Tourism and economic development: Evidence from Mexico’s coastline

Benjamin Faber, Cecile Gaubert 29 June 2016

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Tourism is a particular form of market integration. Rather than shipping goods, tourism involves the export of otherwise non-traded local services and amenities by temporarily moving consumers across space. Tourist expenditures on these local services are then reported as tourism exports in cross-country data on services trade flows.

These tourism exports have grown to become an important channel of global integration, especially in developing countries. Over the past decade, tourism exports have exceeded manufacturing exports for 40% of developing countries, and they exceeded agricultural exports for half of them. The average annual growth rate of tourism exports from developing countries was 11% over the 30-year period 1982-2012.1

Unsurprisingly in this context, tourism has attracted widespread policy attention. Virtually every country in the world has one or several publicly funded tourism promotion agencies. Some governments and international organisations have also been advocating the promotion of tourism to foster local development in economically lagging regions within countries (e.g. World Bank 1979, DFID 2000). At the same time, much of the existing social sciences literature on tourism has been rather critical about its long-term economic consequences, especially in developing countries (Hawkins 2007). For example, Honey (1999) and Dieke (2000) have questioned the extent to which the gains from tourism accrue to the local population, rather than being captured by multinationals or domestic elites. In economics, the existing literature has argued that tourism may give rise to a particular form of ‘Dutch disease’, by reallocating factors of production towards stagnant service activities and away from traded sectors with higher potential for productivity growth (Copeland 1991).

Despite the rapid growth of tourism and widespread policy interest, the existing literature on trade and development has so far paid relatively little attention to this channel of market integration. In recent work, we seek to fill this gap using the empirical context of Mexico, a country where tourism has become an important economic force since the 1950s (Faber and Gaubert 2016). Our analysis aims to contribute to our understanding of two central questions. First, what are the long-run economic consequences of tourism in a developing country? Second, what are the channels underlying these effects?

To address these questions, we combine a reduced-form empirical analysis of the effects of tourism on local economic outcomes with a quantitative spatial equilibrium model, which we calibrate using these moments to explore the aggregate implications of both domestic and international tourism integration. In the first part, we follow the recent empirical literature (e.g. Autor et al. 2013, Topalova 2010, Mian and Sufi 2009) exploiting within-country variation to credibly identify the effects of policy shocks on relative regional outcomes. This approach is of interest in its own right, but in general does not shed light on aggregate effects that are common across regions. This shortcoming is particularly acute when the objective is to estimate long-term effects, as over time workers are mobile to arbitrage away regional variation in real incomes. In the second part, we follow a more structured approach that allows us to interpret the observed local effects through the lens of a general equilibrium model, and to explore the aggregate implications.

Our empirical strategy exploits variation in today’s cross-section of Mexican municipalities to capture the long-term effects of tourism on relative regional economic outcomes. Beach tourism in Mexico has had more than half a century to materialise into today's observed distribution of regional outcomes. To base the estimation on plausibly exogenous variation in local tourism exposure, we take inspiration from the tourism management literature, arguing that tourism is to a large extent determined by the quality of a very specific set of local natural characteristics. In particular, we identify a set of beach quality criteria from that literature, such as the presence of a nearby offshore island or the fraction of coastline covered by white sand beaches, which we can capture using high-resolution satellite data to construct instrumental variables for tourism attractiveness along the Mexican coastline.

Figure 1 Beach characteristics along the Mexican coastline

Notes: The left panel displays the remote sensing satellite data covering the Mexican coastline at a resolution of 30x30 meter. The right panel displays the location of islands within 5 kilometres from the Mexican coastline.

Using this design, we find that tourism has strong and significant positive effects on municipality total employment, population, local GDP and wages relative to less touristic regions. According to our preferred specification, a 10% increase in local tourism revenues leads to a 2.8% increase in municipality total employment, a 2.2% increase in population, a 4.3% increase in municipality GDP and a 0.3% increase in wages in today's cross-section of Mexican municipalities. Interestingly, these effects appear to be driven by sizeable local multiplier effects on traded sector production – we find that a 10% increase in local tourism revenues leads to a 3.2% increase in local manufacturing GDP. This effect holds conditional on municipality differences in access to transport infrastructure, as well as for manufacturing sectors that are not intensively used as inputs in the production of tourism-related services.

To interpret these effects and guide the estimation of the aggregate implications of tourism in Mexico, we then investigate them quantitatively through the lens of a spatial equilibrium model. We build on the work of Allen and Arkolakis (2014), Ahlfeldt et al. (2015) and Redding (2015), and extend their framework to capture the economic forces that are relevant in our context. That is, in addition to trade in goods and migration across regions, the model features trade in tourism-related services across regions and countries, input-output linkages between tourism and manufacturing, as well as local production externalities.

