key: cord-022394-bbdls7jv authors: Henderson, Joan C. title: Economic Tourism Crises date: 2009-11-16 journal: Managing Tourism Crises DOI: 10.1016/b978-0-7506-7834-6.50003-x sha: doc_id: 22394 cord_uid: bbdls7jv nan Economics is a key infl uence on both the demand for tourism and supply of facilities and services. Economic circumstances in generating and receiving countries help to shape fl ows of tourists and their spending patterns and the nature and speed of development, which also react to general economic movements. Such economic forces may operate to create both opportunities and problems for the tourism industry, certain of the latter having the potential to evolve into a crisis. Tourism crises of an economic origin are discussed in this chapter, which examines tourism's vulnerability to economic conditions in the wider environment and approaches to alleviating any damage arising from these conditions. Attention is also given to how the economic impacts of tourism may themselves be a cause or catalyst of crises and measures that can be adopted to lessen the risk of these occurring. Case studies at the end of the chapter explain how outbound tourism from Japan has been damaged by economic uncertainty and describe the repercussions of the 1997 Asian fi nancial crisis for tourist activity, both indicative of the linkages which connect tourism and economics. Characteristics of local, national and international economies and any alterations in them exercise a crucial infl uence on the tourism industry (Bull, 1998) which has its own internal economic dynamics (Lundberg et al., 1995) . Depending on the nature of change, it will stimulate or depress demand in source markets and make destinations more or less attractive regarding prices and products. Costs of travel and perceptions of these costs, as well as an individual's fi nancial position, also play an important part in vacation decisions. The health of an economy additionally helps to determine resources available for investment at home and abroad in the transport, accommodation and attractions sectors which are essential to tourism. Business travel too benefi ts from the heightened trading which is generated by economic progress (Davidson and Cope, 2003) . Income is a key variable of levels of participation in leisure tourism and there appears to be a close relationship between economic prosperity and a buoyant market. This was evident during the years following the Second World War in the West when rises in personal disposable income allowed lower and middle income groups to spend more on tourism than ever before. Destination choices expanded from nearby locations to more distant centers with a corresponding shift from national to intra-regional and then inter-regional travel (Murphy, 1985) . Such a trend was later apparent amongst the Asian "tiger" economies of Korea, Taiwan and Singapore and is now spreading to other countries experiencing development. Affl uent middle classes of consumers are emerging, notably in China which has seen rapid expansion in domestic and international tourism fueled by its exceptional economic achievements (Zhang et al., 2000) . However, economic downturn can undermine demand and possibly result in crises for industries in origin and destination countries if the slump is suffi ciently intense or prolonged. The recession of the 1990s on the US mainland contributed to a decline in Hawaii's tourism from 1990 to 1993, and Japan's economic diffi culties had adverse consequences for its outbound tourism in the same decade, including travel to Hawaii (see Case One). Deterioration in the global economy at the end of the twentieth century was considered partly responsible for a slowing down in worldwide tourism, recovery believed to be driven partly by the economic cycle. At the same time, domestic industries can gain from these reversals as it seems that many tourists choose less expensive options and remain closer to home when anxious about monetary and employment matters. Such a pattern of response suggests the importance of drawing tourists from a range of overseas markets, rather than relying on only a few, together with the need for domestic promotion. It should also be noted that much of the world's population is debarred from tourism because of poverty, although there may be great disparities in income dis-tribution with the presence of a wealthy elite of international travelers in the poorest of countries. A less advanced stage of development does not preclude countries from receiving visitors, but a certain amount of fi nance is required to permit the construction and maintenance of the necessary tourism infrastructure. One reason the African continent as a whole has been prevented from reaching its tourism potential is the parlous state of the economy (Christie and Crompton, 2001) and similar barriers apply in parts of Central and South America and Asia. An absence of funds and uncertain investment climate could lead to a crisis for the tourism industry, compounded by the political and social tensions that frequently accompany economic turbulence. Government economic programs and fi scal policies can impinge on travel behavior and the operation of the industry directly and indirectly, not least in the arena of taxation. The World Travel and Tourism Council (WTTC) uses the four indices of car rental, lodging, meals and air passenger charges to monitor taxes levied. It claims that these have steadily increased around the world in recent years (WTTC, 2002) and cities