which tourism demonstrates their biggest source of income, a slump in tourist arrivals can be devastating (Dwyer, 2005; Page& Connell, 2006; Wall& Mathieson, 2008). Nevertheless, tourism s potential to advance economic development cannot be negated (Imlinger, 2009). Unlike products of other export industries, the tourism product is a highly differentiated one, which is linked to numerous sectors of the national economy and thereby holds multipliable potential (Sadler& Archer, 1975). The more tourism is embedded into local economic structures, the more can the initial tourist expenditure circulate in the local economy. The tourism multiplier effect will be explained in the following THE MULTIPLIER EFFECT IN TOURISM Economic growth through tourism is predominantly driven by the multiplication of unit spending through different sectors of the local economy (Lejárraga& Walkenhorst, 2007). Once a tourist spends money on a commercial tourist product, the money enters a cycle stimulating more indirect revenues within the economy. This ongoing circulation of expenditures within the destination is referred to as the tourism multiplier effect (Weaver& Lawton, 2002). Leakage is a fundamental concept to the multiplier as in the successive circulation of money, leakages occur at each round (Weaver& Lawton, 2002). The tourism multiplier is a statistical expression of how much income or employment (depending on whether one is referring to income or employment multipliers) is generated by a certain amount of tourist spending (Page& Connell, 2006:353). Fletcher and Archer (1991 cited in Wall& Mathieson, 2006:110), pioneers in the application of the multiplier theory to 12

19 tourism, defined multipliers as the ratio of direct, indirect and induced changes in an economy to the direct initial change itself. Accordingly, the multiplier measures three dimensions: The effects of direct, indirect and induced tourism spending (Wall& Mathieson, 2006). These have been described similarly by several researchers (Page& Connell, 2006; Wall& Mathieson, 2006; Lejárraga& Walkenhorst, 2010) as follows: The direct effects of tourism on the economy refer to the direct spending of tourists on tourism-related goods or services. Indirect impacts comprise all tourists spending on non-tourism-related goods or services. Spending by tourist establishments (e.g. Hotels) in non-tourist sectors such as food and beverage, equipment, merchandise and salaries also accounts as indirect impact. Induced effects are a slightly abstract impact of tourism as they emerge from the workers in the tourism industry who re-spend their income on goods and services in the general economy. Whereas direct effects in the tourism sector are often obtained by hotel or restaurant owners, who are often wealthy locals or internationals, the income generated through indirect effects trickles down to the lower income layers of the economy (Mitchell& Ashley, 2010:72). In Figure 2, the successive circulation of direct spending and the resulting indirect and induced spending is visualized. Figure 3 also shows that a portion of revenues cannot be retained by the local economy. This FIGURE 2: THE TOURISM MULTIPLIER AND LEAKAGE Source: Weaver& Lawton, 2002:247 13

20 Figure 2 also shows that a portion of revenues cannot be retained by the local economy. This portion is lost through the purchase of imports by suppliers, hotels and also through workers who respend parts of their income on imported goods or services or save it. Therefore, the revenue lost to the multiplier effect, depicted in Figure 2 is, in other words, leakage from the local economy. Criticism on tourism s role in developing countries and involved leakage rates particularly circles around the form and extent of tourism as tourist expenditure and involved leakage rates can vary vastly. Therefore, observations and studies in the literature about the relationship of leakage and forms of mass and small scale tourism will be investigated in the following ECONOMIC IMPACTS WITH MASS AND SMALL SCALE TOURISM In the debate on tourism s economic impacts on destinations, forms of mass and small scale tourism often become subject of discussion. The type and extent of tourism is often coupled with the degree of leakage and forms of mass tourism are commonly associated with high leakage (Hampton, 1998; Weaver& Lawton, 2002). Therefore, at this point it shall be investigated whether the believed correlation of type an extent of tourism with economic impacts and leakage can be confirmed. At a national level, the fluctuation of leakage with mass and small scale tourism can barely be captured. When examining leakage at a hotel or at a tourism package basis, the retained revenue can be examined. Figure 3 stereotypically presents widely perceived prejudices of the economic implications of mass and alternative tourism, where alternative tourism summarizes all forms of small scale tourism (Weaver& Lawton, 2002). In this simplified illustration the degree of local involvement and control is depicted as subject to mass or small scale tourism. Further, mass tourism dominates the local economy, fails to create internal linkages to the economy and high leakage rates and a low multiplier effect are the result (Weaver and Lawton, 2002:359). Mass tourism accommodation is concentrated in tourist areas, is only large scale and not locally owned, but run by large corporations. 14

21 FIGURE 3: CHARACTERISTICS OF MASS AND ALTERNATIVE TOURISM Source: Weaver, 1998 cited in Weaver& Lawton, 2002:360 Evidently, with mass tourism there are commonly shared negative associations and high leakage rates are usually associated to be coupled with mass and luxury tourism (Hampton, 1998; Weaver& Lawton, 2002). Considering the quantity, high quality and diversification of products and services demanded for these forms of tourism this assumption seems plausible (Diaz, 2001). Indeed, star hotels, which are more commonly associated with mass tourism, have a negative image as identified below. 15

22 Star hotels in developing countries have been presented as having minimal ties to the local economy. With respect to food supply, it is often cited that due to their need for a secure food supply system with high quality products, or for strong links to multinationals, star hotels often import food (Telfer& Wall, 2000:441) Nonetheless, this is an assumption that is generalized and repeated in the literature without sufficient proof (Telfer& Wall, 2000). In fact, studies engaging with higher class hotel supply chains have revealed that a surprisingly little amount of food is imported (Mitchell& Ashley, 2010:95). Especially, All-Inclusive Tourism is subject to criticism; as authors such as Suchanek (2000) argue that more than 50% of the profit of All-Inclusive hotels is captured by foreign hotel owners in other countries. Moreover, discretionary tourist spending (e.g. shopping, local transport, cultural activities etc.) is limited as tourists spend the majority of their time within the resort (Suchanek, 2000). Nevertheless, Mitchell and Faal (2008:viii) report that experience from the Caribbean suggests that the procurement policies of AI resorts can have a positive local economic impact, which could potentially off-set the loss of tourist outof-pocket expenditure. However, this is not automatic and is reliant upon on the commitment and competence of resort management to the local economy and poor people within it. In Weaver and Lawton s stereotypical representation small scale tourism is the idealized form of tourism. This is confirmed by Robinson and Novelli (2005:1), who claim that the niche tourism approach appears to offer greater opportunities and a form of tourism that is more sustainable, less damaging and, importantly, more capable of delivering high-spending tourists. Identical to alternative small scale tourism, niche tourism involves a limited number of tourists in a more sustainable manner (Robinson& Novelli, 2005). Community-Based Tourism, for example, is gaining increased credit as a highly sustainable form of tourism (Robinson& Novelli, 2005). However, also small scale tourism is a subject of criticism. As put forward by Diaz (2001:9) lowleakage tourism can also equate to low-income tourism, resulting in lower total income and therefore, limiting the possibilities for expansion and development by other sectors of the receiving country s economy. Weaver and Lawton (2002:367) utter that Ecotourism, for instance, aims at maintaining a region at a primitive, underdeveloped state for a more authentic experience for tourists. Locals, however, may prefer large-scale tourism with more economic benefits (Weaver& Lawton, 2002:367). Summarized it can be said though, that mass scale tourism undergoes more criticism than small scale tourism. However, it appears that generalizations are made without sufficient proof (Telfer& Wall, 2000) and Weaver and Lawton (2002) argue that large and small scale tourism cannot be 16

