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Elsevier Editorial System(tm) for Annals of Tourism Research Manuscript Draft Manuscript Number: Title: Is Australian Tourism Suffering Dutch Disease? Article Type: Full Length Article (6000 - 9000 words) Keywords: Dutch Disease; Australia; destination management; tourism exports and imports; exchange rates; resource movements Corresponding Author: Professor Peter Forsyth, Corresponding Author's Institution: First Author: Peter Forsyth Order of Authors: Peter Forsyth; Peter J Forsyth, B Ec, M Ec (Syd), D Phil (Oxon); Larry M Dwyer, B Com (UNSW), Ph D (Western Ontario) Abstract: As a result of Australia's boom in exports of minerals to China and other emerging Asian economies, its currency has risen substantially against other leading currencies. The higher exchange rate has posed significant problems for traditional export and import competing industries, one of which is tourism. This is a typical Dutch Disease effect. The discussion highlights how recent changes in Australian inbound, outbound and domestic tourism can be explained in terms of the theory of the Dutch Disease.. Four different policy responses are then discussed. These involve the attempt to: enhance Australia's destination price competitiveness; promote inbound tourism; promote domestic tourism; improve product offerings to make destination Australia more attractive.
Is Australian Tourism Suffering Dutch Disease?
Peter Forsyth (corresponding author)
Department of Economics
Monash University, Clayton, 3800
Victoria, Australia
Tel: +61 3 99052495
Larry Dwyer
School of Marketing, Australian School of Business
University of New South Wales, NSW 2052, Australia
Tel: +61 2 9385 2636; Fax: +61 2 96631985
Ray Spurr
School of Marketing, Australian School of Business
University of New South Wales, NSW 2052, Australia
Tel: +61 411514876; Fax: +61 2 96631985
Cover Letter (with Author details and affiliations)
Peter Forsyth has been Professor of Economics at Monash University since 1997. His
research has been on applied microeconomics, with particular reference to the
economics of air transport, and tourism economic. He has recently published a jointly
edited book on Airport Competition the European Experience, Ashgate. Recent work
has involved using computable general equilibrium models to assess the economic
impacts of tourism, including events, and in analysing tourism and aviation policy
issues. Much of his work is with Larry Dwyer and Ray Spurr.
Author Bio
Is Australian Tourism Suffering Dutch Disease?
Peter Forsyth, Monash University, Australia
Larry Dwyer, University of New South Wales, Australia
Ray Spurr, University of New South Wales, Australia
*Title Page
Research Highlights
Dutch Disease is analysed in a novel context with tourism as the declining sector
Changes in Australian inbound, outbound and domestic tourism explained in terms of
Dutch Disease
The discussion highlights the challenges presented to destination managers.
The findings are relevant to any destination which has a booming (non tourism)
export sector.
*Highlights (for review)
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Is Australian Tourism Suffering Dutch Disease?
INTRODUCTION
Australia is currently experiencing a boom in its mining industry with huge demand for its
minerals to fuel growth of industry in China and other emerging Asian economies. China‟s
real GDP has increased six-fold since 1990, and its economic development effort has required
ever-larger amounts of raw materials for investment in infrastructure and export production.
This boom has come about quite quickly, and it has been substantial (Gregory 2011; Gregory
and Sheehan, 2011). Demand for coal and iron ore has grown, and a third commodity, gas, is
likely to grow sharply over the next decade. Shipments from Australia of coal and iron ore
have risen, but the notable feature of this boom has been that prices have risen very rapidly.
A major economic outcome has been a strengthening of the Australian dollar. While high
commodity prices, high interest rates, and increased financial inflows have played a role in
strengthening the Australian dollar, the major influence has been the resources boom.
Australia's strong Asian ties and Asia's demand for resources all have helped sustain the rise
of the Australian dollar against other leading currencies, which in mid 2012 reached historic
highs (TRA 2012b).
