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Aruba Tourism Conference, July, 2002
The Economic Contribution of Tourism to Aruba
Sam Cole
Growth of Tourism in Aruba
• Trends in Tourism Arrivals etc
• Comparison with other Islands - Income and Resources
• Tourist Resort Life Cycle Theory
Contribution of Tourism to Economy
• Trends in Employment, GDP
• Tourism Income and Employment Multipliers
• Impact on GDP, Employment, Immigration, per capita Income, etc
Tourism and Public Sector Finance
• Govt. Incentives, Tourism Related Spending
• Net Revenues per Tourist
• Net Revenues by type of Hotel
Future Trends and New Policy?
• Does Resort Life Cycle Theory Apply to Aruba?
• New Products, Plans, and Partnerships
• Tourism System and Forecasts
• New Strategy or More of the Same?
© Sam Cole, July 2002
Tourism Trends in Aruba 1957-2001
Capacity, Arrivals, and Occupancy
100 %
90%
80%
70%
60%
50%
40%
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Aruba is one of the most successful tourist destinations in the Caribbean.
However,
• Growth has been steady but subject to shocks and cycles
• Recent slowdown in rate of growth of arrivals and accommodation
• High but declining average occupancy (in effect, six hotels are “empty”)
• Despite high growth and high occupancy, the tourism sector declares modest profit.
• Aruba has become increasingly dependent on tourism
• Aruba’s economy is open to commodity and factor markets
• Hotel industry is consolidating into powerful megachains
• Etc. etc.
© Sam Cole, July 2002
Resort Life Cycle Theory
Life Cycle Theory
Most widely cited “theory” of tourism (due to Butler 1980)
Stagnation might arise from:
■ Carrying Capacity Constraints (e.g. beaches)
■ Limited Potential Market (e.g. income or fashion)
■ Loss of Attractiveness (e.g. distinctiveness culture)
■ Other Production or Institutional Factors
Does Aruba fit the theory?
© Sam Cole, July 2002
Tourism Income and Density - Aruba and Other Caribbean Islands
Island
Population
thousand
GDP $ /capita (1993)
GDP
Growth
rates
Tourism % GDP
Rooms/
1,000
Rooms
Rooms
/Km2Area
Rooms
/Coastline
Km
GDP
impact
/Room
$k
Netherlands Antilles (So)
158
7600
-1.8%
35%
19
3008
4
34
163
US Virgin Islands
109
11000
59%
50
5450
14
92
130
Netherlands Antilles(No)
36
7600
-1.8%
35%
107
3852
20
92
127
Puerto Rico
3685
6200
6%
3
11055
1
36
124
Cayman Islands
30
23000
49%
115
3450
11
66
95
Antigua & Barbuda
64
6800
3.9%
74%
52
3338
8
52
94
Bahamas
273
10200
47%
49
13377
12
133
91
British Virgin Islands
18
10800
82%
68
1224
5
27
89
Barbados
264
7000
3.2%
25%
22
5808
13
92
77
Aruba
79
13600
6.5%
47%
78
6154
25
130
65
St. Lucia
143
1650
2.2%
69%
21
2997
5
41
58
Turks & Caicos
13
5000
8.7%
81%
82
1066
2
14
52
Anguilla
10
6800
1.4%
91%
103
979
8
29
52
St. Kitts & Nevis
42
3500
52%
38
1596
6
31
46
Source: Guidance for Best Management Practices for Caribbean Coastal Tourism by Island Resources Foundation, St. Thomas, Virgin Islands, December 1996. GDP Growth from ECLAC Economic Survey of Latin America and the Caribbean, 2001, CBS Aruba, Caribbean Development Bank, for years around 1998. Last three columns are author’s calculations.
Aruba has the highest density of tourism by area or coastline,
yet only derives a middling per capita income from tourism.
© Sam Cole, July 2002
Economic Trends in Aruba 1972-Present
Economic Trends in Aruba 1972-2000
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Aruba pulled off a remarkable economic recovery after the shutdown of Lago in 1986 largely through rapid expansion of the tourism industry.
However,.
© Sam Cole, July 2002
Income per Capita (Afl 1000)
Real Per Capita Income and Tourism Trends
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40
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Arrivals/10,000
After accounting for inflation and immigration
• Real average GDP/per capita incomes are rising quite slowly
• Little evidence of productivity improvements
• Which is a concern if Aruba’s tourism potential really is becoming depleted.
• Therefore, we need to understand how tourism affects the Aruba’s economy,
how the tourism system works, and how
to estimate the consequences of new
projects and strategies.
