November 20, 2001 -- On September 11, 2001 terrorists hijacked four U.S. commercial airliners and deliberately crashed three of them into New York City's World Trade Center and the U.S. Pentagon military headquarters in Washington, D.C.  The fourth plane crashed in a field in Pennsylvania, aborting what was likely another terrorist target.  The World Trade Center's twin towers soon collapsed, a slice of the Pentagon was decimated, and thousands of innocent lives were lost within one horrific hour.  Billions of dollars worth of man-made infrastructure, buildings, and capital were instantly depreciated.  The visual impact of these events is etched in the memory banks of all who watched the catastrophe unfold on live television. The living nightmare will forever be remembered as one of the darkest hours in human history.

In the wake of the tragedy, the travel and tourism industry is reeling.  Airline travel and hotel stays have plummeted worldwide.  Industry revenues, profits, and stock values are all down.  Industry workers are being laid off in large numbers.  Simply put: Many more people than before have an understandable fear of flying. Others have lost all patience with travel delays and disruptions that were already a nuisance before the tragedy, and they are opting to stay home.  "Tourism is [was?] the world's No. 1 industry, and the services are reliant on people's safety and security, and people's financial safety and security," said Graham Miller, a tourism lecturer at the University of Westminster in London.  "Both of these have been threatened by this event."  Thousands of tours and hotel accommodations around the world from Egypt to Las Vegas to Australia have been canceled.  Francesco Frangialli, secretary general of the World Tourism Organization (WTO), called the attacks a "terrible blow" [to the tourism industry].

[Editor's Note: The acronym "WTO" for the World Tourism Organization here is not to be confused with the identical acronym for the World Trade Organization.]

Ironically, the WTO had recently published a report entitled "Tourism: 2020 Vision."  The report appraised the future of the WTO industry in the twenty-first century and forecast sustained growth for the next two decades.  The predicted annual growth rate for tourist arrivals was 4.3 per cent, and the anticipated annual growth rate for international tourism receipts was 6.7 per cent.  According to the WTO's forecast, about 1.5 billion tourists would visit foreign countries annually by the year 2020, spending approximately US $2 trillion per year -- or US $5 billion daily!

Soon after the mournful drama of September 11, the WTO issued a "Report of the Secretary-General: Terrorist Attacks in the United States of America."  The proclamation acknowledged that the "unprecedented and brutal act of terrorism is likely to have profoundly negative consequences for domestic and international tourism."  It strongly condemned "heinous acts of terrorism," characterized terrorism as "an enemy of peace and tourism," expressed compassion to the people of the United States and victims of the tragic event, and proffered a firm conviction that "tourism is a resilient sector which has repeatedly demonstrated its ability to overcome problems and weather crises."

The Economics of Tourism

The tourism industry generates substantial economic benefits to both host countries and tourists' home countries.  It is an especially important industry to developing countries.  The main benefits of tourism to a country are foreign exchange earnings, tax revenues, business opportunities for budding entrepreneurs, and employment for workers in the industry.

According to the WTO, "Tourism is one of the top five export categories for as many as 83% of countries and is the main source of foreign exchange earnings for at least 38% of countries."   Foreign exchange earnings from exports are used to purchase imports and augment reserves.  They generate income in the host country and can stimulate consumer spending and investment in other sectors of the economy.

Tax receipts from tourism are both direct and indirect.  Direct tax receipts are generated from the incomes earned by businesses and workers.  Indirect taxes are duties levied on goods and services purchased by tourists.  The World Travel and Tourism Council estimates that tax contributions related to tourism worldwide were US $800 billion in 1998.

Tourism is a monopolistically competitive industry.  It has many relatively small enterprises producing slightly differentiated products and services.  Barriers to entry and exit are relatively low.  For these reasons, the tourism industry provides tremendous opportunity for relatively small businesses to thrive and is a leading generator of jobs.  The hotel accommodation sector alone provided around 11.3 million jobs worldwide in 1995, according to the United Nations Environmental Programme (UNEP).  Tourism generates jobs directly through hotels, restaurants, nightclubs, taxis, and souvenir sales.  Indirectly, jobs are generated through the supply of goods and services required by tourism-related suppliers.  The WTO estimates that tourism represents 7% of jobs worldwide.

Injections and Leakages: The Multiplier Effect

Macroeconomic theory teaches that any injection into the circular flow of income of a country will start a multiplier effect.  An initial change in autonomous spending generates a magnified effect on total spending through many rounds of spending and re-spending.  Each subsequent round of spending gets smaller and smaller because of leakages, but the overall effect is still much greater than the original injection.  For example, if tourism spending were to increase in a given country by, say $100 million, then the businesses and workers that received the $100 million would re-spend some fraction of that amount.  One person's spending has become another person's income.  The fraction of a marginal increase in income that is spent is called the marginal propensity to consume (MPC).  The fraction that is not spent is called the marginal propensity to save (MPS).  The multiplier coefficient is 1/(1-MPC) or 1/MPS.