with the highest rates are depicted in Table 2 .1. There are also departure taxes applicable to all modes of transport and visa fees are another offi cial revenue earner. Such fi nancial burdens are opposed by commercial practitioners and destination marketers who argue that they project a poor image, alienate visitors and may undermine the fi nancial viability of tourism enterprises (Lipman, 1997) . Their sudden imposition and defi ciencies in administration can be disruptive and there is scope for corrupt practices in certain instances. Currency values and their fl uctuation are an additional determinant of tourist trends and investment. Substantial alterations are felt by tourists and refl ected in the prices charged by operators and agents with consequences for demand. An exceptionally strong currency may deter inbound visitors but encourage outbound travel, as demonstrated by Switzerland, where the hotel industry confronted a crisis due to uncompetitive prices in the 1990s. Switzerland became an expensive destination for foreigners while its nationals were lured abroad to take advantage of their enhanced purchasing power there, accommodation occupancy levels declining as a result. Hotels were advised to be more creative and energetic in their marketing in order to regain lost market share and attract more mature travelers interested in escaping from the stresses of everyday life to the delights of an alpine environment (Marvel and Johnson, 1997) . A markedly appreciating currency and prevailing notions of the costliness of locations are thus challenges for the tourism industry, which must strive to offset a drop in arrivals by stimulating greater expenditure among those who do elect to visit. A currency which is falling dramatically in value does not inevitably boost arrivals and excessive volatility may deter investors and make tour operators and travel agents cautious about selling places thus affl icted. The Turkish lira depreciated by 70% over a few days at the beginning of 2001, but this did not have a favorable effect on inbound tourism and severely curtailed departures (Okumus et al., 2005) . Brazil's 2002 currency crisis led to an overall contraction in inbound visitors, especially from other Latin American countries (Euromonitor, 2004) like Argentina where there was also economic and political turmoil. Visitors caught up in the chaos were seriously inconvenienced and tourists in Buenos Aries described being unable to cash travelers checks or use credit cards because of emergency banking measures intended to stem cash withdrawals. Surcharges were imposed and retailers raised prices in anticipation of a continuation in the collapse of the peso. Outbreaks of violence were reported (BBC News, 2002b) , indicative of how economic anxieties can fuel broader unrest which might endanger tourist safety. The Asian fi nancial crisis and its aftermath have been well documented and the case provides insights into the complex dynamics of an economic tourism crisis initiated by currency volatility (see Case Two). Studies suggest different experiences and the presence of success factors which enabled some destinations to manage the crisis better than others. While at the heart of the economic turbulence, Thailand exhibited an ability to weather the storm attributable to its long-standing reputation as a tourist destination, range of attractions and amenities and intensive advertising. Indeed, the crisis was exploited as an opportunity to reposition Thailand as a country of nature-based, cultural and MICE (meetings, incentives, conferences and exhibitions) tourism rather than mass tourism coastal resorts. Indonesia lacked these advantages and the economic crisis there was a source of a social and political agitation, posing a more serious threat to tourism and impeding effective action and the pace of recovery (Henderson, 1999a) . The introduction of the euro as the common currency for most members of the European Commission in 2001 created a single market of 300 million residents who, alongside visitors, no longer had to worry about currency transactions when traveling within the euro zone. However, it was a threat to some destinations where a lack of price competitiveness was revealed by comparisons which were easier for tourists to make. There was negative publicity about struggles with software and price hikes, particularly in Italy, where it was reported that visitors had to pay more for public transport and museum admission. The adoption of the euro also meant a drastic loss of currency exchange business and a doubtful future for smaller scale providers of this service (BBC News, 2002a) . Offi cial attempts to control balance of payments defi cits may incorporate limits on money taken out of a country and the purchase of foreign currency. Some countries also enforce compulsory currency exchange, insisting that visitors convert a minimum sum of local currency and restricting amounts they can leave with. In an example of the former, an individual's foreign travel allowance was set at £50 in the UK in the late 1960s. The decision proved benefi cial for the domestic industry and companies selling all-inclusive foreign package holidays (Holloway, 1998) , but constrained aspects of independent international travel. Certain sectors of the tourism industry are characterized by the intensity of competition which is often expressed in terms of price. Minimization of costs is therefore essential, and signifi cant rises can precipitate crisis, especially if