Tourism: A Passageway to Development
June 3, 2002—Farmers on the outskirts of Dar es Salaam wake up early, sometimes before the sun is up, to give their produce one last check before loading their bicycles for the trek to the city's outdoor markets. The bike ride over rutted paths and streets, with heavy and unwieldy loads, can be arduous. That situation changed for some of these farmers when new management took over the Royal Palm Hotel in 2001. The hotel, in the center of Dar es Salaam, needed a better way of procuring fresh vegetables and flowers for its residents, and started sending a truck directly to the farmers. This simple change not only brought efficiencies to the market, it also helped create a new market for local farmers. This type of impact is played out over and over again in tourism projects throughout the developing world.
For many developing countries, tourism is a significant vehicle for economic progress that creates jobs, foreign exchange, and tax revenues — all of which contribute in one way or another to improving poor people's lives.
While poor countries command only a minority share of the international tourism market, tourism can make a significant contribution to their economies, says the UK's Department for International Development (DFID). According to a 1999 report by DFID, 80 percent of the world's poor (below $1 a day) live in 12 countries. In 11 of these, tourism is significant and/or growing. Of the 100 or so poorest countries, tourism is significant (accounting for over 2 percent of GDP or 5 percent of exports) in almost half the low-income countries and almost all the lower-middle income countries.
"Tourism can play a critical economic role in developing countries, especially for those with limited income-generating alternatives," says Motomichi Ikawa, executive vice president of the Multilateral Investment Guarantee Agency (MIGA), a private sector branch of the World Bank Group. "While tourism accounts for less than 1 percent, or $269 million, of our cumulative guarantees portfolio, we believe this sector offers our developing member countries tremendous growth potential."
Tourism is one the world's fastest growing industries, expected to overtake agriculture as the world's largest industry by 2010. In the past year, an estimated one out of every 13 workers was employed either directly or indirectly by tourism, according to the World Travel and Tourism Council. In the year ahead, the travel and tourism economy is expected to contribute $3.5 trillion to world GDP and account for 11.6 percent (or $1.1 trillion) of total world exports, the council says.
Tourism can generate significant revenues for governments through a variety of taxes, including sales tax, value added tax, room or "bed" tax, airport or exit tax, aircraft landing fees, corporate income tax, payroll tax, social security tax, import duties, and property tax. Tourism is, in fact, the world's largest tax contributor, with an estimated $800 billion in personal and corporate taxes recorded in 1999. Governments use these taxes for a plethora of activities, sometimes earmarking them for specific purposes. Belize, for example, has started to impose conservation taxes on tourists. In some areas of Northeast Brazil, room fees include a charge for government-provided infrastructure.
Urban facilities, such as hotels and airports, are often essential for emerging and transitional economies that lack the basic infrastructure to attract international investors and business people. Upscale hotels can have the broadest economic impact per unit of capital invested, and a well-planned, integrated resort development is generally more cost-effective in terms of infrastructure use and a better guardian of the environment than mass tourism or ad hoc developments throughout the country.
Of the 14 tourism projects supported by MIGA, 10 have involved the construction or rehabilitation of hotels. Some of these projects have been in Costa Rica, where for more than two decades, the government has been working to develop and consolidate its tourism industry in an effort to diversify its export earnings base, and to offset a migration of manufacturing employment to countries with cheaper labor.
These efforts, focused on ecologically sustainable tourism development, have paid off for the country. "Tourism is the main generator of income in Costa Rica," says former Minister of Tourism Walter Niehaus. "It is the great democratizer." When it comes to distribution of income from tourism, residents of all income levels across the country benefit, Niehaus explains.
The hotels guaranteed by MIGA in Costa Rica address a number of needs: Most of the middle- to upper-range hotels in San José and the city's outskirts are old and fall short of the standards, management, services, and reservations systems demanded by today's business travelers. In addition, there is a shortage of rooms available in this price range. By issuing guarantees to enable the investments to go ahead, MIGA has played a key role in helping the country follow the development path it set out for itself.
"MIGA has been a great supporter of investments going into Costa Rica," says Niehaus. "Just the name of MIGA alone helps to build confidence in a project, which is also helpful when it comes to getting investment partners."
"Tourism's main comparative advantage over other sectors," says the World Travel and Tourism Council, "is that visitor expenditures also have a 'flow-through' or catalytic effect across the economy in terms of production and employment creation." Through consumption of local products in hotels, tourists can be a catalyst for the development of small businesses in the production and service sectors, and generate linkages to agriculture, fisheries, food processing, and light manufacturing, such as the garment industry. Tourism is a cross-sectoral activity, in which visitors also spend a substantial amount of money outside the hotel for food, transport, guides, entertainment, shopping and handicrafts, entrance fees, and so on. Estimates of such ex-hotel expenditures vary according to the type of hotel and local circumstances, but can range from half to nearly double the expenditures in the hotel. Tourism can also create investment opportunities for small and medium-size enterprises.
Illustrating the cross-sectoral impact of projects in this sector is a hotel project supported by MIGA in Mozambique. The project, which involves the upgrading and renovation of the 220-room Rovuma Carlton Hotel in Maputo, is helping the country respond to the rising demand posed by the country's growing tourism industry. It also involves the development of Maputo's first modern shopping mall consisting of restaurants, some 40 retail stores, and office space. This is expected to generate a substantial multiplier effect for other downstream businesses, such as dry cleaning, food and beverages, local handicrafts, and marketing services.