23 stereotyped as good or bad; it very much depends on the circumstances at the destination. As the UNWTO (2004) confirms, it should be kept in mind that sustainable tourism development guidelines and management practices are applicable to all forms of tourism in all types of destinations, including mass tourism and the various niche tourism segments. It may be a more feasible approach to judge tourism not by its scale, but more so by its nature. For example, Backpacker tourism, which can take place at a small or mass scale, demands simple and cheap services involving less capital-intensive infrastructure, which in turn facilitates local ownership and management of accommodation, transport and restaurant facilities (Hampton, 1998). A crucial factor in how successful tourism is for the local economy, be it mass or small scale, is how well the tourism industry is interlinked with the local economy. The less it is interlinked, the higher may be the leakage through the purchase of imported goods and services. After having established a contextual basis, now the leakage effect in tourism has to be investigated thoroughly. Its definitions, the reasons for its occurrence, its measurement methods and its significance and relevance will be analyzed in the following 2.3 THE LEAKAGE EFFECT IN TOURISM On the basis of high levels of reported leakage, critics of international tourism have claimed that the industry does not leave significant revenue in host economies (e.g. Brown, 1998; Mbaiwa, 2005) (Sandbrook, 2010:126). Indeed, if revenue leakage is high benefits from tourism can be severely diminished (UNCTAD, 2010). However, the term leakage is used in a variety of contrasting ways by tourism researchers (Mitchell& Ashley, 2010:79). Therefore, in the following definitions of leakage are gathered and contrasted A DEFINITIONAL DISCUSSION ON LEAKAGE The leakage effect in tourism is controversially discussed in publications and academic literature. Reviewing literature on tourism s economic impacts, it seems that there is confusion among economists and campaigners criticizing tourism with what the term leakage essentially comprises (Mitchell& Ashley, 2010:79). Sadler and Archer (1975:181) already criticized in 1975 that a great proportion of much needed foreign exchange earnings from tourism leaks out of the economy again; however, up until today, there is no standardized definition of leakage. As depicted by Sandbrook (2010:125) leakage of tourism revenue has many definitions, but is broadly concerned with the failure of tourist spending to remain in the destination economy, however defined. Lejárraga and 17

24 Walkenhorst (2007:31) define leakage as the portion that leaks into imports and pays foreign factors of production. This outflow can be caused by money spent on imported equipment, materials, capital and other imported consumer goods or services to provide for the requirements of international tourists (Page& Connell, 2008). Hemmati and Koehler s (2000) definition grasps the same aspects The UNCTAD (2010:9), however, defines leakage as the process whereby part of the foreign exchange earnings generated by tourism, rather than reaching or remaining in tourist-receiving countries, is either retained by tourist-generating countries or other foreign firms. In this definition, even money that never reaches the destination is considered as leakage. The UNWTO (1995:53) lists the following types of expenditure on imports as the main causes for leakage: Imports for materials and equipment for construction The import of non-durable goods such as food and beverage Repatriation of income obtained by foreigners Repatriation of profits obtained by foreigners Interests paid for foreign loans Marketing expenses abroad However, the extent of these six sources of leakage can vary significantly from country to country (UNTWO, 1995). The term repatriation implies that the money accrues at the tourist-receiving destination, but is repatriated, i.e. send back in form of profits to foreign firms or wages of foreign workforce. Marketing expenses abroad are regarded as an imported service in the UNWTO definition. Leakages can occur in a number of ways (Gollub et al., 2003) and several authors cluster leakage into three types: internal, external and invisible leakages (Diaz, 2001; Gollub et al., 2003). The table below (Table 2) briefly summarizes the different types of leakages for the ease of understanding. While internal leakage distinctly depicts the expenditure for imported goods and services as leakage (Diaz, 2001; Gollub et al., 2003) external leakage entails two different aspects, which should be categorized separately. While the first aspect of external leakage refers to money that has once accrued at the destination, the second aspect structural or pre-leakage(smith& Jenner, 1992, cited in Mitchell& Ashley, 2010; UNCTAD, 2010)- describes the money that never reaches the destination economy as it either remains in the tourism generating economy or goes to international transport companies. 18

25 TABLE 2: TYPES OF LEAKAGE TYPES OF LEAKAGE DESCRIPTION Internal leakage External leakage Also referred to as import coefficient as these leakages primarily occur through imports. The weaker the economy is in terms of producing quality goods and services, the higher the imports (Diaz, 2001; Gollub et al., 2003). The UNCTAD (2010) simply terms this as economic leakage Refers to tourism expenditures that accrue outside of the destination. Firstly, external leakages accrue to foreign investors through repatriated profit earnings and amortization of external debt (Diaz, 2001; Gollub et al., 2003; UNCTAD, 2010:10). Secondly, they flow to external intermediaries for bookings or foreign-owned transportation services to the destination (Diaz, 2001; Gollub et al., 2003). This aspect of external leakage is also depicted as pre-leakage (Smith& Jenner, 1992, cited in Mitchell& Ashley, 2010) or structural leakage (UNCTAD, 2010:10). This leakage is retained by tourist-generating countries and does not reach touristreceiving countries (UNCTAD, 2010). It tends to occur in the early parts of the tourism value chain and arises due to the very structure of the tourism value chain (see Chapter 2.2.2) (UNCTAD, 2010:10) Invisible leakage Loss or opportunity cost that cannot be measured reliably, but which can constrain noteworthy cumulative effects. It is mainly of financial nature i.e. tax avoidance through international transactions, and off-shore investments (Diaz, 2001; Gollub et al., 2003). Source: Compiled by author based on Diaz, 2001; Gollub et al., 2003; UNCTAD, 2010; Mitchell& Ashley, 2010 Not all researchers segment leakage as in Table 2 though and understandings whether leakage should comprise all three categories diverge. Mitchell and Faal (2008:1), for instance, state that leakages are generally defined as the proportion of total holiday price that does not reach or remain in the destination. Some leakages happen at the destination, when a tourist or hotelier pays for goods or services that are imported. Others have sought to include in leakages the external payments that never make it to the destination country such as travel agent commissions, tour operator payments and foreign airlines. Defining these payments as a leakage is misleading (Mitchell& Ashley, 2007a). Thereby, Mitchell and Faal (2008) depict the part of external leakage, which flows to external intermediaries for bookings or foreign-owned transportation services, i.e. structural leakage as an inappropriate component. Similarly, the cited definitions of various researchers do not include structural leakage as leakage (UNWTO, 1995; Hemmati& Koehler, 2000; Lejárraga& Walkenhorst, 2007, Mitchell& Faal, 2008; Page& Connell, 2008; Sandbrook, 2010). Figure 4 below illustrates 19

26 where leakage occurs. The linkage of the tourism economy to other sectors is depicted as leakage from the tourism economy to the general economy. The leakage of the tourist spending spent on pre-departure services outside the destination region is what Diaz (2001) and Smith and Jenner (1992, cited in Mitchell& Ashley, 2010) depict as pre-leakage as the money does not even reach the destination economy. FIGURE 4: LEAKAGES IN TOURISM Source: Mitchell& Ashley, 2010:81 adapted from Lejárraga &Walkenhorst, 2006 Having listed a number of diverging definitions of leakage, some conclusions need to be drawn in order to proceed with the discussion. The inclusion of the so called pre-leakage or structural leakage into leakage calculations appears to be the main issue in the definitional discussion on leakage because authors strongly disagree on this point. Therefore, there is incongruence whether leakage comprises only (a) the loss of money that reaches the destination s economy, but cannot be retained flows out of the economy again for tourism-related imported goods and services, repatriated profits of foreign enterprises at the destination or wages of foreign workforce and destination marketing cost overseas (UNWTO, 1995; Hemmati& Koehler, 2000; Lejárraga& 20