For example, suppose $80 million of the initial $100 million increase in tourism spending is re-spent and the remaining $20 million is saved.  In this case, the MPC is 0.8 and the MPS is 0.2.  The multiplier is 1/(1-0.8) or 1/0.2 = 5.  That means that the initial increase in spending of $100 million will eventually generate a five-fold increase or $500 million in total spending!

However, there are other leakages besides saving.  The two main leakages (other than saving) related to the tourism industry are taxes and related imports.  Taxes are forced saving.  Also, an import leakage related to tourism arises because many tourists demand standards of products that the host country cannot supply.  These products must be imported by the host country to satisfy the consumer tastes of foreign tourists. According to the United Nations Conference on Trade and Development (UNCTAD), the average import-related leakage for most developing countries is substantial, between 40% and 50% of gross tourism earnings for small economies, and between 10% and 20% for most advanced and diversified economies.

Taking into account all of the leakages -- the marginal propensity to save (MPS), the marginal rate of taxation (MRT), and the marginal propensity to import (MPM) -- the actual multiplier effect for tourism may be relatively low compared to other spending injections (such as an increase in government spending).   For example: If the MPS is 0.2, the MRT is 0.1, and the MPM is 0.2, then the tourism multiplier would be 1/(0.2 + 0.1 + 0.2) = 1/0.5 = 2.   An initial increase in tourism spending of $100 million would only generate $200 million in total spending -- not $500 million!

The multiplier principle works in reverse.  That is, an initial decline in tourism spending generates a magnified negative impact on total spending and employment.  War, terrorism, crime, and natural disasters can have this effect on the tourism industry.  However, until the September 11 terrorist attack and the subsequent fallout, the worldwide tourism industry has managed to weather these adversities.  During the Gulf War, for example, growth in global tourism revenues plummeted from 21.5 per cent in 1990 to just 3.2 per cent in 1991. That is a slowdown in the rate of increase -- not an absolute decline; and the following year revenue growth rebounded to 13.5 per cent.

On the other hand, there have been instances in specific countries where an adverse event affecting tourism has brought about a negative multiplier effect on the nation's economy.  On November 17, 1997, a terrorist attack targeting visitors to the Temple of Hatshepsut in Luxor, threw Egypt's tourism industry into turmoil.  The negative effect of the Luxor tragedy is clearly reflected by the data.  Visitor arrivals to Egypt declined by 13.8 per cent from 1997 to 1998.  Egypt's international tourism receipts decreased by 45.4 per cent in1998 compared to 1997.  Egypt is one of those countries in the world in which tourism is a substantial share of overall economic activity.  Tourism is Egypt's second largest foreign exchange earner, and Egypt accounts for 50 per cent of all tourist arrivals to Africa and the Middle East.

There are other countries like Egypt that are vulnerable to the adverse economic effects of terrorism on tourism, because tourism is such a significant part of their overall economic activity.  Jamaica is an example.  Others are less vulnerable to the ill effects of terrorism on tourism, because their economies are more diversified.  Japan is a good example.  The table below shows international tourism receipts as a per cent of export earnings for selected countries around the world.  Countries with a high percentage are more at risk to any decline in tourism and travel.

International Tourism Receipts: 
% of Export Earnings (1998)
Argentina 17.2
Australia 10.2
Canada 03.8
China 06.1
Czech Republic 11.0
Egypt 19.0
France 07.7
Germany 02.6
Greece 25.4
Israel 08.3
Italy 09.6
Jamaica 35.4
Japan 00.9
Jordan 23.5
Mexico 06.1
Netherlands 03.0
New Zealand 10.9
Poland 18.3
Portugal 14.0
Russia 07.4
Spain 18.7
Switzerland 06.5
Syria 24.1
Tanzania 49.8
Turkey 14.3
United Kingdom 05.6
United States 07.6
Uruguay 16.4
Source: The World Bank Group: World Development Indicators

That the terrorist attacks on September 11 occurred in the United States is particularly ominous for the global tourism industry.  Americans are the world's biggest spending tourists.  According to the WTO, Americans spent US $60.1 billion on international travel in 1999, followed by Germans at US $48.2 billion and Japanese at US $32.8 billion.  According to the Travel Industry Association of America, total travel expenditures in the United States amounted to US $520 billion in 1999.  US $445.6 billion of this total (85.6%) was spent by U.S residents, and US $74.4 billion (14.3%) was spent by international travelers visiting the United States.  If Americans avoid traveling and foreigners avoid visiting the United States, then the worldwide travel and tourism industry faces a truly dismal outlook in the years ahead.

No one is sure for how long this slump in the worldwide tourism industry will last.  It all turns on how quickly confidence can be restored in the minds of potential travelers regarding airline safety and convenience.  If the global coalition of countries combating terrorism is successful at rounding up terrorists, destroying their networks, and confiscating their finances, then perhaps confidence will be restored and international travel will return to some semblance of normalcy.  The fact is, however,  that the images of what happened in New York City, Washington, D.C. and Pennsylvania on September 11, 2001 will not soon fade.

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