We allow for manufacturing production to be subject to both within and cross-sector agglomeration forces. The within-sector spillover is the standard source of agglomeration economies in economic geography models, and captures the extent to which a larger scale in local manufacturing production is beneficial for manufacturing productivity. In its presence, reducing the scale of manufacturing as the economy re-allocates factors towards services leads to adverse productivity effects in the aggregate. This adverse effect works in the opposite direction of the neoclassical gains from falling frictions to tourism trade. On the other hand, the cross-sector spillover captures the extent to which a larger scale of the local services sector affects traded sector productivity. By increasing local services production, the development of tourism may generate long-run positive spillovers on traded goods production by, for example, improving access to business services for local firms – such as finance, accounting or consulting – by loosening local credit constraints directly, or by facilitating business networks. In the presence of such cross-sectoral agglomeration economies, tourism can give rise to gains in traded-sector productivity that would not have occurred otherwise, thus reinforcing the neo-classical gains from tourism integration.

We estimate the model parameters using an approach that combines model-based indirect inference with our instrumental variable strategy. We find that both types of agglomeration forces are necessary to rationalise the observed effects of tourism across Mexican regions. In addition to the conventional within-manufacturing agglomeration economies, we find that tourism –through its effect on the development of the local services sector – leads to positive spillovers on local traded goods production.

Armed with the calibrated model, we proceed to explore general equilibrium counterfactuals. We find that tourism causes significant long-run gains to the average Mexican household that are in the order of 4.4% of household consumption. Slightly more than one third of these gains are driven by international tourism, and the remainder by domestic tourism across Mexican regions.

Turning to the underlying channels, we find that about one half of the observed effect on local GDP can be explained by neoclassical forces, including the direct effect due to local tourism expenditures. The remainder is driven by gains in local manufacturing activity due to both cross and within-sector agglomeration forces. In the aggregate, however, we find that these spillover effects contribute relatively little to the estimated welfare gains. That is, while the presence of within and cross-sector spillovers reinforce one another, leading to the large observed re-allocations of economic activity towards touristic regions, we find that they largely offset one another at the aggregate level, so that the aggregate gains from tourism are mainly driven by a classical market integration effect.

To conclude, much of the existing literature on tourism and economic development has been critical about tourism's long-term implications, especially in developing countries. At the same time, governments around the world have committed substantial public funds for national and regional tourism promotion policies. Our analysis serves to inform this debate by providing empirical evidence on the long-term effects of tourism activity on both local and aggregate economic outcomes in a developing country context.

References

Ahlfeldt, G M, S J Redding, D M Sturm, and N Wolf (2015), “The economics of density: Evidence from the Berlin wall”, Econometrica, 83 (6), 2127-2189

Allen, T, and C Arkolakis (2014), “Trade and the topography of the spatial economy”, The Quarterly Journal of Economics, 1085, 1139

Autor, D H, D Dorn, and G H Hanson (2013), “The China syndrome: Local labor market effects of import competition in the United States”, The American Economic Review, 103 (6), 2121-2168

Copeland, B R (1991), “Tourism, welfare and de-industrialization in a small open economy”, Economica, 515–529

DFID (1999), “Tourism and poverty alleviation: Untapped potential”, DFID, London

Dieke, P (2000), The political economy of tourism development in africa, Cognizant Communication Corporation.

Faber, B, and C Gaubert (2016), “Tourism and Economic Development: Evidence from Mexico’s Coastline”, NBER Working Paper No. 22300

Hawkins, D E, and S Mann (2007), “The world banks role in tourism development”, Annals of Tourism Research, 34(2), 348–363

Honey, M (1999), Who owns paradise?, Island Press

Mian, A, and A Sufi (2009), “The consequences of mortgage credit expansion: Evidence from the US mortgage default crisis”, The Quarterly Journal of Economics, 124 (4), 1449–1496

Redding, S J (2015), “Goods trade, factor mobility and welfare (Tech. Rep.)”, National Bureau of Economic Research.

Topalova, P (2010), “Factor immobility and regional impacts of trade liberalization: Evidence on poverty from India”, American Economic Journal: Applied Economics, 2 (4), 1–41

WorldBank (1979), “Tourism: passport to development?” World Bank/UNESCO Conference

Endnotes

[1] Figures based on UNCTAD statistics (http://unctad.org/en/Pages/Statistics.aspx).

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Topics:  Global economy

Tags:  tourism, Mexico, economic growth, government, market integration, global economy

Assistant Professor at the Department of Economics, University of California Berkeley

Assistant Professor of Economics, University of California, Berkeley

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