© Sam Cole, July 2002
Income Multiplier Effect from Tourism in Aruba
A Simple Static Model used to estimate the contribution of all or part of an industry in a given year.
Income from Tourism = X (Tourists and Investment)
*
Leakage = L X (Imports and Repatriation)
Multiplier Effect = X/L (Income recycled in local economy)
In Aruba the average leakage L = 50% so the Multiplier M = 2 i.e. total income I to island from $1 of tourist spending is about $2
© Sam Cole, July 2002
Average Aruba Tourism Income and Job Multipliers (1998)
Type
Size
Self-Multipliers
Tourism Output Multiplier*
2.10
Tourism Sector Job Multiplier**
2.16
Inter-relational Multipliers
GDP/Tourism Income Multiplier*
1.18
Wages/Tourism Income Multiplier*
0.42
Total Jobs per Afl million
19.8
Note: Based on 1998 Aruba Input-Output Table and CBS Data Calculated as the total long-run impact of all tourism spending.
*Shows income from each Afl of Tourist Income.
*Shows all new jobs in Aruba from one new hotel sector job.
The various multipliers are relevant to specific development needs and policy issues, for example:
• After Lago closed, Jobs /Tourism multipliers were most relevant.
• Today, GDP and Wage multipliers may be more relevant.
© Sam Cole, July 2002
Previous Estimates of GDP/Tourism Income Multiplier
Source
Year
Multiplier
IDAS (1981)*
1980
0.40
ITEO (1981-83)
1979
0.94
IMF (1985)**
1986-9
1.14
DECO National Plan (1986)**
1989-90
1.01
NCEER (1991)
1991
1.30
CBS (1996)
1994
1.21
CUS (2002)
1998
1.18
Note: Calculated by different methods and models.
* includes only first and second round effects
** imputed by author from incremental changes in reported results
Aruba GDP/Tourism Spending Multiplier
• Some evidence that GPD per Tourist Dollar is increasing...
• This is possible, desirable, but seems unlikely.
© Sam Cole, July 2002
Estimated Gross GDP Contribution from Tourism
(based on 1998 Aruba Input-Output Table and CBS Data)
Item
Amount Aflm
GDP 1998
2,923
Tourist Spending
Tourism Exports 1998
1,399
Total GDP Contribution from Tourism
1,824
Share of GDP induced by tourism
62.4%
Construction of Hotels
Average Hotel Construction
53
Total Contribution to GDP
74
Share of GDP
2.5%
Total Contribution to GDP
64.9%
Total Contribution to Employment
68.7%
Amounts are Afl million (1998)
This is based on the total long-run impact of all tourism spending. Contribution from construction varies over the life cycle of hotels.
Typical Effect of Increased Leakages on One Afl of Tourist Spending
Item
1998
Estimate
Repatriation or
Leakage %
Effect of Leakage
Relative
Income
New Tourism Exports
1.00
1.00
100%
Increase in Leakage
Profit Repatriation
9%
-0.03
Wage Repatriation
12%
-0.07
Direct Import Leakage
10%
-0.1
Impact on Income
Net GDP Contribution from Tourism
1.30
1.06
81%
Compensation of
Employees
0.73
0.59
81%
Community, social and personal services
0.55
0.44
79%
Note: Table shows the downstream (or trickle-down) effect of Afl 1.00 of additional tourist spending with increased leakages.
In Aruba a 10% decrease in income retention depresses multipliers by about 20%.
© Sam Cole, July 2002
Leakage, Multipliers and Income vary across industry and style of enterprise .
Stylized Examples of Economic Contribution via Dil
fferent Types of Hotel
Hotel
Tourist Spending X
Leakage L
Multiplier M
Island Income 1
Fancy “Club
Med” Enclave
$400
80%
1.25
$500
Inexpensive
Local Hotel
$100
30%
3.3
$333
Local Boutique Hotel
$300
40%
2.5
$750
The big question is how to increase X (exports) and minimize L (leakages).
X depends on having the right primary product, marketing, etc. (hotels, airlines, tourism authority)
L depends on the secondary products, local skills, entrepreneurship, etc. (education, economic development agencies)
• Multipliers can be manipulated through policy.
• However, without export markets a high multiplier is of little benefit.
• Hence the need for some kind of private-public partnership to establish the best synergy
© Sam Cole, July 2002
Trends in Public Sector Revenue, Expenditures, and Deficit
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Trends in Revenues and Public Expenditures
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Real Public Expenditures/Capita Revenue/GDP % Surplus/Expenditures %
Revenue as share of GDP is falling, but is not especially large by international standards.