While minerals exports have increased, the mining boom has lead to a contraction in other
tradable goods and services- the Dutch Disease effect. „Dutch Disease‟ is a term coined in the
late 1970s after economists identified a link between the discovery of large deposits of
natural gas in the Netherlands and the decline of its manufacturing sector. The theory
postulates that, due to a resources boom, the domestic currency appreciates due to increased
*Manuscript (without author details, affiliations, or acknowledgements)Click here to view linked References
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export sales but this adversely affects other, non-resource exporters, making them less
competitive. Additionally, a resources boom attracts scarce inputs to production such as
labour and capital away from other sectors creating an additional impact. There are several
dimensions to this concept (Gregory 1976; Corden and Neary, 1982). An export boom (eg.
natural gas, oil) leads to a rise in real incomes in a country, which give rise to spending
effects- thus residents of the country, are able to spend more. The boom leads to increases in
exports of the booming commodity, but reduced demand for other exports, and additional
imports of goods and services that compete with domestically produced items. Resources are
shifted away from the production of the non-booming („lagging‟) exports, and into the
production of the booming sector‟s exports, and non-tradable goods and services. Thus, while
the mining exports of Australia continue to grow, other sections of the economy have
declined. These include agriculture, international education and manufacturing (Corden,
2012).
One export and import competing sector particularly affected by Australia‟s mining boom is
its tourism industry. Tourism, as a tradable service, is affected by the rise in the exchange
rate, and the various spending effects resulting from the boom. The question arises as to the
extent to which the tourism industry is affected by the mining boom. There has been some
discussion of Dutch Disease in the tourism literature, but with one exception that we know of
(Tourism Research Australia 2011a, 2012b), it has been in the context of tourism as the
booming sector – not as a sector affected by the boom. Since tourism turns non-tradable goods
and services into exportable goods and services, the symptoms of Dutch disease can also result
from a demand shock of inbound tourism booms as opposed to the traditional Dutch disease
supply shocks, such as discoveries in natural resources. Copeland (1991) in an earlier
theoretical paper, argued that a tourist boom tends to raise the demand for and hence the
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prices of nontraded goods (i.e. improvements of the so-called secondary terms of trade),
expanding their production at the expense of the traded sectors and, in particular, the
manufacturing sector. This argument suggests that a tourist boom can lead to de-
industrialization, consistent with Dutch Disease. The welfare implications for tourism have
since been examined by Chao, Hazari, Laffargue, Sgro and Yu (2006), Nowak and Sahli
(2007), Capó, Font and Nadal, (2007), and Holzner (2011). These studies support Copeland‟s
view that the main channel through which an increase in domestic or international tourism
may alter national welfare is a change in the real exchange rate (or terms of trade) of the host
economy. Consistent with this research, computable general equilibrium (CGE) modelling has
also shown that an increase in the demand for Australian tourism impacts adversely on other
sectors of the Australian economy, traditional exports and import competing industries in
particular, but can generate an increase in welfare depending on the size of the terms of trade
effect (Adams and Parmenter 1995; Dwyer, Forsyth, Spurr, and Ho 2003).
While the above studies have focused on the effects of an expanding tourism industry on
other economic sectors, the question arises as to the reverse situation, that is, where another
export sector is booming and having effects on tourism. This issue, where tourism is a
„lagging‟ rather than booming sector has important analytical and policy implications for
destination management. This paper has several aims. First, the Australia‟s Dutch Disease
situation is outlined briefly. The way in which tourism is affected by the Dutch Disease is
then discussed- the theoretical discussion is matched up with the empirical experience. The
paper then shows how recent changes in Australian inbound, outbound and domestic tourism
can be explained in terms of the theory of the Dutch Disease. This sets the scene for a
discussion of how destination managers should respond to the impacts on tourism of a boom
in another export sector. Four different policy responses are then discussed. These involve the
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attempt to: enhance Australia‟s destination price competitiveness; promote inbound tourism;
promote domestic tourism; improve product offerings to make destination Australia more
attractive. The policy discussion highlights the advantages of the different approaches and the
challenges that each poses to destination managers. The issues addressed are relevant to any
tourism destination where tourism is a lagging (non-booming) export sector.