unexpected and beyond the control of management. This is demonstrated by rapidly rising oil prices, which have the capacity to slow down growth in global, domestic and tourism economies. Economic recession damages consumer and investor confi dence in general and within the context of tourism, as already noted, while all businesses have to contend with higher fuel bills. Transport companies and especially airlines are likely to be among the worst hit with fuel accounting for between 10% and 20% of the latter's costs, the second highest after labor. The issue acquired greater urgency when a surge in prices for crude oil added to the problems of airlines in the early years of the twenty-fi rst century (see Boxed Case One). Business had already slumped because of terrorism, the Iraq war and the Severe Acute Respiratory Syndrome (SARS) virus which resulted in a number of airline bankruptcies worldwide and government intervention and fi nancial aid to prevent further collapses (BBC News, 2004) Volatile oil prices seem set to continue, but the civil aviation industry appears to have learned lessons from recent experiences about the necessity of planning ahead and taking action to reduce exposure to escalating charges. These charges cannot always be passed on to customers in their entirety for fear of compounding the original crisis by alienating passengers and depressing demand. IATA also launched When fuel costs spiraled at the beginning of the current decade, certain airlines were in a stronger position than others. This partly depended on the extent of hedging, which is a term used to describe buying fuel in advance at a set rate. The practice does, however, carry the risk of prices falling below those agreed on. European companies appeared to be better protected than others and also gained from the weakness of the US dollar, in which oil is traded, against the euro. British Airways had hedged 45% of its fuel needs for 2004 at US$28.50 a barrel and Lufthansa had covered 89% of its requirements for 2004 and 35% for 2005. Delta and Continental in the USA were reported not to have hedged for 2005; American Airlines had hedged 15% for the fi rst quarter of 2005, reduced to 5% thereafter. The limited activity in the USA was attributed to a belief that excessively high oil prices would eventually drop, credit ratings which discouraged the purchase of oil on the futures market and a need for cash which had led to the disbanding of former hedging arrangements. The exception was Southwest, which had hedged 85% of its demands for 2005 at US$26.00 a barrel and a proportion in subsequent years up to 2009 as part of a long-term cost control strategy. In response to the crisis, several companies started to hedge again and some waited in anticipation of a price fall while all tried to cut costs. A common reaction was the introduction of fuel surcharges which was supported by IATA and price hikes. Nevertheless, these surcharges could not apply to advance bookings and over capacity and intense rivalry among American carriers made it diffi cult for them to increase fares signifi cantly compared to their European counterparts, although undercutting by budget carriers was a concern in the latter case. There were additional concerns about effects on demand. Sources: Airwise News, 2005; Daniel, 2005; USA Today, 2004. a "fuel action campaign" to help member airlines by promoting greater effi ciency in fuel usage, a reduction in taxes and lower hedging costs (IATA, 2005a). The potential economic gains from tourism are widely recognized and a powerful rationale underlying growth strategies in many countries at differing stages of development. However, there are also negative economic outcomes (Dwyer et al., 2004; Mathieson and Wall, 1996; UNEP, 2002) which may precipitate crisis or play a part in its emergence. Major problems are outlined below and are particularly acute in the less-developed world, where several states may be looking to tourism to diversify their export base and earn hard currency, yet are not always able to secure these goals and are vulnerable to the hazards of over-dependence. While income is generated by tourism, the public sector also has to spend in order to develop and support the industry. National and sub-national governments have responsibilities for the building and running of the necessary infrastructure, including communications and utilities such as water and power. They may also be providers of amenities like museums and parks and owners, or part owners, of transport companies. There are other less obvious areas of expenditure. Frechtling (1994, p. 395) identifi ed life quality and fi scal costs borne by communities and offi cials which are depicted in Table 2 .2. Such environmental damage must be factored into any analysis which attempts to calculate the overall value of tourism for destinations (Tisdell, 2001 ). There will be additional spending on administration, planning and marketing and authorities may offer an assortment of subsidies and rebates to developers and operators in a bid to win projects and investment. In some situations, host communities appear to be subsidizing tourism and this could provoke hostility which is aggravated when tourist demand infl ates prices for goods and services. Land and property may become more expensive and perhaps exceed the reach of the local population. Outsiders from second home owners to foreign hotel developers are thus privileged at the expense of residents and these issues can be a matter of political