Tourism is labor intensive, with about two employees required per hotel room in developing countries, depending on the type of hotel and local skill levels. Tourism tends to employ a high number of entry-level and female workers, and the physical working conditions are often healthier and safer than other sectors. For example, the Courtyard Hotel, a project supported by MIGA in Costa Rica, is expected to create an estimated 62 jobs, including managerial, professional, and technical, of which 58 will be hired locally. In addition, another 100 jobs are expected to be created during the construction period. Local contractors will be used for the hotel's construction.
With an increasing dependence on local employees, hotels are upgrading the skills of their employees through formal and informal training, and, in many countries, local people are rising through the ranks to technical and senior management positions. In Damascus, Syria, for example, a new hotel project backed by MIGA has allocated $2.5 million to train Syrian nationals who will be employed by the hotel. Training will be conducted onsite and in other locations in the Middle East.
In addition to these benefits, tourism also generates a demand for key infrastructure, such as water and sanitation services, and telecommunications, as well as for financial services, which are integral to successful tourism. These improvements also benefit the local community.
A boon to any country, these results are highly significant for developing countries.
"Because the barriers to tourism are lower than for many traditional exports, such as sugar and textiles, developing countries perceive tourism to be one of the few global industries in which they can be successful players," says David Bridgman, an investment marketing specialist in MIGA. In fact, the share of developing countries in world tourism "arrivals" grew steadily from 19 percent in 1980 to some 30 percent in 1998.
In addition to the hotels it supports, MIGA has also offered its backing to an aerial tramway, built in 1994, that runs atop the rainforest canopy on the edge of Braulio Carillo National Park in Costa Rica. The 1.3 km tramway and accompanying accommodations make sensitive economic use of the country's rain forest, while preserving and protecting the environment. Named a "natural resource" by the President of Costa Rica, the project also allocates resources for research and educational purposes, including a program to improve environmental awareness about the importance of protecting the rain forests. Within this program, admission for Costa Rican school children and students is free or reduced.
Another project guaranteed by MIGA involves a $1.6 million investment into Albania, an IDA (low-income) country. The country's tourism sector — considered by both the World Bank and the Albanian government to be a key engine of future economic growth — was greatly disrupted by the Balkans conflict. Albania's coastline holds great potential as a local and international tourist destination, but the necessary infrastructure is missing. The MIGA-supported project involves the construction of the country's first marina, which includes a lodge facility and a restaurant. In addition to providing employment and training to local residents, the project is procuring goods locally and spurring the development of local businesses. The project should be completed this summer.
In today's globalized market, a country competes with every other destination in the type and price of tourism it offers. If a country is to successfully compete in the international tourism market, standards of excellence must be introduced for its products, particularly for infrastructure and accommodation and services. A coordinated approach and good management are also key to heading off negative externalities, such as overbuilding, exploitation, and environmental degradation. "This is where a group like MIGA comes into play — by ensuring that the investments it supports adhere to the highest standards of excellence across the board," says Ikawa.
There is little doubt about the development benefits to countries that host tourism projects. But without private capital for the construction of accommodations and provision of services, the potential of tourism assets cannot be realized. And for investors to go into these countries, the business environment has to offer the opportunity to operate profitable firms. Improvement in the investment framework for tourism, and in government support, allows developing countries to compete in world markets for private capital and create an industry that is sustainable.
"There is a role for MIGA's technical assistance services in this regard," says Ikawa. "Since 1993, we have been helping our developing member countries target, attract, and retain foreign direct investment in the tourism sector. This includes advising governments on the need to have a solid investment framework that encourages businesses to invest in their countries."
MIGA's tourism initiatives typically involve investment strategy workshops and are often linked to "catalytic" conferences that bring together investors and project sponsors. Because tourism is often approached from the standpoint of regional interest, MIGA typically organizes its technical assistance and events as single sector, multi-country exercises. This approach has the advantage of encouraging regional cooperation and the exchange of "best practices" among developing countries. From the perspective of investors, this type of event provides the advantage of bringing a large number of project sponsors and key decisionmakers together in one location.
MIGA also coordinates closely with other members of the World Bank Group, public agencies such as the World Tourism Organization (an international group vested by the UN with a central role in promoting the development of responsible, sustainable, and universally accessible tourism), and private entities such as the World Hospitality and Travel Association.
To date, MIGA has been active in promoting foreign direct investment in tourism in Latin America and the Caribbean, Central Asia, Central Europe, the Middle East, and Africa. MIGA receives a large number of requests for assistance from developing member countries. These requests continue to rise, reflecting governments' increasing focus on tourism to promote economic development.
Although tourism is generally not as susceptible to fluctuations in demand as commodity exports, the sector was running slower for most of 2002 than it was the year before. The World Travel and Tourism Council says demand was affected by worries over traveling in the wake of September 11 and by spending cutbacks associated with the global economic downturn. However, fourth quarter output was running well above that seen in the immediate aftermath of September 11.
"MIGA clearly has a part to play in this environment," says Ikawa, "first, in using our guarantees program to mitigate the perceived risks that inhibit tourism investment in developing countries, and second, in helping countries improve the environment for tourism investment and helping businesses find out about these opportunities."