Public Sector Deficit is growing, but is not especially large.
Real Public
Expenditures/Capita are falling, and are not especially high.
© Sam Cole, July 2002
Calculation of Net Government Income From Tourism
Net Revenues = Tourist and Hotel Revenues + Other Revenues + Welfare Saving
- Incentives - Tourism Related Public Expenditures
Principal items accounted for:
• Room and Casino Tax, Wage Tax, Profit Tax, Import Tax, and Tax Holidays
• Downstream Economy-wide Revenues (Income Tax, Customs Duties, etc.)
• Public Spending on Residents and New Immigrants
• Unemployment Reduction and Welfare Saving
• Tourism Infrastructure Spending and Opportunity Costs
• Other Tourism Support Spending.
• Unit Construction Costs.
• Transfer Payments/Repatriation of Income by Immigrants and Overseas Investors
• Net Saving from Immigrant Workers and Direct Imports.
• Hotel Share of Tourist Spending
• Exit Value of Property
• Consolidated Discounted Present Value of Operation to Corporations.
• Average Net Revenues over Hotel Construction and Operations Lifetime
Data Problems
*Some generalized data are used in the scenarios in order to estimate potential tax revenue. This is because information about individual operations is usually confidential. Good data are rarely available. In the age of creative corporate accounting, one has to use common sense.
© Sam Cole, July 2002
Estimated Net Revenues per Hotel Room
(with Taxes paid at Standard Corporate Rate and with some Welfare Saving)
Impact/Unit Afl k
Tourist
Spending
Construction and Infrastructure
12 Year Average**
Itemized Revenues
General Revenues
43.9
25.9
40.9
Net Room/Casino Tax
3.1
2.6
Net Profit Tax
0.3
3.6
0.9
Net Revenues
47.1
29.5
44.1
Itemized Expenditures
Spending on Arubans
19.4
9.5
17.8
Spending on Foreigners
25.3
14.0
23.4
Capital
4.9
2.6
4.5
Welfare Saving*
(8.3)
(8.3)
(8.3)
Opportunity Cost
1.8
10.2
3.2
Net Expenditure
43.0
27.9
40.5
Revenue - Expenditure
Net Govt. Income
4.0
1.6
3.6
* Welfare Saving on employable unemployed ** Weighted Average over 12 year lifetime
• This suggests that there is a net public income from tourism
• However, in Aruba hotels pay few taxes and there is little unemployment to relieve.
© Sam Cole, July 2002
Estimated Net Revenue to Public Sector from Current Hotel Mix
Scenario
1) With No Tax Holiday
2) With Tax Holiday
3) With Tax Holiday and without Welfare Saving
Type of Development
Revenue/ Tourist Night Afl
Total
Annual
Aflm
Revenue/ Tourist Night Afl
Total Annual Aflm
Revenue/ Tourist Night Afl
Total Annual Aflm
Aruba
Total/Average
6.3
27.7
1.8
8.5
(7.6)
(34.2)
Based on current mix of hotels. Note: Items in parenthesis show a net loss. The consolidated results are weighted by the present composition of hotels and averaged over a 2-year construction phase and 10-year operation phase.
Scenario 3 comes closest to the current situation in Aruba.
• In this scenario, new immigrant workers become a net revenue source to government since they pay more taxes than they receive in benefits.
• It would take a 2.8% increase in the average tax rate on all GDP with no increase in public expenditures to bring Scenario 3 into the black
• Hotels in Aruba show almost no net profit yet insofar as occupancy is high and developers are lining up to locate here, there must be significant leakages of income overseas.*
• Since the current approach to tourism in Aruba already results in a net public sector deficit, then “more of the same” will likely increase the deficit.
© Sam Cole, July 2002
Net Revenue per Tourist Night from New Tourism Developments
Scenario/Type of Accommodation
1. With No Tax Holiday
2. With Tax Holiday
3. With Tax Holiday/Without Welfare Saving
Luxury
1.1
(1.3)
(8.4)
Standard
7.5
6.0
(4.4)
Economy
9.9
9.3
(2.5)
Timeshare
9.7
0.9
(10.0)
Guesthouse/Apartment
3.9
3.7
(2.5)
Estate
44.1
(102.9)
(173.8)
Note: Items in parenthesis show a net loss.