contention, any disputes interfering with the functioning and prospects of the tourism industry. As tourism grows so do the costs and more money leaves the economy to pay for imported equipment, materials, and goods as well as interest on loans. Design, consulting and management fees of external agencies may have to be paid and not all profi ts and salaries will be retained. Leakages are heaviest in smaller economies and the magnitude of multipliers too depends on the size of the economy, resources, access to supplies, diversity, import substitution possibilities, local skills and labor availability. When these aspects are unfavorable, multipliers may be extremely low and caution should be exercised about the priority allocated to tourism. There are also opportunity costs associated with tourism when it draws capital, land and labor away from other sectors. Traditional economic structures may thereby be weakened and social welfare projects deprived of funding, provoking criticism of tourism. In less-developed countries, indigenous businesses may not possess the capital requirements for entry into parts of the tourism industry so that there is a reliance on foreign direct investment and multinational enterprises. These companies are often based in tourist generating countries and in a position to exercise considerable control. Such economic relationships can erode the authority of local decision makers and the profi tability of the private sector, leaving residents feeling excluded and alienated. Enclave tourism typifi es these tensions with its self-contained resorts designed so that guests do not have to leave the compound, restricting their contribution to the surrounding formal and informal economies. These economic impacts can incite animosity which has the potential to erupt into crisis, especially if reinforced by social and political grievances. Tourism employment is another controversial matter and its merits have been questioned due to work which is largely low skilled and poorly paid. Other limitations relate to unsociable hours, seasonality and seasonal unemployment, infl ows of migrant labor and workforce displacement. Nationals in less-developed countries also are likely to occupy menial posts while expatriates are found in management positions; this also means the drain of their salaries being remitted home. Strikes over pay are rare among hotels, especially in the Third World, but there was an example in Cambodia in 2004 (see Boxed Case Two). In another unusual case, three aggrieved employees set fi re to a hotel in San Juan, Puerto Rico, on New Year's Eve 1986, killing 98, to protest against their low wages and working conditions. Inequalities of income between tourists and those who serve them are symptomatic An international hotel management company included two luxury properties in Cambodia among its portfolio. Staff from both hotels fi rst went on strike at the end of 2003 and industrial action continued into 2004 in a dispute over the 10% service charge levied on customer bills. Workers wanted to receive the money thus collected directly whereas the hotel management preferred distributing it indirectly through set monthly allowances and meals and training. Cambodian law required that employees receive the service charge, but did not specify in what manner and the issue had become a cause of disagreement between local unions and foreign hotels in particular. Two judges ruled the strikes illegal in April and the company sacked about 300 personnel who were participating. However, other judges found in favor of the workers and an Arbitration Council later advised that those who had been dismissed should be re-employed. There were demands for a boycott from the Cambodian Tourism and Services Workers Federation (CTSWF) which was supported by international unions and labor agencies. Protestors, sometimes as many as 200, gathered regularly outside the hotels and a loss of business was reported. For example, the US Embassy changed its plans to hold a July 4 reception at one hotel and the other was closed for much of April. Press articles commented on the extent of poverty in a country where 45% of the population existed on US$1 per day with government estimating that a family needed an average monthly income of US$300 and US$200 in order to live comfortably in the capital and other areas, respectively. Average monthly salaries at the hotels were said to be US$160 and US$210, but the CTSWF argued that some staff were paid only US$1 or US$2 daily. Guest rates for a double room ranged from US$176 to US$276 in 2004. A representative of the company claimed its actions were legal and that "we just need to step out and walk the streets to be reminded what wonderful employment it is to work in a hotel." A settlement was reached between the company and CTSWF in September 2004 when it was agreed that 60% of those sacked would be reinstated and receive 75% of their salaries for the previous six months. Others had found alternative employment, but would get redundancy pay. The agreement was to last one year and the service charge question had still to be resolved by the Labor Ministry. Sources: Asian Labour News, 2004; Associated Press, 2004; Dow Jones, 2004; Far Eastern Economic Review, 2004; New Frontiers, 2004. of the gulf which can separate visitors and residents, disparities which may lead to crises of a socio-economic nature if inappropriately managed. Tourism can make a positive difference to economies of contrasting size and character, but there