AUSTRALIA‟S DUTCH DISEASE
Australia‟s current mining boom took hold from mid 2004. Figure 1 shows that mineral
resource exports returns in original terms have increased strongly (up 121% to $171 billion in
2011–12, compared to 2004–05) relative to other exports in goods and services (including
tourism). During this period, the values of mineral exports from Australia have grown
rapidly.
INSERT FIGURE 1 HERE
From mid 2004, Australia has been experiencing rapid growth in its terms of trade, and a
strong increase in its exchange rate. Both these changes seem to have paused over the last
year or so, but they have settled at high levels (Gregory and Sheehan, 2011). In recent years
the higher exchange rate has posed significant problems for traditional exports and import
competing industries, one of which is tourism. Thus, Australia is experiencing a typical
Dutch Disease situation (Corden, 2012). As with other cases of the Dutch Disease, such as
Australia‟s boom in the 1970s (Gregory, 1976; Gregory and Sheehan, 2011) and the British
and Norwegian North Sea Oil booms (Forsyth and Kay, 1980), this creates an issue of
adjustment in the foreign account. While many industry sectors gain, traditional export
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industries lose markets, and are forced to contract. The mining boom leads to an increase in
imports of traded goods and services such as outbound tourism, and a decrease in non-
mineral exports, such as primary commodities and inbound tourism. Most areas of
manufacturing find it difficult to survive, and tradable service industries, such as tourism, are
negatively affected overall.
The mining boom has seen returns for mining and related industries increase more strongly
than for other industries. As an indicator, Gross Value Added (GVA) in the mining industry
has increased from $47.1 billion in 2004–05 to $122.9 billion in 2010–11; an average annual
increase of 17.4%. As shown in Figure 2, while GVA for all industries increased by 7.5% per
annum over this period, GVA for tourism increased by only 4.1% per annum over the same
period. Between 2006-07 and 2010-11, the contribution of tourism (direct) to GVA has
declined at the national level and in each state and territory (Tourism Research Australia
2012b).
INSERT FIGURE 2 HERE
There was also a strong growth in the demand for labour in mining and related industries
during this period (141%), which was much higher than the 16% growth in employment
across all industry sectors over the same period, with tourism employment growing at a
slower 9.2% (Tourism Research Australia 2012b).
Underlying these statistics is the fact that Australia is experiencing both a spending effect,
and a resource movement effect, typically associated with Dutch disease, each of which is
affecting its tourism industry.
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The spending effect comes from the higher profitability of the booming sector and related
industries. This sector pays higher wages to its workers, higher capital payments to capital
owners, and higher tax revenue to the government. The rise in real incomes effectively raises
the demand from households and government for all goods and services in the economy,
including non-tradeables. Over the last five to ten years, Australia‟s GDP has not grown
remarkably, but its real gross income (GNI) has, reflecting the additional rents earned from
the mining sector (Australian Bureau of Statistics (2012). While some of these rents are
payable overseas to owners of capital, Australia still gains a large increase in its income. The
increased profitability of the booming sector increases demand for the services sector (non-
tradeable sector), and its prices increase as a result. However, the tradeable sectors are subject
to world prices, which are not influenced by changes in domestic supply, so their tradeable
goods remain at world prices. Effectively, the relativity of prices of non-tradeable to
tradeable goods has increased, and this increase in relative prices reflects a real appreciation
in the exchange rate. Australians are spending their increased income on tradable products
such as TVs, computers and overseas tourism as well as non-tradable products such as home
renovations, restaurant meals and haircuts (Australian Bureau of Statistics 2012b).
At the same time, there is a large resource movement effect taking place. This effect comes
through in various stages. Due to its higher profitability, the booming sector is able to pay
higher wages to attract labour from the other sectors, including the non-tradeable sectors. The
movement of labour out of any non-tradeable sector reduces the output level of that sector.
