Effects of tourism on economic growth in China - Research Paper Example

Effects of Tourism on Economic Growth in China Introduction The size of tourism in China has significantly increased. A significant and sustainable growth has been experienced in China consequent to both domestic and international tourism for the past 20 years. With this, the ratio of tourism to the GDP in the country has been shown to increase every year. However, the impact of tourism in China has not been sufficiently analyzed (Xu, 33-50). In this paper, the effect of tourism to the economic growth in China will be thoroughly evaluated. This is with regards to its contribution to the national economy as well as the relevant policies and implications. It is especially in relation to the year 1997 which experienced the final input-output table, tourist expenditure and a social accounting matrix with minimum sectoral detail. As such, direct and indirect factors brought about by the incorporation of expenditure from tourists such as labour income, creation of employment, increased production and indirect tax among others will be considered. To get a real picture of tourism analysis in relation to the direct and indirect factors, a 48 sector social accounting matrix (SAM) will be constructed. With this data, the type II input-output model that enables people to approximate the “direct, indirect and the induced” effect of international tourism on the economy of China. This model contends that 1.40% of total household income, 1.64% of GDP, and 1.01% of the total Chinese employment depends on the expenditures of international tourism. The variation displayed by these percentages is clearly explained by the sectoral make up of tourist expenditures, as well as the sectoral variations in ratios between capital and labor, backward linkages and labor productivity. Literature Review In the last 10 to 20 years, the Chinese economy has witnessed tremendous growth. This is a similar case to its international tourism which has been found to grow at a faster rate. The China National Tourism Administration reveals that, for the first time, China was ranked at fifth position with regards to the number of international tourists who visited and the expenditure that was incoming from foreign tourists (58). A huge increase in the amount of expenditure from foreign tourists with an average of average of 19.7% in each year was recorded between 1978 and 2001. For this reason, the World Tourism Organization had expected that China would have been the primary tourist destination in the world by 2010 (Yan & Wall 260). Currently, it is speculated that, by the year 2015, China will become the second largest travel and tourism economy in the world after the United States. The main factors influencing the tremendous growth in China’s economy include its flourishing and widely considered growth in the tourism industry. This is also because of the open policy established by the Chinese, and an increased number of flights between China and other countries in the world. Moreover, various great improvements such as the transport infrastructure in China, accommodation in hotels and the increased tourist attractions have significantly contributed to this growth. One of the major theories in macroeconomics is the economic growth theory. Through the use of quantitative analysis, it has been shown that the effect of tourism on the developing economy of China bearing in mind the undeveloped levels of their tourism industry, tourism plays a significant role in the development of the country’s economy. In the conclusion of their 1992 study, Yan and Wall (270) noted that both domestic and international tourism only had a slight impact on the national level. This is with regards to the diversity and size of the economy in China. Using the traditional Type I Input-output model, they did not include the impacts of domestic tourism. Contrary to the use of outdated data in this case, the World Travel and Tourism council has recently projected the indirect and direct effects of domestic and foreign tourism leading to a revenue collection of $152 billion and the creation of domestic jobs amounting to 54 million (WTTC par. 1-8). In incorporates the input-output data from the Chinese system of National Accounts. Background Information Similarly to other developing countries, International tourism has been made a priority by the Chinese government since 1970. They have done this by enhancing the communication between China and the other countries in the world. It is in the effort to earn foreign hard currency to assist in the importation of facilities and technology. In spite of these efforts, it is still realized that the larger economic effect on the economy of China is influenced by domestic tourism. According to various studies, it is the domestic tourist expenditure that increases production, employment, direct tax and value added labor income. The function of international tourism as the main earner of foreign exchange in China has reduced due to an improved export