are also constraints which destination authorities need to acknowledge. Plus, it may not be the best solution to economic problems or the most suitable vehicle for general development. A heavy reliance on tourism could lead to economic weaknesses, so an effort must be made to integrate it into a wider economic program which incorporates diversifi cation. These imperatives are more pressing in less-developed countries which are striving to overcome what is often a relationship of dependency on wealthy tourist markets (Harrison, 2001) . There are, however, signs of movement in the direction of achieving more equitable relations between Third World governments and the international tourism industry. Some of the former now insist that hotel companies from overseas purchase a specifi c amount of materials locally, hire a proportion of local labor, train a number of these employees for management positions, contribute to an improved infrastructure and donate to natural and cultural heritage conservation schemes (Kusluvan and Karamustafa, 2001) . Such undertakings may be a prerequisite to gain approval to do business, but organizations should be prepared to take these actions voluntarily and exercise corporate social responsibility which incorporates a "triple bottom line" of environmental, social and economic returns (Zadek, 2002) . The effi cacy of tourism taxation remains debatable. It can be both a factor underlying crisis and a possible remedy. The WTTC has campaigned against fi scal measures that harm the competitiveness of the industry, calling for participation by the private sector in tax policy formation. Nevertheless, there is support for the principle that those who enjoy a product or service should pay for it (Lipman, 1997) . A similar argument can be applied to meeting the expense of environmental pollution and other damage caused by tourism, acceptance of these obligations by tourists and the tourism industry providing useful funding and helping to avert local opposition to tourism. The industry can also seek to communicate the many economic advantages of tourism to communities, interest groups and politicians; this is especially important in circumstances in which development might be fi ercely resisted. Adopting such a measure and the others noted above could assist in the amelioration of some of tourism's negative economic outcomes, frustrating the evolution of crises connected to the costs of tourism and criticism of these costs. Participation in tourism and public and private sector activity is closely related to prevailing economic circumstances in countries which generate and receive visitors. Economic growth stimulates demand and new investment, but its absence may result in crises for outbound and inbound industries. Tourism development can itself harm economies, especially those of less-developed nations, and such repercussions may trigger crises. External economic structures and processes are beyond the control of the tourism industry which can only react to changes which occur, although some can be anticipated and planned for. In comparison, appropriate measures can help to minimize economic disruption due to tourism and thereby lessen the intensity of related crises or avoid those which might otherwise evolve. Japan saw substantial growth in overseas travel after government restrictions were relaxed in the 1960s. International outbound travelers increased from approximately 2.5 million in 1975 to just under fi ve million in 1985, over 10 million in 1990, and 16.7 million in 1996. The main factors accounting for this strong upward trend were greater prosperity, more leisure time, and the availability of package tours. Expenditure also rose at a corresponding rate to produce what has been described as one of the most spectacular success stories of the modern tourist era, the volume of Japanese tourists and their high per capita spend attracting the attention of many destination marketers. The onset of recession and a decline in value of the yen started to have an impact by the middle of the 1990s, and over 40% of respondents cited costs as a barrier to international travel in a 1995 Japan Travel Bureau survey. As the Asian fi nancial crisis unfolded, the Japanese economy deteriorated further with problems in the banking sector, fl uctuating stock exchange prices and unemployment. Tourism fi gures, already showing much slower growth, responded by entering a decline for the fi rst time in 20 years. Numbers fell from 16.8 million in 1997 to 15.8 million in 1998 and travel agency bankruptcies rose by about 40%. An offi cial of the All Nippon Travel Agents Association described the industry as a casualty of the economic situation, with the emergence of a new type of budget traveler who was looking for value for money and likely to travel independently rather than in the traditionally organized tour group. Japan did, however, manage to retain its third position in the list of the world's top 40 tourism spenders in 1997, even though expenditure had shrunk by over 10% compared to 1996. Nevertheless, the yen lost a third of its value in US dollar terms between 1995 and 1997. These trends were of concern to many centers which were heavily reliant on Japanese tourists such as Hawaii where they comprised two-thirds of the eastbound visitors on which tourism, and the economy as a whole, depended. Japan's faltering economy and stagnation in demand caused a revision of forecasts and reassessment of the segment's signifi cance, prompting diversifi