As a result, this creates excess demand for non-tradeable goods. Consequently, the price of
non-tradeable goods will rise to restore the equilibrium in the non-tradeable sector, which
again leads to a real appreciation. Real appreciation reflects a stronger domestic currency
relative to foreign currency. As a result, this adversely affects exports of all other sectors. In
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Australia, in the current boom, the resource movement effect is not so much a matter of a
shift to the booming sector. In the present boom, it is not so much that the resource
movement effect takes the form, for example, of plumbers and carpenters in Cairns, a tourism
and agricultural centre, moving to the Pilbara, a mining area, so much as baristas and
hairdressers in Cairns moving to Sydney, a major urban and financial city. To this extent, the
resource shifts set in motion by the boom may be easier to be accommodated than if there
were there a large shift to the mining regions. The reduced production of export and import
competing goods frees the resources to be used in the mining and non-tradable industries.
This shift of resources is important to understanding what is happening to Australia‟s tourism
industry at the present time.
Since traditional export sectors, including tourism have had capital, investment dollars, and
labour drawn away by the record profitability of mining and related industries. Reflecting this
unevenness in growth, terms such as „patchwork‟ or „two-speed‟ are being used to describe
the condition of Australia‟s economy. According to many economists, we are no longer
dealing with a cyclical shift but a structural change in the Australian economy (Corden 2012)
TOURISM AND DUTCH DISEASE
Tourism is a relatively large industry for Australia. In 2010-11 tourism‟s contribution (direct
plus indirect) to Australian gross value added (GVA) was $69.1 billion, or 5.3% share of the
Australian economy. In 2010-2011, 907,100 people were directly and indirectly employed by
spending on tourism, representing 7.9% cent of total Australian employment. Tourism
exports were $23.7 billion in 2010-11, accounting for 9.0% of the national total (Australian
Bureau of Statistics 2011). However, despite these impressive statistics, over the past decade,
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the tourism industry has underperformed against the broader Australian economy, the latter
growing at an average annual rate of 7.5% in nominal terms while the tourism industry has
grown by only 3.9% a year. If the Australian economy grows at its thirty year average of
3.2% a year, forecasts suggest that tourism‟s share in the economy will continue to decline in
the period to 2020 (Tourism Research Australia 2011a).
Prior to the year 2000, inbound and outbound tourism were both growing strongly. Domestic
tourism was growing, but at a much slower pace.
Table 1 provides data on Australian inbound, outbound and domestic tourism over the past
decade.
INSERT TABLE 1 HERE
Table 1 reveals that, since the middle of the decade, inbound tourism has grown but quite
slowly. Between 2004-05 and 2011-12, international visitor arrivals to Australia have grown
by 1.4% per annum from 5.4 million to 6.0 million – well below the long term average of
4.4% (1991-92 to 2011-12). Inbound leisure arrivals have struggled most since 2004-05,
growing by just 0.5% per annum despite rapid expansion in the China market.
By contrast, columns 3 and 4 reveal that outbound tourism has been growing very rapidly
with numbers more than doubling between 2000 and 2011. In contrast to the lower than
average growth in international visitor arrivals, short-term departures by Australians have
increased from 4.4 million to 8.0 million (growth of 8.4% per annum) between 2004-05 and
2011-12. Furthermore, over the same period, departures specifically for leisure have nearly
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doubled from 3.3 million to 6.4 million (growth of 9.9% per annum). Australia now has a
deficit both in arrivals and the tourism balance of trade. An increasing outbound market
contributes to a widening „tourism trade deficit‟, from a peak surplus of $3.6 billion in 1999–
00 to a deficit of $5.0 billion in 2009–10 (Australian Government, 2011).
Domestic visitor nights, shown in columns 5 and 6, were lower in 2011-12 than was the case
at the beginning of the decade. Between 2004-05 and 2011-12, domestic visitor nights have
fallen by 0.3% per annum from 289.7 million to 284 million. Leisure travel, in particular, has
come under pressure not only from the higher value of the Australian dollar (linked in part to
the mining boom) and strong competition from overseas destinations but higher prices for
tourism services. Reflecting this, leisure nights have fallen by 0.5% per annum from 229
million in 2004-05 to 221 million in 2011-12. Domestic interstate visitor nights for leisure
have fallen from 102 million to 92.8 million (down 1.4% per annum).
