Economic Leakage in Tourism: What It Is and How to Prevent It
Tourism is a significant driver of economic and social development. It is responsible for generating income, employment, investment, and ultimately, improving the quality of life for locals. But local communities in different destinations are not fully experiencing the benefits of this activity due to economic leakage in tourism.
When it happens, all the investment and effort put into growing tourism doesn’t pay off once part of the money generated by this industry leaves the host city or country.
This blog covers what economic leakage in tourism is, its consequences and what actions to take in order to keep tourists’ expenditures inside your destination.
What is economic leakage in tourism?
Tourism leakage happens when the revenue generated through tourism is lost to other countries or economies.
Tourism is an activity that traditionally brings foreign currency into a country’s economy. But due to globalization and travel conglomerates, this money is likely to leave the host country preventing the economic and social development of touristic areas.
Historically, economic leakage in tourism is more significant in developing countries. Sometimes it can nearly neutralize the money generated by tourism activity.
In Fiji, it is estimated that 60% of the money earned through tourism ends up leaving the country. In another study, tourism leakage estimates range from 40% in India to 80% in the Caribbean.
What triggers economic leakage in tourism?
Leakage is intrinsic to tourism and is present in all countries. However, its intensity varies in degree depending on how developed the destination is and the actions taken in order to prevent it.
Basically, leakage occurs through six main mechanisms:
1) Good and Service
In order to supply travelers’ demands, many destinations import goods and services. This type of economic leakage in tourism is more noticeable in islands, which are highly dependent on imports.
In this case, tourism leakage happens when the host country doesn’t have the ability or technology to build tourism-related infrastructure and depends on foreign companies for it. For example, to build airports and ports or to implement a new travel technology.
3) Foreign ownership
When the tourism industry is not well-developed in a destination, it’s common for governments to attract foreign investment in order to start the activity in that area. However, when foreigners have ownership of the touristic infrastructure, the profits generated by this activity are taken away from the host market. That is the case in a destination dominated by international resort chains, for example.
4) Promotional expenditures
Having an international presence is paramount for many destinations, on the other hand, it’s a source of tourism leakage. When a destination invests in attracting foreign visitors, the money spent on advertisement and publicity goes abroad.
5) Tax exemptions
When a destination gives tax exemptions to foreign investors it is giving up tourism income. This strategy to grow the tourism industry is common in developing destinations, but it should be well planned in order to not harm the local community.
6) Foreign employment
During the high season, the increase in demand leads to the opening of temporary job opportunities. This often attracts foreign workers interested in making money and leaving the destination after the end of the season.
Why is economic leakage in tourism an issue for destinations?
Although tourism has lots of benefits —it boosts the local economy, creates new jobs, promotes cultural exchange— on the other hand, it also has negative impacts:
- Puts pressure on the local infrastructure
- Impacts the environment
- Changes the daily life of residents
- Drains local resources
- Affects the local production chain
- Increases the demand for goods, services and accommodations, which rises their prices
When the money earned through tourism leaves the host destination, little or nothing can be done in order to mitigate these bad impacts and promote social, cultural and environmental well-being for the local community.
Hence, tourism stops being an attractive investment and turns into an issue for the destination.
How can tourism stakeholders prevent tourists’ expenditures from leaving a destination?
Tourism leakage is harmful to destinations, especially the ones that rely on tourism as the primary source of income.
In order to prevent it, the government, destination managers, travel companies, the local industry, residents and visitors should work together to make sure the money spent on this activity is reaching the right pockets.
Some actions that destination leaders can take in order to reduce economic leakage in tourism are:
Support local suppliers
The host community is a great source of workforce, services, and products that should be integrated into the local tourism industry. Destination managers should incentivize travel companies to buy from local producers before searching for suppliers abroad.
Attract conscious travelers
Destination marketers should invest in campaigns to attract conscious travelers. This type of traveler knows the importance of tourism as an economic and social driver for the host community. They make sustainable choices, support the local suppliers and protect the environment.
Promote niche tourism
Travelers looking for a niched experience are interested in discovering the local culture, history, culinary and hidden gems. Unlike mass tourism, which is usually offered by international companies and associated with overtourism, niche tourism is often offered by locals to a small group of travelers.
Incentivize local companies
Instead of giving tax exemptions to international companies, try reducing the taxes for local accommodations, operators and producers. A relief in taxes gives a chance for the local tourism ecosystem to flourish.
Limitate the presence of multinational corporations
All-inclusive packages are very popular among travelers. The issue is that about 80% of travelers’ expenditures on these packages go to international corporations. By restricting the presence of these companies in a destination, travelers should turn to local providers in order to have a complete stay.
Stimulate the diversification of the local economy
The more dependent on tourism a destination is, the bigger the tourism leakage. A destination with a diversified economy has more bargaining power when dealing with international investors.
Digitalize the tourism offer
Increasing the online exposure of local travel providers is a way to drive them more bookings. Destinations that are digitalizing their tourism offer, such as Visit Zagorije, not only make local companies more competitive but also facilitate the booking process for visitors.
Tourism leakage is an issue all destinations have to deal with. When not addressed, tourism income is drained out of the local community, preventing its economic, social and environmental development.
In this article, we have presented seven initiatives to fight back economic leakage in tourism:
- Support local suppliers
- Attract conscious travelers
- Promote niche tourism
- Incentivize local companies
- Limitate the presence of multinational corporations
- Stimulate the diversification of the local economy
- Digitalize the tourism offer
If you are a destination manager or marketer interested in empowering your local tourism stakeholders, SmartDestination is the right partner for you. We are a group of award-winning tech companies specialized in travel, tourism and hospitality with a complete solution to digitalize your tourism offer.
Contact us if you want to boost your travel and tourism product.