27 or Walkenhorst,2007, Mitchell& Faal, 2008; Page& Connell, 2008; Sandbrook, 2010; Mitchell& Ashley, 2010) (b) definition (a) plus the pre-departure spending that never even reaches the destination s economy as it is lost to international airlines, tour operators, travel agencies and hotel chains (referred to as structural leakage or pre-leakage) (Diaz, 2001; Gollub et al., 2003; UNCTAD, 2010) Consequently, a first important conclusion of the definitional discussion on leakage is that definition (a) constitutes the minimum definition of leakage and at a maximum, leakage comprises all components included in definition (b). Consequently, all reviewed authors agree that the aspects grasped by definition (a) represent leakage (UNWTO, 1995; Diaz, 2001; Gollub et al., 2003; Lejárraga& Walkenhorst, 2007, Mitchell& Faal, 2008; Page& Connell, 2008; Sandbrook, 2010; Mitchell& Ashley, 2010; UNCTAD, 2010). However, a number of researchers (Diaz, 2001; Gollub et al., 2003 UNCTAD, 2010) regard definition (b) as the all-embracing definition of leakage in tourism. Subsequently, the different definitions will be referred to as definition (a) and (b). There is incongruence whether the second component of definition (b) (structural leakage/ preleakage) should be termed as leakage. Strong counterarguments against definition (b) can be found in the literature. Mitchell and Ashley (2010) put forward that including pre-leakage means including payments made for booking, insurance and travel services and thereby, even profit margins of airlines, travel agencies and tour operators are accounted as leakage. This rockets leakage out of proportion as marketing, insurance, retailing, packaging, and long-haul flights are often 50 to 70 percent of total package cost and are normally provided by western tour operators and airline companies as most of them cannot be supplied by the host destination (Mitchell& Ashley, 2007:1). Mitchell and Ashley (2010:81) exemplify that including these profits in leakage calculations equals to considering the revenue of a coffee stand at Heathrow as a leakage from the Ethiopian coffee farmers who supply the coffee. The fact that the contested component of the leakage definition is termed as structural (UNCTAD, 2010) or pre-leakage (Diaz, 2001) by those who regard it as integral part of leakage, is conflictive. The UNCTAD (2010:9) states itself that structural leakage occurs due to the very structure of the tourism sector and even when strong linkages reduce economic leakage, structural leakage may still be significant because a large share of international tourism expenditures never reach the 21

28 national economy. Including structural leakage holds the premise that the destination region is entitled to the entire value chain (Mitchell& Ashley, 2007), which is not reflected in the nature of the tourism value chain (see Chapter 2.2.2). The result from this diverging understanding of leakage is a wide range of percentages claimed as leakage proportion. These percentages range from 10% to 90% and are based on different denominator values. Before presenting a selection of claimed leakage rates, the reasons for the occurrence of leakage in developing countries need to be examined in order to enhance the understanding of why leakage occurs WHY LEAKAGE OCCURS IN TOURISM IN DEVELOPING COUNTRIES Leakage, however defined, persists to be an issue in tourism in developing countries and whether and where there is potential for improvement needs to be investigated. Leakage occurs because of various global phenomena and structures. The main causes identified are globalization and the resulting tendency for horizontal and vertical integration and foreign investment. Deficient economic structures in developing countries demonstrate the core problem as this causes a dependence on foreign investment and multinational corporations to compete internationally as a tourism destination. The increased foreign control of the tourism industries in developing countries leads to the leakage of profits, however. The countries of the world have become increasingly integrated and interdependent through trade, global capital flow and the internationalization of the production process (Ahunwan, 2003:1). Globalization is a complex phenomenon affecting economic patterns of development (Ahunwan, 2003; Dwyer, 2005; Case& Fair, 2004) and tourism is both a feature and a cause of globalization (Harrison, 2001). Therefore, global economic integration shapes the tourism value chain (Ahunwan, 2003) as horizontal and vertical integration emerge from globalization (Wall& Mathieson, 2006). The result is increased efficiency, but in turn, profits leak to tourism-generating countries (Wall& Mathieson, 2006). Another effect of globalization is that many multinational companies import goods or services irrespectively of the availability in the local economy (UNCTAD, 2010:9), for example to take advantage of economies of scale or to maintain global standards in their business chain. Structural leakage (see Table 2) is therefore, mainly caused by these globalized structures, which can barely be avoided. It may be necessary to lose a share of international tourism expenditures to foreign airlines, tour operators, travel agencies and hotel chains (UNCTAD, 2010:9) in order to get the tourist to the destination. Without these global structures, there would be no value 22

29 chain and no tourist (Mitchell& Faal, 2008) as part of the reason why tourism value chains are increasingly international in developing countries is, because often these structures cannot be supplied by the destination (UNCTAD, 2010). Deficient economic structures in developing countries are the main reason for the occurrence of leakage. High revenue leakages are more prospective to arise in developing countries with limited economic diversification, including small island states (developing or developed), because local industries often cannot meet excessive tourism demand and there is a lack of capital among locals to invest (Weaver& Lawton, 2002; UNCTAD, 2010). This is due to deficient supporting supply industries, infrastructure and inefficient distribution systems (Bull, 1995). As identified in Chapter 2.2.4, economic growth through tourism is predominantly driven by the multiplication of unit spending through different sectors of the local economy (Lejárraga& Walkenhorst, 2007). However, deficient supporting supply industries at the destination often cause the need for imports and linkages to the general economy remain minimal. The lack of capital among locals to invest in tourism infrastructure (Bull, 1995) often leads to the dominance of foreign investment in the tourism industries of developing countries (Wall& Mathieson, 2006). In this day and age, foreign ownership is a common phenomenon and management and license arrangements across different countries have become ordinary (Ahunwan, 2003:245). Foreign investment, however, has very adverse effects on developing countries and is repeatedly listed as one of the main reasons for high leakages as it hinders the full derivation of tourism income (UNWTO, 2002). At the same time, foreign investment is also commonly acknowledged as a main driver for tourism (UNCTAD, 2010). The UNCTAD (2007:7-8) refutes the common perception that many developing countries are dominated by foreign investors and also the UNWTO states that there is often confusion about levels of foreign ownership; local ownership is often masked by franchise agreements and management contracts (UNWTO, 2002:34). Therefore, the UNCTAD argues that a lot of these claims are unsubstantiated (UNCTAD, 2007). Nevertheless, it cannot be denied that the higher the proportion of local ownership and local management of the tourism establishments at the destination, the higher are the direct effects of tourism. A correlation between foreign investment and leakage is evident, but Dwyer and Forsyth (1994:524) make a valid point by saying that if profits paid overseas are thought of as a "leakage" from the economy, then the initial payment for the facility should be thought of as an "injection" that would not have occurred except for the foreign investment. Over the longer term, there is no overall leakage. 23