ability and high foreign exchange reserves. With this research result, it is clear that local tourism should be more developed than international tourism. Thus, the development of domestic tourism is likely to lead to improve the consumption of households, which is considered to be weak at the moment. Unlike with the development of international tourism, its development would not lead to the serious problems related to insufficient supply as was the case in the 1980s whereby the government made remarkable improvement to meet the demands of tourists. A shift in priority is, therefore, necessary to be done by focusing more on domestic tourism than international tourism. The total travel and tourism demand in China currently accounts for about 4.3% of the total market share. What is currently known as “holiday economy” to refer to the unprecedented economic growth in China and the increase in disposable incomes has led to the increase in domestic tourism. As Worldwatch indicates, more than 70 Billion RMB has been collectively spent by the Chinese during the three yearly long holidays; national day, spring festival and the international labor day over the last five years (par. 1-5). In China, international tourism is highly considered to attract foreign exchange and thus a stimulus to the economic growth. The actual effect of foreign tourism to the Chinese economy will be herein analyzed using the most recent data. This will include the use of SAM data to create an IO model which is extended to cover accounts related to travel and satellite (OECD pp. 35-45). Data Analyzing Tourists Using the SAM Model The designation of an account as either endogenous or exogenous is the most fundamental step towards movement from SAM to a model structure. According to Bulmer-Thomas, the Social Accounting Matrix (SAM) plays an essential role in making accounting records for different economies (2). In accounting, it is based on the principle of double registry in the bookkeeping. A SAM is composed of rows and columns that record incomings and outgoings respectively. This can also reflect the income and expenditure. In the SAM the sum obtained in each row must be the same as that in the corresponding column. The Sam Model thus fully covers all the financial flows (Round par. 1-5). IO models on the other hand tend to focus more on the details between industries more than the modeling of the redistribution process involving incomes. In Table 1, the aggregated SAM for an analysis of tourism in China is reflected. It possesses 12 accounts where one of them is a production, two are factors, five are institutions, combined capital account, international tourism, the rest of the world, and a total account. Further 37 sectors are disaggregated from the production account from data obtained from the 10 table hence the creation of a detailed SAM account with 48 sectors. Table 1: International visitor arrivals and tourism receipts: 1978-2000 from The China National Tourism Administration CNTA 35), Year Visitor?Arrivals* (Thousand ?People) Growth Rates??% Tourism Receipts (Million?US ?dollars) Growth Rates??% 1978 1,809 ? 263 ? 1979 4,203 132.3 449 70.9 1980 5,703 35.7 617 37.3 1981 7,767 36.2 785 27.3 1982 7,924 2.0 843 7.4 1983 9,477 19.6 941 11.6 1984 12,852 35.6 1,131 20.2 1985 17,833 38.8 1,250 10.5 1986 22,819 28.0 1,531 22.5 1987 26,902 17.9 1,862 21.6 1988 31,695 17.8 2,247 20.7 1989 24,501 -22.7 1,860 -17.2 1990 27,462 12.1 2,218 19.2 1991 33,350 21.4 2,845 28.3 1992 38,115 14.3 3,947 38.7 1993 41,527 9.0 4,683 18.7 1994 43,684 5.2 7,323 ** 1995 46,387 6.2 8,733 19.3 1996 51,127 10.2 10,201 16.8 1997 57,588 12.6 12,074 18.4 1998 63,478 10.2 12,602 4.4 1999 72,796 14.7 14,099 11.9 2000 83,444 14.6 16,224 15.1 Average ? 21.4 ? 20.2 1980-88 ? 25.7 ? 19.9 1990-2000 ? 11.9 ? 19.1 * Visitor arrivals constitute overnight stays and same day arrivals There is a problem in relation to the evaluation of the impact of tourism on the economy of China. As explained by Fletcher, this is in relation to its lack of classification as a single industry. It can, however, be solved by correcting the expenditure of tourists per commodity group in terms of its imports. These must be assigned to the domestic factory concerned with production. It is with this that the direct impact of tourism on value added and employment can be estimated. Most indirect effects are produced by the relationship between industries dependent on tourism and the others. Studies have shown that tourist establishments and industries that rely on tourism lack a backward linkage with supplying companies and forward linkage with purchasing companies (Archer 920; Archer & Fletcher 35). Thus, as suggested by Oosterhaven & van der Knijff, (100) the IO Model will be most appropriate to measure the impacts from such factories that are solely based on the backward linkages. Indirect effects are also caused by linkages with the household and the government sectors besides with other industries. They are exhibited by a backward character due to consumption and government