cation with regard to new markets and products. The Bank of Hawaii recommended stressing the state's function as a center for business and conferences, exploiting its location and access to other Asian Pacifi c and Latin American markets. Sources: Bank of Hawaii, 2003; JNTO, 1999; JTB, 1999. The Asian fi nancial crisis was centered on South East Asia and had its origins in a combination of factors which included structural economic weaknesses, inappropriate government policies and global liquidity problems. Diffi culties started in Thailand, which devalued its currency in the middle of 1997 and asked for help from the International Monetary Fund, and quickly spread to neighboring countries. Currencies declined sharply, Indonesia's losing 70% of its value against the US dollar with a fi gure of 40% in the case of Malaysia and Thailand. There was also intense speculation on stock markets and recessions ensued. The stronger economies of Hong Kong, Singapore, South Korea and Taiwan were not spared and there was a general erosion of confi dence. Many investors in the region decided to withdraw funds and postponed planned investment or channeled it elsewhere. Excessive economic volatility was followed by mounting unemployment, rising prices and business failures. Such conditions were accompanied by social disturbances and some political unrest, notably in Indonesia, and all of these developments had consequences for tourism. Unprecedented exchange rates were attractive to some long-haul visitors from countries unaffected by the economic turmoil, but travel within the region declined sharply. Asian Pacifi c countries as a whole recorded a fall in arrivals and spending from within and outside the region by the end of 1997. There were exceptions to the trend; Thailand and South Korea, for example, reported an expansion in volume. Nevertheless, income generated was disappointing when converted into US dollars. The spending power and confi dence of Asian consumers, who traditionally account for about 75% of the region's tourists, had been badly hit by the crisis which depressed their demand for travel. The slight growth seen in European and North American arrivals in some destinations was unable to offset the contraction of the regional market. Economic uncertainty inhibited tourism investment and planning by both public and private sectors. Financial constraints delayed existing and new projects, some of which were abandoned. There were doubts about the survival of some businesses and a number of hotels chose to charge in US dollars so that guests were denied the advantages of lower prices due to weak currencies. Events attracted widespread media coverage around the world and several stories were devoted to the social and political tensions associated with economic collapse. Such material served to communicate negative images and a sense of risk. There was a common pattern of response to the crisis by tourism industries and authorities, although circumstances did differ from country to country. Emphasis was given particularly to increased domestic and international promotion. Attempts were made at innovation in pursuit of a more diversifi ed product offering and wider market. However, National Tourism Organizations (NTOs) found that the purchasing power of their budgets was substantially reduced outside Asia and therefore explored possibilities of partnerships and greater private sponsorship. The fi nancial allocation of marketers was cut in some cases and they had to cope with this alongside rationalization of air services due to declining passenger traffi c, higher accommodation costs and a heavier taxation burden on tourists. There had been some discussion at the height of the fi nancial crisis about whether it was the beginning of the disintegration of the world economy due to a contagion effect, but such dire forecasts were not realized. Conditions were more ordered by mid-1998 and economies were expanding again by 1999. Most of the tourist destinations which had been hit were also returning to normality and actually drawing more international arrivals than they had been prior to the onset of the crisis. Nevertheless, tourism was revealed to be very vulnerable to economic change and its full recovery was also dependent upon economic improvement. Confi dence in the region as a whole had been badly shaken and the crisis had a lingering impact. Sources: de Sausmarez, 2003; Henderson, 1999a Henderson, , 1999b Henderson, and 1999c Muqbil, 1998; Prideaux, 1999; Roubino, 2002; WTO, 1999. Economic tourism crisis: A crisis for the tourism industry which arises from economic changes within the tourism system or wider economy. Tourism economic impacts: The consequences of tourism for a destination economy. Over-dependence: A situation in which destinations are economically reliant on the tourism industry. Tourism taxation: Taxes levied on individual tourists and the tourism industry which can be both general charges and those specifi c to tourism. Leakages: Money fl owing out of a destination economy in assorted forms in order to develop and maintain inbound tourism. 1. How might demand for tourism be adversely affected by economic movements? 2. Why might economic conditions in destination countries result in tourism crises? 3. Which economic impacts of tourism could result in a crisis for the industry? 4. Can the industry exercise any control over crises which owe their origins to developments in the wider economy? 5. 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