30 Foreign investment causes external leakage through repatriated profit earnings to foreign owners (Diaz, 2001; Gollub et al., 2003; UNCTAD, 2010) (see Table 1). This leakage is inevitable, however, in order to access sufficient sources of development finance for facilities and infrastructure (Gollub et al., 2003). If a destinations economy is already strongly concentrated on tourism (e.g. the Maldives, where 83% of employment comes from tourism and linked industries) higher leakages might have to be accepted in return of jobs and income (Gollub et al., 2003:24). The UNCTAD (2010:10) even goes that far to say that some degree of leakage is intrinsically associated with international trade transactions, and may be a necessary cost of conducting tourism. Furthermore, it should be recognized that tourism is not the only sector in which foreign investment occurs. As put forward by the UNWTO (2002:34) there is no body of evidence to confirm that the leakages associated with tourism are typically greater than for other comparable export sectors, nor of any evidence that the supposed levels of foreign ownership are any higher than for comparable sectors. This citation raises the question why foreign ownership and leakage are so commonly criticized in tourism LEAKAGES IN OTHER ECONOMIC SECTORS The previous section identified that globalized operations, foreign investment and deficient economic structures in developing countries cause an increased leakage of tourism profits. However, an aspect that is often neglected in the discussion on leakages in tourism is that financial leakages occur in many economic sectors due to the same reasons mentioned above (Wall& Mathieson, 2006). Indeed, tourism import-related leakages are inferior to leakages in other economic sectors such as the manufacturing, agriculture and heavy industry (Diaz, 2001:8). In these sectors capital and labour are more commonly sourced internationally (Perez-Ducy de Cuello, 2001 cited in Gollub et al., 2003:24). This would advocate for tourism as a preferred sector of development as it generates more profits and has greater indirect and induced effects due to its linkage to other economic sectors (Diaz, 2001; Mitchell& Ashley, 2010). Fletcher (1989:517) conducted research on the Korean economy, which revealed that tourism leakages in Korea were only half as high as those from the majority of other sectors. Although, these data are very outdated and Korea had a relatively low import propensity at that point in time (Fletcher, 1989) a general tendency in leakage structures among economic sectors may persist until today. 24

31 International tourism in developing countries is discussed frequently as it is as identified in Chapter 2.1 among the top three foreign exchange earners in more than half of the world s least developed countries UNCTAD, 2010). Its role as a potential catalyst of economic development (UNCTAD, 2010) draws attention to the industry. Consequently, it can be concluded that financial leakage is not a particular characteristic of tourism, but is present in many sectors in developing countries. As tourism is such an important industry in developing countries, leakages in tourism are frequently discussed. After having discussed why leakage occurs in tourism in developing countries, ways to diminish leakages have to be considered. As structural leakage can barely be avoided (UNCTAD, 2010), the following chapter deals with the reduction of internal leakages - or more specifically, the importcoefficient (Diaz, 2001). Furthermore, apart from the repatriation of profits and wages, the import coefficient is the only element, which all researchers depict as a component of leakage DIMINISHING LEAKAGE BY LINKING TOURISM TO THE LOCAL ECONOMY LINKAGES While there is a multitude of examples and causes for high leakages (Torres, 2003 cited in Lacher& Nepal, 2010), there is a lack of research strategies to reduce leakage from the tourism industry (Lacher& Nepal, 2010). Linkages play a two-sided role in the discussion on leakage. Linkages are the network of inter-sectoral supply relationships between the tourism economy and the rest of the productive sectors of the domestic economy (Lejárraga& Walkenhorst, 2007:16). For one, linkages could be listed among the factors explaining why leakage occurs as deficient economic structures, as identified in Chapter 2.3.2, obstruct creating linkages to the general economy. Lacking linkages, in turn, lead to the increased reliance on imports, which causes leakage. Conversely, tourism s potential essentially lies in the possibility of linking the tourism sector to various other sectors at the local level (UNCTAD, 2010) in order to evade the reliance on imports and to thereby reduce leakage. More and more developing countries have introduced tourism linkages programmes particularizing essential engagements to strengthen local linkages (UNCTAD, 2010). As clearly identifiable in the illustration of the tourism value chain in Figure 1 linkages between the value chain and other economic sectors can be numerous and diverse (UNCTAD, 2010). Key linkages would support domestic ownership, develop a high-skilled domestic workforce and promote the localization of supply chains (UNCTAD, 2010). The most common sectors forming linkages are 25

32 agriculture and commercial fisheries, transportation, entertainment, construction and manufacturing (Weaver& Lawton, 2002:249). Tourism facilities like hotels, restaurants or local tour operators require goods and services to function including basic infrastructure services such as energy, telecommunications and environmental services (UNCTAD, 2010:7). Thereby, tourism can create backward linkages to the economy via employment (Telfer& Wall, 1996). Taking into account that tourism s effects can go back to even more abstract items required by resort hotels such as pool cleaning equipment, kitchen utensils and bathroom sinks (Weaver& Lawton, 2002:249), the previously mentioned problem of defining clear boundaries to tourism as an economic activity becomes apparent (Mitchell& Ashley, 2010). The complexity of linkages again proves the difficulty to grasp leakage - an aspect that will be picked up again in Chapter 2.4. The linkage between sectors appears simple and obvious, but backward linkages can, of course, only be established when the destination is capable of providing these services (Bélisle, 1983; Telfer& Wall, 1996; Lundberg et al., 1995 cited in Weaver& Lawton, 2002). However, as identified in the Chapter 2.3.2, deficient economic structures in developing countries are problematic (Sadler& Archer, 1975:182; Sinclair, 1998) and often linkages to the domestic markets are weak, which causes leakage (Huybers, 2007). In contrast, if linkages succeed to be established, their primary positive effects are fostering economic diversification and employment (UNCTAD, 2010). While the linkage of tourism to supply sectors appears as an adequate approach to diminish leakages as according to definition (a), the relationship between linkages and leakages is discussed controversially in the literature. The UNCTAD (2010) identifies weak inter-sectoral linkages as one of the key problems in developing countries and even goes that far to say that creating linkages to the local economy is the only approach to reduce leakage. Poor linkages between tourism and local sectors are often put forward as an argument against tourism-led economic development (Huybers, 2007:xxi). Mitchell and Faal (2008:5) also believe in the potential of linkages as they claim that strengthening linkages between tourism and the local economy is one of the most effective ways to promote pro-poor tourism, because it directly engages with building linkages between the tourism sector and poor people. At the same time, one could argue that the increased integration of the local economy could amplify the dependence and therefore, vulnerability of the destination to unforeseen changes in the tourism sector (Mitchell& Faal, 2008). Also, Lejárraga and Walkenhorst (2007) put forward that maximizing linkages would result in an entire economy aligned to tourism. Rather, they suggest, that linkages and leakages should be in a country-specific healthy balance and that there is no general guideline. Therefore, in order to avoid an overdependence on tourism in the 26