Columns 7 and 8 of Table 1 show the Trade Weighted Index (TWI) and annual changes in
this measure. The TWI measures the value of the Australian dollar against a basket of foreign
currencies of major trading partners. Between mid 2004 and mid 2012, the TWI increased by
29.4%. The standard TWI is not, however, an accurate measure of competitiveness for the
tourism industry because tourism trade patterns are different from overall trade patterns.
Dwyer and Forsyth (2011) have developed an industry specific trade weighted index, which
they call the Tourism Trade Weighted Index (TTWI). The TTWI weights the exchange rates
of different countries by their share in inbound and outbound tourism expenditure (not just
their share in overall exports and imports). Recent changes in the index highlights the
competitive pressure Australian tourism is facing. The inbound TTWI has increased by 50%
between June 2000 and December 2009, indicating that in real terms, the cost of visiting
Australia, excluding air fares, fell by 50% over this period. During the same period the
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outbound TTWI increased by 47%, indicating that foreign destinations were, on average 47%
less expensive for Australians (Dwyer and Forsyth 2011).
Establishing any direct causality between the mining boom and various segments in the
Australian tourism industry is difficult. Dutch Disease influence does not necessarily imply
declining inbound visitation. If the impact of lower visitation on the industry was modest, it
could be manifest as a fall in the growth rate, not an absolute decline. Nonetheless, these
recent trends in tourism appear to relate, at least in part, to the mining boom which took hold
in 2004-05.
Studies indicate that exchange rate changes do influence international arrivals, particularly
leisure tourism (Crouch, 1995, Seetaram 2012). Real tourism exports increased 2.3% over the
period 1999 to 2004. This was a period when the Australian dollar averaged around US$0.61.
When compared to the period 2005 to 2010- when the Australian dollar averaged US$0.82-
real tourism exports increased 1.1% (Tourism Research Australia 2011b). A higher
Australian dollar reduces Australia‟s international competitiveness and reduces the spending
power of inbound tourists in Australia.
Figure 3 shows tourism and mining exports and imports in volume terms and movements of
the Australian dollar. The graph highlights the contrast between Australian inbound and
outbound tourism flows since mid 2005 as the exchange rate appreciated.
INSERT FIGURE 3 HERE
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The influence of the exchange rate appreciation varies across different source markets and
across purpose segments. Consider first the international inbound market. International
holiday travellers are more influenced than business travellers and those visiting friends and
relatives. For Australia as a tourism destination, the bilateral exchange rate (the exchange rate
between the source country and Australia) has been found to play a greater role in the
purchasing decision than the country‟s overall exchange rate performance (Tourism Research
Australia 2011b). Over the period 2000-2010, the changes in inbound tourism expenditure are
revealing when considered by source market. While some source countries have experienced
declines in visitor numbers, especially Japan and some in Europe, there have been some real
success stories, especially China (the mining boom reflects the growth of the Chinese
economy). While numbers of Chinese inbound tourists have increased, the 45% appreciation
of the Australian dollar against the Chinese Renminbi, was associated with a decline in real
per-visitor expenditure of 38%. Corresponding falls in real expenditure per visitor occurred in
other major source markets: UK (-29 %), USA (-44%), New Zealand (-17%), Japan (-32%)
and Indonesia (-29%).
Both the spending effect and the exchange rate effect associated with Dutch Disease generate
more outbound tourism, which was growing strongly prior to the boom. As a result of the
boom, Australian residents‟ incomes are higher- in this particular case, quite a lot higher
(Gregory and Sheehan, 2011). The higher incomes generate greater demand for travel
overseas. At the same time, the appreciation of the local currency means that the cost of
Australian tourism services increases relative to overseas tourism services. As a result,
alternative destinations become more appealing to consumers. Since outbound tourism
reduces welfare for Australia (Forsyth et al 2011) this represents a cost of the mining boom,
though not necessarily a large one.