linkages. It is because of their relation to the final consumption of goods and services. As such, these effects are better incorporated using IO models like the demo-economic models and the Social Accounting Matrix Model (Briassoulis 490). Regression Results In this IO/SAM model, some of the structures to be included are 1. x = Z i + cen + ftour + fex 2. Z i = A x 3. cen = Q x = (i – mc) • pc (1 – s – t) k’ x 4. ftour = B tex 5. v = C x where i denotes a column summed by . multiplication from cell to cell and ‘ row vector. In equation 1, the total output x is the sum of intermediate demand zi, the demand of endogenous consumption cen, the demand of foreign tourists ftour and the final demand of the exogenous consumption fex. All these are considered per sector origin. Equation 2 shows the dependence of intermediate demands on input coefficients A and the levels of outputs in purchasing companies x. The dependence of endogenous consumption demand on the coefficients of consumption Q and the levels of output in purchasing industries x that influence the overall labor income. The construction of Q takes place through the combination of the coefficients of per labor units k, the rate of tax t, rate of saving s, the coefficients of consumption package pc and coefficients of consumption import mc. In equation 4, the link between the demand by exogenous tourism by commodity tex and the domestic production industry is displayed whereas in 5, the link between impact variable v and the domestic production per industry is shown. All the above impact variables lead to the v = C (I – A – Q)-1 (B tex + fex). In this equation, C represents the diagonal matrices such as value added, coefficients of employment and household income. All the coefficients apart from s and t are derived from the Macro SAM as shown in Table 2. B can be derived by matching the 9 commodities groups that contain expenditures for foreign tourists with the 17 industries in the IO model. C is a representation of the coefficients of employment, incorporation of the 17 industries in the IO model, and the 9 sectors from the employment statistics (CNBS 593). Table 2. The classification of industry and Type II Chinese output multipliers, in 1997 1 Agriculture 4.01 2 Mining and Quarrying 3.47 3 Foodstuff 4.07 4 Textile, Leather and Clothing 4.27 5 Other Manufacturing 3.95 6 Electric Power, Steam and Hot Water 3.40 7 Coking, Gas and Petroleum Refining 3.92 8 Chemical Industry 4.18 9 Building Materials and Non-Metal Products 4.01 10 Metal Products 4.43 11 Machinery and Equipment 4.32 12 Construction 4.38 13 Transportation, Post and Telecommunications 3.30 14 Commerce and Catering Trade 3.61 15 Public Utilities and Resident Services 3.09 16 Banking and Insurance 2.82 17 Other Services 4.00 Impact of Tourism of Economic Growth The impact of expenditure for foreign tourists is calculated by vtour = C (I – A – Q)-1 B tex For the calculation of total production C is replaced with the unity matrix I From the table the total expenditure from foreign tourists tex was 100, 093 million Yuan. The impact of these impact variables is provided. Other rows provide the % distribution. The industrial contribution of the variables on output and value added is established. In China, imports are near zero. Indirect output effect per each unit in the first order equals one minus the value added effect per unit. Thus, for all foreign outputs, i’A + m’ + c’ = i’ where m equals the imports per unit of output. Industries that have higher output multipliers tend to bear lower value added contribution. As such, the tertiary industries with lower output multipliers contribute more to the GDP (Table 2). Table 2. Direct, indirect and induced impacts of foreign tourism in China, in 1997 Sector* Output, % Value added, % Household income, % Employment, % 1 9.5 13.3 23.9 47.9 2 3.4 4.1 3.9 1.6 3 5.7 3.7 2.1 4 4.5 3.1 3.0 5 4.4 3.6 3.0 9 1.7 1.3 1.2 10 3.9 2.0 2.0 11 8.7 5.7 5.0 12.1 6 1.9 1.9 1.0 7 2.5 1.3 0.7 8 6.7 4.2 3.2 1.2 12 1.0 0.7 1.0 0.7 13 14.4 18.8 15.1 15.9 14 8.9 10.0 10.3 12.0 15 17.3 19.6 16.8 5.8 16 2.0 2.8 1.7 2.7 17 3.5 3.8 6.1 0.1 In billions Yuan In thousands Total 280.1 119.9 59.6 7,464 As % of China 1.64% 1.40% 1.01% Interpretation of Results The results revealed a positive nature with which the relationship between tourists expenditure and foreign exchange into the economy of china. It is mostly achieved on a long-term basis. From the results, it is comprehensible that although there is a lower ratio of tourism expenditure and economic growth in some parts of China, it is related significantly to the economic growth in China. They show that a weak relationship between revenue accrued from tourism and the economic growth is produced by the lack of balance in development. This is despite the fact that some of the developed areas and underdeveloped areas have shown a higher ratio. In addition, most of the policies formulated by the local government to promote the development of tourism have been supported. Conclusion In conclusion, the study of