33 economy, developing the agricultural sector [for example] should ideally be with a national strategy in mind, rather than basing its development solely on strengthening linkages with the tourism sector (Mitchell& Faal, 2008:46). Furthermore, it is important to clarify that linkage and leakage are not mathematical counterpoints. Linkages measure how tourism activity affects nontourism sectors and linkages and leakages are derived from different multiplier calculations (Mitchell& Ashley, 2007; Sandbrook, 2010) (see Chapter ). All in all, arguments in favour of fusing tourism into the local economy outweigh claims against fostering linkages (Telfer& Wall, 2000; Wall& Mathieson, 2006; Mitchell& Faal, 2008; UNCTAD, 2010). Ideally, the interplay between linkage, leakage and economic impacts should be that the more diverse the linkages to the local economy, the larger the scale of local economic activity and the lower the leakages (eg. UNCTAD, 2010). However, the incongruity of arguments emphasizes the need for clarification in this subject. In view of the fact that one third of tourism spending accounts to food (Bélisle, 1983:498), maximizing linkages to local food sectors could have a significant impact on the level of leakage. Telfer and Wall (2000) derive from their field research that by fostering local linkages to the food sector, leakages can be reduced and multipliers can be enhanced. Therefore, linkages to the food sector will be thoroughly investigated in the following. Besides, this part of the literature review demonstrates a contextual basis for the case study presented in Chapter 3, which investigates the linkages of hotels to the local economy in food and beverage procurement LINKAGES TO FOOD There is a general recognition that there should be an increased reliance on local resources (Telfer and Wall, 1996:636). According to the Inter-American Institute for Cooperation on Agriculture (cited in Mitchell and Ashley, 2010) 60 to 80 cents of every tourism dollar spent on food and beverage in the Caribbean leaks out of the local economy. At the same time, one third of tourism spending accounts for food (Bélisle, 1983). The relationship between tourism and agriculture is ambiguous, however. The sectors often compete for labour, land and water, although they could also have a more symbiotic relationship, in form of local food supply (Maurer, 1992; Telfer& Wall, 1996; Mitchell& Faal, 2008). Stimulating the demand for local food and beverage through tourism demonstrates a significant opportunity for the local economy to diversify and modernize and also, to create more employment (Bélisle, 1983). Increased agricultural employment could particularly create sources of livelihood for poorer parts of the population (Mitchell& Faal, 2008). The OECD 27

34 confirms that agricultural growth is considered as more important for poverty reduction than growth in other sectors in developing countries; depending on the scale and structure of the economy and climatic conditions (Loayza& Raddatz, 2006, cited by Cervantes-Godoy& Dewbre, 2010). In many Small Island Developing States local agricultural production does not increase with increasing tourism development, however (Hemmati& Koehler, 2000). Nevertheless, in the case of the Dominican Republic, UN data shows a steady increase in food and agricultural productivity within the last decade (UNdata, 2011) and the OECD identified agriculture is a main contributor for poverty reduction in the Dominican Republic (Cervantes-Godoy& Dewbre, 2010). However, whether this increase coincides with the strong and steady rise in tourist arrivals (Oficina Nacional de Estadística, 2011) is not proven. The (UNCTAD, 2010:15) lists several governmental actions that could help to develop and foster locals supply chains. Some of these aspects are: fostering the productivity of the agricultural sector and its linkages to tourism providing small scale businesses with education and training encouraging hotels and restaurants to source supplies locally In the efforts to localize supply chains, the accommodation sector plays a major role as it takes up a significant amount of tourist spending and requires resourceful supply (Wall& Mathieson, 2006). As opposed to international transportation, hotels are more integrated into local economic networks - or at least have the potential to be integrated. There are a multitude of issues and factors that play a role in strengthening the linkages between tourism and agriculture. In the literature various issues with local sourcing have been discussed. The following table (Table 3) summarizes the identified aspects. These include the type of accommodation, tourist behavior and preferences, quality and reliability of food, volumes and capacities, the seasonality of tourism and agriculture as well as the competitiveness of firms and persisting mistrust and lacking communication between international hotels and local suppliers. 28

35 TABLE 3: ISSUES WITH LOCAL FOOD SOURCING TYPE OF ACCOMMODATION Size& class of a hotel change conditions for local sourcing (Mitchell& Faal, 2008:47) (ties in with debate on mass- and small scale tourism Chapter 2.2.5) =>The larger the hotels the higher the demand for high volumes of supplies Complex menu structures require an established& reliable supply system (Telfer& Wall, 2000) => larger/ higher class businesses tend to rely more on imports (Mitchell& Faal, 2008) => higher leakages Luxury goods often cannot be supplied locally (Hemmati& Koehler, 2000) Hotel development is often rapid& uncontrolled in developing countries => instant demand for high quantities of agricultural products, which cannot be met by local suppliers (Wall& Mathieson, 2006; Lacher& Nepal, 2010) TOURIST BEHAVIOR AND PREFERENCES QUALITY& RELIABILITY VOLUMES& CAPACITY SEASONALITY COMPETITIVENESS Food consumption patterns vary with type, nationality and food culture of tourists (Bélisle, 1983; Telfer& Wall, 2000; Torres, 2002) o Types of tourists can range from highly organized, conservative mass tourists to flexible, adventurous& spontaneous tourists, of which the second is more likely to consume local food (Torres, 2002) In the Caribbean, local meals have proven to not sell well (Bélisle, 1983); however, this may vary from destination to destination The need for reliability, punctuality and consistent quality and quantity of food is one of the main issues leading to reliance on imports (Hemmati& Koehler, 2000; Mitchell& Faal, 2008) Local food often lacks quality& hygiene (Hemmati& Koehler, 2000; Mitchell& Faal, 2008) o This goes along with the technological lack of processing, distributing and storing agricultural products (Mitchell& Faal, 2008) Large hotels require large amounts of food Insufficient capacities of individual farmers to increase production or a lack of a surplus in production in the local agriculture (Telfer& Wall, 2000; Wall& Mathieson, 2006) Physical limitations such as an unsuitable agricultural climate also play a role (Mitchell& Faal, 2008) The difficulty of matching supply and demand is further complicated by the seasonality of tourism& agriculture (Mitchell& Faal, 2008) Peak holiday season and peak harvesting times may not overlap The lack of adequate facilities may hinder storage Absurdly, locally produced food is often more expensive than imported food =>links with the issue of globalization as small scale producers cannot make use of economies of scale (Smeral, 1998; Hemmati& Koehler, 2000; Mitchell& Faal, 2008) International companies often have vertical monopolies or only work with established international businesses in supply networks (Hemmati& Koehler, 2000) LACK OF COMMUNICATION & MISTRUST Issues concerning contract agreements with local farmers (Bélisle, 1983; Telfer& Wall, 2000; Wall& Mathieson, 2006) Purchasing and payment policies of large hotels are often incongruous with operations of small suppliers depending on prepayments due to limited budgets (Telfer& Wall, 2000) => need for more communication and more flexible negotiations (Telfer& Wall, 1996) Lack of communication and understanding between tourist facilities and the agricultural sector (Telfer and Wall, 1996) Misunderstandings and prejudices between the sectors (Mitchell and Faal, 2008) Source: Compiled by author based on Bélisle, 1983; Smeral, 1998; Telfer& Wall, 2000; Hemmati& Koehler, 2000; Torres, 2002; Wall& Mathieson, 2006; Mitchell& Faal, 2008; Lacher& Nepal,

