Leakage effect
Encyclopedia
The leakage effect is a concept within the study of tourism. The term refers to the way in which revenue generated by tourism is lost to other countries' economies. Leakage may be so significant in some developing countries that it partially neutralizes the money generated by tourism.
'leakage' in Thailand
estimated that 70% of all money spent by tourists ended up leaving Thailand
(via foreign-owned tour operators, airlines, hotels, imported drinks and food, etc.). Estimates for other Third World countries range from 80% in the Caribbean
to 40% in India.
Leakage is not restricted to less-developed countries. Australia experiences a significant leakage effect from Japanese tourists. Though the spend the most per capita of all tourists to Australia, much of what they spend is through Japanese travel companies, Japanese hotels, and other foreign-owned businesses. There is thus significant leakage to Japan's economy.
Leakage not only varies from country to country, but also from industry to industry. High-income tourism may well significantly increase leakage, as that industry likely involves importing more goods and services than usual. Ecological or adventure tourism may exhibit a very small degree of leakage, however, as they place value solely on what the host country has to offer.
and the United Kingdom
, the benefit to the economy from tourism is twice the dollar amount spent by tourists. In smaller places, such as Micronesia
and Polynesia
, that benefit is half the dollar amount spent. Some locations have managed to nullify the leakage effect almost entirely - New York City claims to generate seven dollars for the local economy per dollar spent by tourists. Some estimates of the degree of leakage claim only 5% of money spent on tourism remains in a developing country's economy.
Methods
Leakage occurs through six different mechanisms. It is an intrinsic component of international tourism and thus is present in every country, to widely-varying degrees.Goods and services
Many countries must purchase goods and services to satisfy their visitors. This includes the cost of raw materials used to make tourism-related goods, such as souvenirs. For starting tourism industries, this is a significant problem, as some countries must import as much as 50% of tourism-related products.Infrastructure
Some less economically developed countries do not have the domestic ability to build tourism-related infrastructure (hotels, airports, etc.). The cost of such infrastructure is then leaked out of the country.sapopo 4 RefilweForeign factors of production
Smaller countries often require foreign investment to start their tourism industry. Thus, profits from tourism may be lost to foreign investors. In addition, travel agents outside of the destination country remove money from that market as well.Promotional expenditures
Many countries spend considerable sums of money for advertisements and publicity. Maintaining a presence abroad may increase the volume of tourists to a country but also represent a considerable loss of money to foreign markets.Transfer pricing
Many foreign companies manipulate their pricing to reduce taxes and other duties. In smaller or less developed countries, where many tourism-related companies may be foreign owned, this can represent a substantial loss of income.Tax exemptions
Countries with a small tourism industry may have to give tax exemptions or other offers to increase foreign investment. While this may enlarge the tourism industry there, it must be taken into account as an instrument of income loss.Application
A study of tourismTourism
Tourism is travel for recreational, leisure or business purposes. The World Tourism Organization defines tourists as people "traveling to and staying in places outside their usual environment for not more than one consecutive year for leisure, business and other purposes".Tourism has become a...
'leakage' in Thailand
Thailand
Thailand , officially the Kingdom of Thailand , formerly known as Siam , is a country located at the centre of the Indochina peninsula and Southeast Asia. It is bordered to the north by Burma and Laos, to the east by Laos and Cambodia, to the south by the Gulf of Thailand and Malaysia, and to the...
estimated that 70% of all money spent by tourists ended up leaving Thailand
Thailand
Thailand , officially the Kingdom of Thailand , formerly known as Siam , is a country located at the centre of the Indochina peninsula and Southeast Asia. It is bordered to the north by Burma and Laos, to the east by Laos and Cambodia, to the south by the Gulf of Thailand and Malaysia, and to the...
(via foreign-owned tour operators, airlines, hotels, imported drinks and food, etc.). Estimates for other Third World countries range from 80% in the Caribbean
Caribbean
The Caribbean is a crescent-shaped group of islands more than 2,000 miles long separating the Gulf of Mexico and the Caribbean Sea, to the west and south, from the Atlantic Ocean, to the east and north...
to 40% in India.
Leakage is not restricted to less-developed countries. Australia experiences a significant leakage effect from Japanese tourists. Though the spend the most per capita of all tourists to Australia, much of what they spend is through Japanese travel companies, Japanese hotels, and other foreign-owned businesses. There is thus significant leakage to Japan's economy.
Leakage not only varies from country to country, but also from industry to industry. High-income tourism may well significantly increase leakage, as that industry likely involves importing more goods and services than usual. Ecological or adventure tourism may exhibit a very small degree of leakage, however, as they place value solely on what the host country has to offer.
Effect
As a result of the leakage effect, tourism industries in developed countries often are much more profitable per dollar received than tourism in smaller countries. Islands, in particular, suffer from significant leakage. In countries such as TurkeyTurkey
Turkey , known officially as the Republic of Turkey , is a Eurasian country located in Western Asia and in East Thrace in Southeastern Europe...
and the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, the benefit to the economy from tourism is twice the dollar amount spent by tourists. In smaller places, such as Micronesia
Micronesia
Micronesia is a subregion of Oceania, comprising thousands of small islands in the western Pacific Ocean. It is distinct from Melanesia to the south, and Polynesia to the east. The Philippines lie to the west, and Indonesia to the southwest....
and Polynesia
Polynesia
Polynesia is a subregion of Oceania, made up of over 1,000 islands scattered over the central and southern Pacific Ocean. The indigenous people who inhabit the islands of Polynesia are termed Polynesians and they share many similar traits including language, culture and beliefs...
, that benefit is half the dollar amount spent. Some locations have managed to nullify the leakage effect almost entirely - New York City claims to generate seven dollars for the local economy per dollar spent by tourists. Some estimates of the degree of leakage claim only 5% of money spent on tourism remains in a developing country's economy.