INDIRECT FINANCIAL COST

A major thrust of the cautionary platform was its emphasis on the substantial indirect financial
cost that are incurred by tourism in a destination. The best-known are the costs subsumed under
the category of revenue leakages. Some or all of the following leakages may curtail the
circulation of tourist receipts in the destination economy as depicted in segment of figure 8.2,
and thereby erode the multiplier effect :

Imported current goods and services that are required by tourists or the tourist industry

(e.g.petrol,food)
Imported capital goods and services that are recuired by the tourist industry (e.g

furnishing,taxis,architects fees)
Factor payments abords,including repatriated profit,wages and hotel management fees
Importantsfor governments expenditure (airport,road and port equipment)
Induced importants for domestics producers who supply the tourist industry (e.g fertilizer
to grow the food consumed by tourists)
Serious revenue leakages, as suggested earlier, are more likely to occur in small and

specialised economies, given their lack of capacity to supply the goods and services required by
the local tourism industry. In addition, the relatively small population of these destinations does
not normally possess sufficient investment capital to sustain desired levels of tourism
development. Severe revenue leakages are associated with enclave resort situations, or selfcontained facilities where patrons are discouraged from spending their money outside of the
operation's confines, and where most of the goods are imported from beyond the local
community (Freitag 1994).
Problems with revenue leakage
Revenue leakages are regarded as insidious for several reasons, particularly when the leakages accrue to a
different country rather than another region within the same country :
1. They siphon away circulation effects (i.e. the multiplier effect) that could benefit the economy of
the destination.
2. The cumulative indirect component is less tangible and harder to measure than direct expenses,
and therefore more difficult to quantify as a first step towards addressing the problem.
3. Even if they can be measured, their existence usually reflects basic shortcomings in the economic
structure of the destination that are extremely difficult to resolve.
4. Imports not only dissuade local entrepreneurs from supplying similar goods, but they may
displace existing local (i.e. small-scale) producers who cannot match the quality, price or
quantity provided by the exporter.

5. The presence of leakages implies, to a greater or lesser extent, an economic depend. ency of the
destination on the exporter, which constrains the ability of destination stakeholders to manage
their own affairs. This is especially problematic when businesses are dominated by expatriate
managers.
For all these reasons, integrated and long-term tourism management strategies should try to foster
linkages between tourism and the destination economy, so as to reduce the potential for revenue
leakage and maximise the multiplier effect.

Indirect incentives
Augmenting the direct incentives outlined in the 'Direct financial costs section are
various indirect incentives. These include preferential or reduced interest rates, the provision of
land for sale or lease on favourable terms, depreciation allowances, tariff and quota exemptions
on tourism-related imports, and tax holidays. An example or the latter are the ten-year tax-free
periods commonly offered to developers who construct hotels of a certain size in the Caribbean.
Other indirect incentives include loan guarantees and special depreciation allowances on
tourism-related capital goods. Such provisions are often more popular in governments than direct
incentives because they do not involve the direct outlay of money. Rather, governments obtain
less revenue than they would if the incentives were not offered (e.g. the interest realised at full
market rates rather than reduced interest rates).
FLUCTUATIONS IN TAKE

A stable and predictable flow of inputs and outputs in many industries contributes to
financial stability and facilitates the management process, as enormous investments in time and
energy are not required to gauge and prepare for continual changes in the supply/demand
equation (see chapter 7). The dairy industry is an example of a sector with low demand
uncertainty. Demand in this sector is not significantly influenced by weather or other changeable
factors, nor is the market likely to suddenly stop purchasing dairy products. In addition, since
consumers consider dairy products to be a basic necessity, consumption patterns will not be
seriously affected by a downturn in the economy.
Supply-side factors
Tourism is an example of an activity that is frequently at the opposite end of the s
trum to the dairy industry, being highly vulnerable in some manifestations to change in
weather, fashion and sociopolitical conditions. It is worth re-emphasising that the in situ
nature of consumption inherent in tourism is one reason for this uncertainity in demand.
Tourists must travel to the place of 'production (i.e. the destination) whereas dairy
products exhibit the opposite tendency; they travel from the place of production to the