36 In 1983 Bélisle claimed that the interrelationship of tourism and food demand is an underresearched subject and up until today there is a lack of literature on this matter. The majority of literature found on tourism and local food sectors during this very research is limited to the Caribbean (Telfer and Wall (2000) confirm this phenomenon). Bélisle (1983: ) identified four major research gaps within the field of food and tourism: the relationship between food imports and leakages the impact of tourism on local food prices the reasons why a large proportion of food is imported and not produced locally the correlation of local/international food sourcing and the quality, size, location and ownership of a hotel While partial aspects of these research gaps are covered in Table 3, these claims are still confirmed in contemporary academic literature as for example by Telfer and Wall (2000), Wall and Mathieson (2006) or Mitchell and Ashley (2010). Filling these research gaps would provide some clarity in the debate on leakages and help interpreting numbers in the right context. Especially, the impact of tourism on local food prices would call the detriment of high leakages into question. A closer investigation on this issue is needed to identify in how far the reduction of leakage rates through increased local food sourcing is a favourable target. However, this exceeds the scope of this thesis and needs to be researched separately. To sum up, this section aimed at elaborating the issues involved with local food sourcing. The majority of problems with local food sourcing can be lead back to the aspect of deficient economic structures in developing countries. While so far, the focus was on explaining what leakage comprises, why it occurs and how it could potentially be diminished, the following chapter deals with the measurement of leakage rates and the problems involved. 2.4 APPROACHES TO MEASURE LEAKAGES SCALE AND METHODS While definition (a) and (b) generally imply the measurement of leakage at a national level, the scale at which leakage is measured varies. Leakages are most commonly measured at a national level, but some studies also calculate leakages at regional level (i.e. Sandbrook, 2010). Divergently, sometimes leakage is measured at a package price basis (i.e. Sinclair, 1991 cited in Hemmati& Koehler and in Mitchell& Ashley, 2010) and in 30

37 studies such as the one by the GIZ employed for this thesis, hotels are investigated in order to determine the leakage rate of the hotel s operations. To say which approach is appropriate depends on the purpose of research. For calculations based on the package price or on hotel operations macroeconomic measuring methods do not apply. However, for measuring leakage at a national or regional scale, such methods are relevant. There are various methods to measure tourism-related revenue and revenue leakage. Inconsistency in leakage rates does not only arise due to definitional issues (see Chapter 2.3.1), but also due to incongruent measuring methods. While this is a very complex topic, only four methods to measure economic impacts and thereby, leakage will be introduced briefly: The Tourism Satellite Account (TSA), the tourism multiplier, the value chain and the input-output analysis. The methods are investigated in regards to their applicability to definition (a) and (b) as well as their advantages and disadvantages. Apart from the multiplier method, the methods and their applicability are revised by Mitchell and Ashley (2010:18) in Figure 5. Subsequent to the presented methods, the issues with measuring leakage based on the package price paid in the tourism generating region will be elaborated TOURISM SATELLITE ACCOUNTS (TSA) According to the OECD (2010), a core contributor in the development of the tourism satellite account concept (TSA), the TSA enjoys international recognition as being the principal method to measure the economic impacts of tourism on a country (Weaver& Lawton, 2002). The TSA, approved by the United Nations Statistical Commission (UNSC) in 2000 (Theobald, 2005), can be described as a unique set of inter-related tables that show the size and distribution of the different forms of tourism consumption in a country and contributions to gross domestic product (GDP), national income, employment and other macroeconomic measures of a national economy (Frechtling 2010:136). The TSA has two dimensions: a monetary and a non-monetary one (Weaver& Lawton, 2002). Tourism-related consumption and output, identified from the demand and supply side, is quantified in relation to other economic sectors and thereby reveal tourism s contribution to a nation s gross domestic product (Weaver& Lawton, 2002; Theobald, 2005). In this dimension total tourist consumption by product type, profits and wages of tourism-related industries, net taxes obtained from tourism, and imports of tourism-related goods and services can also be determined (Weaver& Lawton, 2002:246). Employment, arrivals and departures represent the non-financial information of the TSA. The model is 31

38 greatly appreciated as it includes estimates on tourist s discretionary expenditure on goods (UNCTAD, 2010), which many other approaches do not. The TSA has a few drawbacks though as summarized by Weaver and Lawton (2002): the scope, the negligence of the multiplier effect and the time gap between data recording and data release. The problems of scope relate to the issue that TSA can only be conducted at a national level (see Figure 5) (Mitchell& Ashley, 2010). For countries where tourism is agglomerated in smaller geographic scales these areas cannot be observed individually and tourism s contribution may look minor in the TSA, although in respective areas it might be a vital source of income (Sandbrook, 2010). The issue of scale in measuring and comparing leakages will be addressed in more detail in Chapter 2.5. The second problem with TSAs is that the multiplier effect cannot be grasped entirely as indirect effects for example the food purchase of a hotel restaurant cannot be grasped (Weaver& Lawton, 2002:246). However, other authors put forward that additional Input-Output tables are used within the TSAs to grasp the flow of tourism expenditure throughout the economy (Frechtling, 1999 cited in Mitchell& Ashley, 2010). Furthermore, the time gap between data recording and the publication of data can range up to three years due to the time and effort required and the costs involved (see Figure 5). These issues leave noteworthy flaws with the TSA. Especially, in developing countries the establishment of accurate TSAs is burdened by data availability and quality (Gollub et al., 2003; Mitchell& Ashley, 2010). Nevertheless, this method is depicted to the most accurate one (Weaver& Lawton, 2002; Gollub et al., 2003; UNCTAD, 2010) and it is increasingly applied (see Figure 5) (Mitchell& Ashley, 2010). However, the TSA alone cannot grasp leakage as according to definition (b), as it solely accounts impacts at the destination DETERMINING THE TOURISM MULTIPLIER As opposed to all other methods mentioned here, which only have a very limited focus on indirect and induced effects (see Figure 5), the multiplier analysis is a useful tool to grasp the full picture of economic effects of direct, indirect and induced spending. Multipliers can be calculated for regional areas as well (Wall, 1997). However, there are not only different types of multipliers, but also differing definitions and approaches to measure them, which lead to confusion among impact studies (Hughes, 1994; Lejárraga& Walkenhorst, 2007; Mitchell& Ashley, 2010). According to Lejárraga and Walkenhorst (2007:30), this variance has rendered cross-country comparability of multiplier effects linkages and leakages unfeasible. Furthermore, multiplier studies in different countries 32

39 are broadly dispersed in time, which makes it hard to compare linkages and leakages from country to country (Lejárraga& Walkenhorst, 2007). To measure economic impacts of tourism the Keynesian multiplier can be employed (Lejárraga& Walkenhorst, 2007). It states the amount of income generated per unit of tourist expenditure (Lejárraga& Walkenhorst, 2007:31). The total Keynesian multiplier, measuring the entire economic input of tourism spending, is composed by two sub-multipliers. Whereas the direct Keynesian multiplier measures the first-round income effects in the tourism economy per unit of tourist spending, the indirect one quantifies how much the remaining economic sectors profit per unit of tourist spending (Lejárraga& Walkenhorst, 2007). Evidently, the multiplier method can only take money that reaches the destination into account (concurrent to definition (a)). With the Keynesian multiplier method, leakage is solely the portion that leaks into imports and pays foreign factors of production (Lejárraga& Walkenhorst, 2007:31). Therefore, leakage cannot be calculated for definition (b) with this method. Sinclair (1998 cited in Mitchell& Ashley, 2010) argues that countries may only receive a small share of the tourism expenditure spent internationally and still, the multiplier may appear high due to strong linkages with other economic sectors. To capture the leakage the difference between one and the Keynesian multiplier needs to be computed (Lejárraga& Walkenhorst, 2007:31). As according to Lejárraga and Walkenhorst (2007:32), the Keynesian Multiplier calculation to grasp leakage works as follows: Total Keynesian Multiplier = Tourism s Contribution to the entire Economy Tourist Expenditure Leakage = 1 - Total Keynesian Multiplier Linkages can be captured with the income ratio multiplier, which is the ratio of the indirect and direct Keynesian multipliers (Lejárraga& Walkenhorst, 2007:32). It can grasp how much income is generated in the general economy for every unit of income generated in the tourism economy. Thereby it can grasp linkages. As according to Lejárraga and Walkenhorst (2007:32), the ratio multiplier calculation to measure linkages corresponds to the following: Ratio Multiplier = Direct Keynesian Multiplier Indirect Keynesian Multiplier Linkage = 1 + Ratio Multiplier 33