Income per Tourist from Hotels
20
15
10
Type of Accomodation □ 1. With No Tax Holiday
■ 2. With Tax Holiday
■ 3. With Tax Holiday/Without Welfare Saving
• Again, Scenario 3 comes closest to the current situation in Aruba.
• However, the other scenarios show that a different mix of hotels and public policy could remove the deficit..
• Note again that the results for
individual hotels or types of accommodation are tentative and
depend critically on the details of
each property, product, and policy.
© Sam Cole, July 2002
The Rise (and Fall) of Successive Product Innovations
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Transport Innovations
• walking, horses, boats and canals, railways, cars and busses, airplanes,...
Tourism Innovations
• lodging houses, hotels, national chains, international chains, timeshare, mega chains, cruise liners, space platforms, ...
• The resort life cycle theory is incomplete (which does not mean it is wrong).
• Every resort cannot catch every wave.
• But combining innovations will facilitate more robust development.
• Maintain distinctiveness and avoid becoming a generic island paradise.
© Sam Cole, July 2002
Simple Model of the Dynamics of Aruban Tourism
Number of Visitors depends on Number of Rooms
- build it and they will come provided you offer the right product and market it effectively.
Construction of a New Hotel and the Number of Rooms depends on occupancy
- provided scale economies warrant construction of a new hotel.
Add government incentives and irregular demand because of e.g. recessions.
Include System delays in construction and marketing.
Add Corporate
and Local Scale Economies
Incentives
Tourist
Demand
Test of Simple Model against Historic Record of Tourism in Aruba
Model Predictions for Rooms and Occupancy versus Historical Record
100 %
90%
80%
70%
60% o
03
50% §40% o 30% 20 % 10 % 0%
• Assumptions in the simple model recreate many of the key features of the historic record.
• Framework for re-assessing past trends and policies and comparing future strategies.
© Sam Cole, July 2002
Projections of Aruba Tourism Capacity and Use
Best fit forecast (so far).
Same model with new competing destinations.
Model Projections - Occupancy and Hotel Rooms
100 %
90%
80%
70%
60% S'
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0%
Model Projections - Occupancy and Hotel Rooms
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• The forecasts are sensitive to assumptions about scale economies, decision rules, competition, etc.
• Nonetheless, it is important to have a basic understanding of the interplay between supply and demand.
© Sam Cole, July 2002
New Products, Plans, and Partnerships
Examine alternative partnership strategies/product mix, for example:
• Partnerships to identify new tourism products to maintain margins, markets, and competitiveness.
• Protection and improvement of the distinctive character of Aruban tourism.
• Strategic partnership with a single mega-chain to secure market (e.g. become Marriott Island)
• Increase local inputs to the construction and operation of the tourism industry to increase multiplier.
• Consolidate existing anchor hotels and expand boutique tourism to deepen and diversify product
• Develop new tourism centers to diversify product and address regional needs in Aruba.
Adopt development indicators and goals other than GDP and arrivals growth, for example:
• Distribution of income, wealth, and employment induced by tourism
• Opportunities for Aruban entrepreneurs and workers
• Education, training, support, and infrastructure required to facilitate opportunities
• Net public sector return sufficient for Aruban development needs.
• Robustness to general and industry specific shocks.
• Fragility of natural, cultural, and social resources
Evaluate specific fiscal, economic, etc. options, for example:
• Role of foreign investors and workers
• Provide general support rather than tax holidays etc. to individual developers.
• Increase and/or smooth occupancy to raise capacity utilization.
• Adapt existing capacity to more innovative use.
• Limit expansion of new hotels and increase prices.
• Raise general taxes, end tax holidays, increase minimum wages, etc.
• Most issues can (and should) be addressed in a systematic and comparative way. Even if the findings are not 100% accurate, they can help Aruba to make sensible policy choices.
• Strategies should be evaluated as a package and individual projects should be evaluated on their own merits.
© Sam Cole, July 2002
Small Print: Truth in Tourism Forecasting for Small Places Tourism is very complex.
Even a partial list of relevant variables would include incremental growth, resource and other constraints, seasonal and climatic phenomena, causal lags, feedback, coupled growth, scale economies, lumpy investment, market competition, technological change, segmented markets, vintage capital, dualistic economies, inter-sectoral links, ad hoc and reactive public policy, external economic shocks and cycles, bad forecasting, inadequate data and theory, competing cultures, symbolism and fashion, an evolving tourism sector and global economic organization, plus variability in weather and climate. Combinations of these variables can lead to complex behavior that even may be inherently unpredictable - in which case a very robust strategy is needed.
© Sam Cole, July 2002