homes of consumers. Supply-side disruptions within the destination, such as political

uncertainty or a disruption of infrastructure, thus have a major and sometimes
overwhelming bearing on visitor intakes (see chapter 4 and alsoth: chapter 1 case study).
Factors that are not specific to particular destinations can also be influential, as indicated
by the 12-14 per cent decrease in global travel reservations that followed the terrorism
actions of September 2001, and the 26 per cent decrease in the number of inbound tourist
to Thailand in January 2005 (i.e the month following the tsunami) over the same month
in 2004 (ILO 2005)
Demand-side factors
Also by way of reiteration, demand-side factors such as the availability of
discretionary income have a particularly harsh effect on tourism, given its status as an
essentially luxury or discretionary product. Most consumers will direct their first
cutbacks towards their tounsm activities rather than dairy products should disruptions in
the economy reduce their discretionary income or generate feelings of financial
insecurity. As noted in chapter 7, tourism suffers an additional liability in that the
products cannot be stockpiled an empty hotel room produces no economic value, but
is a fixed cost that still requires maintenance, mortgage repayment etc.
These cautionary comments about the instability of tourism demand and supply
do not contradict earlier information in this textbook that claims a positive global outlook
for the tourism sector. Rather, problems can arise for managers when the patterns and
underlying factors that apply at the global level are assumed to be valid for individual
destinations as well. In other words, the steady growth experienced worldwide represents a pattern of cumulative behaviour that does not necessarily indicate the performance of specific destinations. For any individual destination country, a similar analysis of
arrival trends since 1950 would likely reveal a great deal of fluctuation. In the wake of
the 2001 terrorist attacks, for example, many Muslim-dominated countries experienced a
prolonged period of reduced inbound visitation.
Seasonality
The tendency to report destination arrival data for an entire year is misleading,
since such statistics usually disguise significant affect the supply/demand equilibrium.
These temporal variations variations in intake that iations are caused partially by
demand-side factors such as holiday time availability in the origin markets (e.g. summer

holidays, winter break). However, equally,or more, influential are supply-side factors
such as changing opportunities in attractions and activities and how much si the
destination is dependent on these changeable.Resorts that are dependent on winter sports
or 3S-based activities readily come to mind as tourism products that are subject to
significant seasonal variations in demand.
Australia is not plagued by seasonality to the same extent as pleasure periphery
destinations such as Spain or the Caribbean, partly because of the diversity of major
market sources and variations in their peak periods of outbound travel. Substantial
variations in climatic conditions within Australia at any given time mean additionally
that there is no particular season in which the country can be uniformly characterised as
'hot' or 'cold'. Yet, as depicted in figure 8.5, diverse seasonality effects are still evident
within various inbound segments. A further complication is the deviation of specific
market segments from this pattern. Holiday travellers, for example, more or less
paralleled the overall trend, while business travel peaked in the period from July to
November and then dropped sharply in December and January.
Where strong seasonal variations are part of the normal annual tourism cycle of a
destination, a large amount of economic and social disruption can occur if appropriate
compensating measures are not taken by tourism managers.
Fashion
Much less predictable than the seasonal variations are the effects of fashion. As
discussed in chapter 4, this is demonstrated by the shifting perceptions in 'Western
societies towards sunbathing, beaches and water sports, which became popular during
the Industrial Revolution but may eventually fall out of general favour due to concerns
about skin cancer. This would force 3S destinations to develop and promote alternative
tourism products. Mother perspective on fashion is the rise and fall of specific
destinations. Places often become fashionable due to novelty and curiosity, but are soon
superseded by newer destinations offering a similar (i.e. easily substitutable) product.
Thus, St Lucia may have the status of being the 'in' Caribbean destination one particular
year, only to be replaced, in turn, by Anguilla, St Martin and Grenada. This effect is
experienced in many other industries, but one dilemma for tourism is the tendency in
destinations to acquire an accommodation inventory commensurate with the level of the

highest demand. When visitor arrivals decline because of the fashion factor (as opposed
to the cyclic seasonal effect), the specialised nature of hotels means that they are difficult
to convert permanently to other uses when high fixed costs become too much 01 burden.
The fashion effect is closely associated with the resort cycle concept, which discussed in
chapter 10.
Vulnerability to instability