40 INPUT-OUTPUT ANALYSIS (I-O MODEL) Input-Output models employ information from national accounts data (Mitchell& Ashley, 2010). Foreigners expenditures for hotels and restaurants, travel agencies, tour operators and tourist guides are recorded as travel services exports in national balance of payments statistics (UNCTAD, 2010:5). The I-O model can measure the size of the tourism-related economy and its significance for the macro economy. It can also measure these figures at subnational levels (see Figure 5) (Mitchell& Ashley, 2010). With the I-O model the scope and nature of linkages can be measured and quantified and second and further round economic effects of tourism can be captured (Fletcher, 1989; Mitchell& Ashley, 2010:110) and leakages in form of imports can be measured reliably (Reis& Rua, 2009). However, like the TSA and the Value Chain Analysis, the I-O model is very technical and cannot grasp dynamic effects (i.e. substitution effect and spending patterns) (see Figure 5) (Mitchell& Ashley, 2010). Consequently, the I-O model cannot grasp leakage as according to definition (b) THE VALUE CHAIN ANALYSIS (VCA) The Value Chain Analysis is a tool that enables the identification of stakeholders along a chain of transactions, from conception through production to consumption and after-use (Mitchell& Faal, 2008:2). With this analysis the key processes and stakeholders in tourism as well as the flow of benefits can be identified along all operations, from pre-departure to their return home (Mitchell& Faal, 2008; Mitchell& Ashley, 2010). In order to achieve this, the entire value chain is mapped and all transactions from producer to consumer are traced; thereby inter-sectoral linkages can be indentified (Mitchell& Ashley, 2010). Further, leakages can be traced evaluating the flow of benefits in the value chain as the VCA examines the whole chain of transactions from the tourism generating market to the destination region. Consequently, this method is the only method that can grasp preleakage/ structural leakage. As apparent in Figure 5 the VCA only maps the value chain for a tourism product and not for tourism at a regional or national scale. The VCA by itself does not reveal anything about the impact of tourism on the macro economy nor on the size of the tourism sector (see Figure 5) (Mitchell& Ashley, 2010). The usage of the VCA to measure leakage appears to be the most contested approach as its denominator value is the package price for a tourism product (Mitchell& Ashley, 2010). As stated before, some rather dramatic claims about the leakage of the benefits of tourism from developing 34

41 countries have evolved with the use of the VCA (Mitchell& Faal, 2008:17). Mitchell and Faal (2008:18) put forward that the VCA fails to recognize the important difference between tourism and other types of trade namely that tourism involves people interacting directly with the market through out-of-pocket or discretionary expenditure. FIGURE 5: AN OVERVIEW OF RESEARCH APPROACHES IN THE LITERATURE Source: Adapted from Mitchell and Ashley, 2010:18 35

42 2.4.2 SO FAR IDENTIFIED PROBLEMS WITH CAPTURING LEAKAGE The introduction of the methods illustrates the problems involved with the measuring of leakage. All methods grasp different aspects. Only leakage as according to definition (a) can be grasped by all previously discussed methods and invisible leakage (see Table 2) cannot be measured at all. Pre-leakage/ structural leakage can only be measured by the VCA, which in turn cannot reliably measure all facets of the maximum definition of leakage (definition (b)) and which only has limited applicability as it is based on a tourist product. Therefore, it revealed that, besides the fact that it is contested what accounts as leakage, there are different methods to calculate leakage, which are incongruent. Leakages are measured at different scales and not only the methods differ, but also within the methods, such as the multiplier method, divergences lead to inconsistent results (Hughes, 1994; Lejárraga& Walkenhorst, 2007); especially, at the regional and local level, statistical data is either not available or not presented in the form needed for a multiplier calculation (Hughes, 1994). Lastly, also the data basis used for measuring methods varies as tourism expenditure extends over a wide range of businesses and hence, patterns of expenditure are often difficult to determine (Wall& Mathieson, 2006: 119). This issue of defining clear boundaries to tourism as an economic activity, explained in Chapter 2.1.1, entails problems for economic impact studies as there are incongruent understandings to what accounts as tourism income and thus, denominator values diverge (Smith, 1994; Hemmati& Koehler, 2000; Mitchell& Ashley, 2010). An example for this issue was given by Smith (1994) in Chapter illustrating the difficulty of recording spending on goods and services, which are only partially or not designed for tourist consumption. The so far identified problems and irregularities regarding the composition of leakage figures are an important finding for this thesis and are summarized in Table 4 for the ease of understanding. These problems lead to a lack of reliable and transparent empirical data, which will be illustrated in the following section. 36

43 TABLE 4: IRREGULARITIES IN COMPOSING LEAKAGE FIGURES ASPECT PROBLEM SOURCE Definiton Scale of Measuring Leakage Measuring Methods Incongruence within Methods Data Capturing and Resulting Denominators Lacking standard definitions: Definition (a) and (b) grasp entirely different aspects (see Chapter ) Diverging scales at which leakage is measured: at a national, regional, tourism product level Different methods grasp different definitional aspects of leakage Incongruence within methods (e.g. multiplier method different definitions and measuring approaches) Unclear boundaries to tourism as an economic activity => divergence in what is recorded as tourism income (see Chapter the example of Smith (1994)) => not all discretionary expenditure can be traced and recorded, especially in developing countries See Chapter for the respective sources of definition (a) and (b) Observation by author Observation by author Hughes, 1994; Lejárraga& Walkenhorst, 2007; Mitchell& Ashley, 2010 Smith, 1994; Theobald, 2005; Hemmati& Koehler, 2000; Mitchell& Ashley, 2010 Source: Compiled by author partially based on Hughes, 1994; Smith, 1994; Hemmati& Koehler, 2000; Theobald, 2005; Lejárraga& Walkenhorst, 2007; Mitchell& Ashley, THE RESULTING LACK OF RELIABLE EMPIRICAL DATA Mitchell and Ashley (2010:81) confirm that there is a lack of empirical data to prove claimed leakage rates. Considering the issues with measuring leakage outlined in Table 4, it is not surprising that leakage figures diverge widely in values. To illustrate the diverging estimates of leakage rates, a selection of claimed percentages will be presented. As a consequence of the lack of empirical data, leakage claims `tend to be based on very old recycled data, which get further distorted over time (Mitchell& Ashley, 2010:81). In order to gain some transparency, where possible, the author sought to trace the indicated sources for leakage figures and tried to identify on which definitional basis the estimates were composed and which method was employed. In the following, the vast scope of numbers cited in the literature will be demonstrated. Beforehand, an example for the inadequate recycling of data will be presented. Leakage figures employed in literature are often taken from other secondary sources as the data collection for calculating leakage is very complex and time consuming and data 37