tourism development of the economy in China has revealed that while the role of economic growth in the promotion of tourism is great, that of tourism in the promotion of economic growth can still not be evaluated. However, this role can be enhanced with time. In over roughly the last decade, there has been faster growth in the international tourism growth than the rest of the economy in China. This has led to the projection of the country as being the main tourism destination around the world by the year 2010 (Yan & Wall, 257-265). An investigation is thus performed on the dependence of Chinese economy on the expenditure by tourists. This is from the year 1997 from where there insufficient and detailed data as reflected in Fig. 1. From the literature review, it can be realized that there is a lack of forward linkages in the area of tourism and its activities. As such, it was necessary to integrate the IO impact Model with the demand for endogenous consumption that is based on the SAM model. They were used to estimate the “direct, indirect and induced dependence” that the Chinese economy has on the international tourism in the country. 20 18 16 148 12 10 8 6 4 2 0 Fig. 1: The growth of expenditure from foreign tourists in billions of US $ in China from China National Tourism Administration, 2002. From the results, a small dependence of 1.64% is revealed by the Chinese GDP on the international tourism. This result is, however, not absolutely small when compared to other more tourism-dependent economics apart from China. It is nonetheless speculated that the constant maintenance of these results will lead to a double of the resultant value. This will lead to the closeness in percentage to the results obtained in some of the small countries with bigger effects. However, it can also be noted that the Chinese GDP has a greater value than the Chinese household income and the Chinese employment which stand at 1.40% and 1.01% respectively. From these results, it can be deduced that international tourism in China possesses an essential role in the value addition to the country’s economy. It majorly stimulates the activities in industries that provide modern services. This is especially with regard to the employment impact which highly depends on the industrial composition and bears a significant difference from that of the GDP. 50% of the composition in industries is concentrated on the agricultural sector while the household impact only contributes 24% of the GDP and 13% by the impact of GDP. It shows that agriculture in China is still in its traditional aspect and still needs some effort to produce value in relation to some little input. From this research, it can be concluded that the impact of international tourism in China displays a lot of prospects for the future of the Chinese economy. This is because, although it is currently small, it still possesses a value-added intensity that is quite high. Works Cited Archer, Brian. “Importance of Tourism for The Economy of Bermuda,” Annals of Tourism Research, vol. 22. 1995: pp. 918-930. Print. Archer, Brian. & John, E. Fletcher. “The Economic Impact of Tourism in The Seychelles,” Annals of Tourism Research, vol. 23. 1996: pp. 32-47. Print. Briassoulis, Helen. “Methodology issues, tourism input-output analysis,” Annals of Tourism Research, vol. 18. 1991: pp. 485-495. Print. Bulmer-Thomas,V. Input-Output Analysis in Developing Countries.. New York: John Wiley. 1982:pp. 1-15. Print. China National Statistics Bureau (CNSB). “1997 Input-output table of China,” China Statistical Yearbook, China Statistical Press, Beijing. 2000: p. 593. Print. China National Tourism Administration (CNTA). “Rank of China’s Tourist Arrivals and Tourism Receipts in The World 1978-2001,” China Tourism Statistical Yearbook, China Tourism press, Beijing.2002: p. 35. Print. Fletcher, E. John. “Input-output Analysis and Tourism Impact Studies,” Annals of Tourism Research, vol. 16. 1989: pp. 514-529. Print. OECD.“Measuring the Role of Tourism in OECD Economies, The OECD Manual on Tourism Satellite Accounts and Employment,” OECD Paris, No. 10. 2000. Print. Oosterhaven, Jan, & E.C. van der Knijff. “On the economic impact of recreation and tourism: The input-output approach,” Built Environment, vol. 13. 1987: pp. 96-108. Print. Round, I. Jeffery. “Social Accounting Matrices and SAM-based Multiplier Analysis,” World Bank working paper. 2004. Retrieved 6 March 2013 from www.ecomod.net/conferences/iioa 2004. Worldwatch. China to Become Second Largest Tourism Economy within the Decade. 2013. Retrieved 6 March 2013 from http://www.worldwatch.org/node/3920 WTTC (2003) The impact of Travel and Tourism on Jobs and the Economy, China and China Hong Kong SAR. World Travel and Tourism Council Retrieved 6 March 2013 from www.wttc.org/publications/pdf/China Hong%20Kong.pdf) Xu, Gang. 1999. Tourism and Economic Development in China, Richmond Surrey: Curzon Press Yan, M & G. Wall (2001) “Economic Perspectives on Tourism in China,” Tourism and Hospitality Research, vol. 3, pp. 257-275. Print. Read More