More uncertain and potentially harmful than the vagaries of fashion are the effects
of social and political instability within or in the vicinity of a destination Especially
insidious is the potential for just one random and completely unpredictable act of
terrorism or sabotage to cripple a destination's tourism industry, as demonstrated by the
terrorist attacks on the United States in September 2001 and the Bali bombings of 2002.
Even though little can be done to prevent such occurrences, tourism managers need to be
aware of this vulnerability, and of the possibility that very positive growth performance
can be reversed in an instant. Accordingly, a strategy of broader economic diversification would help to cushion such impacts, as it would with seasonal variations.

COMPETITION WITH OTHER SECTORS

The multiplier effect is attractive because it stimulates a diverse local economy
through the generation of significant linkages within the destination. In some cases,
however, a competitive rather than a complementary relationship evolves between
tourism and other sectors in the local economy. It was noted earlier, for example, that
tourism-induced food imports may displace or dissuade local production if the scale
economies of the exporter and the bilateral trade environment are such that a cheaper and
better quality non-local product can be offered to the hotels.
Further marginalisation of agriculture occurs because of tourism's status as a more
competitive bidder for land. A golf course or resort hotel, for instance, represents a far
more lucrative use of prime agricultural land than a sugar cane operation. Where farming
is already a marginal activity, as the sugar industry was on the Caribbean Island of
Antigua in the 1960s, tourism serves to accelerate its decline by offering strategically
located land owners a viable alternative land use. Finally, the opportunity cost of using
a resource for tourism over some other activity should be taken into consideration.
Money or land allocated to tourism, in effect, is money or land denied to agriculture,

which thus represents a forgone opportunity for the destination. This effect has been
noted in the wine-producing regions of South Australia, where investment in tourism is
seen to divert attention and investment from wine production (Beverland 1999).
EMPLOYMENT PROBLEMS

It cannot be denied that tourism is an efficient generator of direct and indirect

employment, but the nature of this employment may not always be conducive to the
comprehensive economic development of the destination. Wages in the tourism sector
tend to be low compared with other sectors (although agriculture in many cases is an
exception), with 'hospitality workers' in Australia averaging just over $19 per hour in
2006 compared with almost $26 per hour in comparable service sectors (ABS 2006b).

Several interrelated factors account for this differential:

the unskilled nature of most tourism jobs, with relatively few opportunities for upward

mobility and few training opportunities

the tendency of employers to treat jobs requiring higher levels of skill (as in the

emotional labour component of customer service) as unskilled

high labour turnover (i.e. unstable labour force)
the weakness or absence of unionisation and collective bargaining arrangements
the tendency of many employers to flout minimum wage regulations, sometimes through

the employment of illegal migrants

where there are few or no alternatives to tourism, local wages may be depressed because
of the lack of competition
Because of the seasonal and cyclical nature of tourism, the sector is also
characterised by a high incidence of seasonal, part-time and casual employment, thereby
further contributing to the discrepancy between the actual number of people employed
and the actual hours and wages achieved. Tourism in Australia and elsewhere has
addition-ally been criticised, like certain other sectors, for fostering a ghetto-like
environment that provides women with lower pay (ABS 2006b, Thrane 2008), poorer
working conditions, less career mobility, less access to training programs and less
effective trade union support. Ironically, the advocacy platform has interpreted many of
these alleged shortcomings as advantages, in that low wages mean that more workers can
be hired, and unskilled workers can find employment opportunities more readily.
Furthermore, part-time and seasonal jobs may be more desirable among certain segments

in the workforce, such as single mothers and students (see Contemporary issue:
intenational tourism students and part-time employment).