44 accessibility may be an issue. One example for the above mentioned recycling of data is the repeated citation of an UNWTO (1995) report, which various sources found during the research for this thesis refer to (eg. Diaz, 2001:8; Gollub et al., 2003:24; EED TourismWatch, 2007; UNCTAD, 2010:9). However, the UNWTO report has been cited inaccurately. In the original UNWTO (1995:54) source it is stated that there is a broad range of types and quantities of leakage differing from 40% to 50% of the economy of Small Island Developing States (SIDS) and less than 10% of the economy of bigger and more diversified countries. The UNCTAD (2010:9), however, cites the UNTWO (1995) stating that the average leakage for most developing countries is between 40 and 50 percent of gross tourism earnings and between 10 and 20 percent for developed and more diversified developing countries. The UNCTAD (2010:9) clearly includes structural leakage into the leakage definition corresponding to definition (b). At the same time, the UNCTAD cites the UNWTO (1995) leakage estimations in the subsequent sentence, which are only based on the six factors listed in Chapter 2.3.1, i.e. definition (a). Hence, the figures are not cited in the right context. At an earlier point in time, Gollub et al. (2003:24) and the EED TourismWatch (2007) both quoted the same numbers as the UNCTAD does in 2010 (see citation above UNCTAD, 2010:9). Gollub et al. (2003:24), quotes the UNEP as source, which in turn sourced the information from the UNCTAD - however no reference to a particular publication or year is given. The EED TourismWatch (2007) uses the same numbers and indicates the UNCTAD as a source; however, also, without any reference on a particular publication or year. As the UNCTAD (2010) refers to the UNWTO (1995) report from 1995 in their publication in 2010 though, it may be assumed that the UNCTAD has no other source for this information. This in turn would mean that the numbers Gollub et al. (2003:24) and the EED TourismWatch (2007) cite, in the end, both originate from the UNWTO source from 1995 as well; however, slightly altered in content and meaning. Moreover, it needs to be mentioned that the UNWTO (1995) states these estimations on leakage, followed by the affirmation that more precise information is needed on this matter. In this context, the UNWTO (1995:54) criticizes an article published in the Travel and Tourism Analyst, which replicates the estimations of leakage for 17 different countries, but does not reveal the underlying assumptions of what is accounted as tourism-related import and leakage. Examples for lacking explanations on how leakage estimates are composed, i.e. what is considered as leakage, and where they originate from, can be frequently found in the 38

45 literature. A number of estimated/ calculated leakage rates will be presented in the following in order to illustrate the issue. Going back further than two decades, estimates on leakage rates have already been uttered. Vorlaufer (1984 cited in Maurer, 1992) stated that leakage in bigger, more diversified economies accounts to 35% and to about 40% to 60% in small island economies. Studies in Thailand revealed that in % of all tourism income leaked out of the economy (Maurer, 1992). Leakage in fully import dependent countries such as Mauritius is reported to reach 70% to 90% (Forschungsinstitut für Fremdenverkehr, 1982 cited in Maurer, 1992). While the data is clearly outdated, the claims of leakage rates in contemporary literature are not less inconsistent. Hemmati and Köhler (2000:25), for example, say that common estimates of leakages are around 60% to 75%, whereas the EED TourismWatch (2007) reports on the successful reduction of leakage rates in Kenya from 18% in the 1960s to 12% today. In contrast, Gollub et al. (2003:22) refer to reported tourism leakage rates that are as high as 85 percent for African Least Developed Countries (LDCs), 80 percent in the Caribbean, 70 percent in Thailand, and 40 percent in India. Gollub et al. (2003:22) indicate to the United Nations Environment Program (UNEP, n.d.) as a source for this information without any indication to a specific publication. Investigations by the author found that the numbers cited by the UNEP (n.d.) again originate from secondary sources. The hyperlinks on the UNEP homepage to the original sources (e.g. Caribbean Voice or Sustainable Living) of the leakage rates are faulty however and the origin of the numbers as well as the related data collection methods and the underlying leakage definition cannot be identified. However, the underlying leakage definition in the article of Gollub et al. (2003) is the maximum leakage definition (definition (b)) and considering the high percentages it may be assumed that the numbers are based on definition (b). Similarly, Diaz (2001:8-9) notes that observed differences between paid and received prices for developing country tourism services (lodging, food, entertainment, etc.) suggest external leakage or preleakage levels of up to 75 percent. This indicates the use of the VCA because the price of a tourism product is used as denominator. Likewise, a leakage rate of 62% to 78% in Kenya has been determined by Sinclair (1991, cited in Hemmati& Koehler, 2000 and in Mitchell& Ashley, 2010) for 14-night beach-only holiday to Kenya in Considering that EED TourismWatch (2007) reports on leakage rates of 12% in Kenya, the VCA leads to a significantly higher leakage result. Sandbrook (2010) and Mitchell and Ashley (2010) criticize the use of the package price as a denominator, and thus, criticize the use of the 39

46 VCA for leakage calculations. Mitchell and Ashley (2010:82) depict Sinclair s approach to measure leakage as misinterpretation because the inclusion of pre-leakage, in particular flight prices, as well as the exclusion of tourist s out of pocket spending rockets leakage rates out of proportion. The money visitors spend in the destination demonstrate a major financial inflow, which Mitchell and Ashley (2007) estimate to be around a third of total holiday spending a third which is most likely to not involve any major further leakages (Mitchell& Faal, 2008; Mitchell& Ashley, 2010). Mitchell and Faal (2008) sourced their estimation on discretionary expenditure from large scale surveys interrogating tourists on their spending behaviour conducted for a Tourism Master Plan for the Gambia. However, of the methods introduced earlier, only the TSA includes reliable estimates on the tourist expenditure on non-tourism-related goods or services at the destination (UNCTAD, 2010). In contrast, Lejárraga and Walkenhorst (2007) report significantly smaller leakage figures. They calculated the average direct and indirect Keynesian multipliers for 151 countries grouped by income level and region based on data by the World Travel and Tourism Council. As the leakage proportion is calculated with the Keynesian Multiplier (see Chapter ), which indicates that leakage is the portion that leaks into imports and pays foreign factors of production, the underlying definition of their research corresponds to definition (a). As Lejárraga and Walkenhorst (2007:31) state the figure portrays a clear association between leakages and the level of income: OECD countries exhibit the lowest leakages, while low-income countries tourism is characterized by high levels of leakages. Looking at Figure 6, one can identify that on average the highest leakage would account to 38.3% in low-income countries. By region, the highest leakage occurs in Sub-Saharan Africa where 38.5% of tourism income leaks out of the economy. To sum up, cited leakage rates range between 10% and 90% and are often based on secondary sources. Furthermore, the leakage rates have different underlying definitions and the origin and data collection methods are often unclear. However, more leakage claims tend to be based on the leakage definition (b). As this broad range of numbers show, consistent measuring and standard definitions are needed in order to allow any assessment, comparison, or conclusion and to avoid unsubstantiated dramatic claims about the leakage of the benefits of tourism from developing countries (Mitchell and Faal, 2008:17). Sandbrook (2010:126) considers a progress in the issue of leakage measurement as vital to the debate on tourism s potential to help the eradication of poverty and even goes that far to say that the real significance of leakage rates has yet to be discovered. This claim justifies the aim of this thesis. As Sandbrook argues, many leakage studies employ flawed 40

47 methods and use unsuitable, or more neutrally termed varying, data to compute leakages. This issue of variance is also reflected in the diverging definitions of leakage. Up until this point of the thesis, problems involving the definition, composition and measuring of leakage have been identified. In the following chapter, the problems relating to the analysis and interpretation of leakage will be determined in order to finally draw conclusions on the significance of leakage rates as an indicator for the economic performance of tourism in developing countries. FIGURE 6: LEAKAGE IN RELATION TO DIRECT AND INDIRECT EFFECTS Source: Lejárraga& Walkenhorst, 2007:33 41

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