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Australian residents are spending some of their additional income on domestic tourism.
Stronger demand for business travel is evident in key areas associated with the mining boom
(Tourism Research Australia 2012b). Business travel in non-capital city tourism regions has
increased strongly (particularly in Queensland and Western Australia). Some of this growth is
due to the increase in travel associated with the mining boom, particularly by Fly in-Fly out
and Drive in-Drive out workers, implying some competition with mining for accommodation
and aviation (and related infrastructure). There will also be an increase in leisure tourism.
In contrast, the exchange rate effect induces residents to switch out of domestic tourism and
other goods and services, and into outbound tourism. The net impact is often uncertain.
Although it seems that since mid 2004, the positive spending effect appears to have been
outweighed by the exchange rate effect (suggesting that domestic and outbound tourism are
quite good substitutes). Where the spending effect is relatively low, as with the Australian
1970s minerals boom, (Forsyth, 1986) it is more likely that domestic tourism will fall.
Unfortunately, we do not know precisely how substitutable domestic tourism is for outbound
tourism as this issue has been neglected by researchers.
There is a significant difference in the way tourism has been affected by the mining boom as
compared to most tradable industries in Australia. For most traded goods and services, the
mining boom has been associated with a sharp quantity adjustment- producers of export and
import competing products have lost market share, and in some cases have exited the market.
For tourism, in contrast, the main response to the exchange rate rise has been in terms of
price not quantity. While the outputs of most industries have been affected by the large rise in
the exchange rate- tourism has been less affected relative some manufacturing sectors. With
tourism, prices in the destination are set in the domestic currency- not, as with most tradables,
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in world prices (the important exception is aviation). In world price terms, tourism prices
have risen- Australia as a whole, has some market power (Forsyth and Dwyer 2002). While
Australia has become less competitive in world tourism markets, the shift out of tourism
towards the booming sector and non tradables has been smaller than in other industries, such
as most manufacturing.
POLICY RESPONSE
In most cases, since the costs of any measures that successfully moderate real appreciation of
the exchange rate and thus Dutch Disease effects may be considerable, the efficient response
to a decline in the export of a tradable industry is to do nothing to slow up or prevent the
decline of particular firms or industries adversely affected. The argument is that „lagging „
export sectors‟ need to adjust to the world economy and that the different assistance options
such as exchange controls and higher tariffs will ultimately come at the expense of other,
more efficient, industries (Corden, 2012). In contrast, if tourism industries are negatively
affected by the Dutch Disease, it does not follow that the usual response- to let the market
work, is necessarily welfare improving. Tourism is not a typical export/import competing
industry. Given that Australia has market power in its tourism product, tourism differs from
other industries in a Dutch Disease context. There are several ways in which the negative
impacts of the Dutch Disease can be mitigated. Four strategies will be discussed here. These
are: price changes through changes in taxes levied on tourists; promotion of inbound tourism;
promotion of domestic tourism; improving product offerings to make the destination more
attractive.
Price changes through changes in taxes levied on tourists
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With most goods and services for which the Dutch Disease is an issue, the small open
economy assumption prevails (Chao et al 2007, Nowak and Sahli 2007). A country buys and
sells a good, such as wheat or rice, at the going world price. Thus a country such as Australia
has effectively no market power over these goods. With tourism it is different- along with
other countries, Australia can determine the price at which it sells its tourism services, by
raising or lowering taxes.
This means that countries can and do exercise market power in inbound tourism. It is very
likely that Australia does not make full use of this market power. To some extent,
destinations can choose the prices at which they sell their tourism services by raising or
lowering taxes. Australia can impose a tax on tourism and inbound tourists will have to pay
it, if they choose to visit Australia. Australia already imposes specific tourism taxes, such as
the Passenger Movement Charge (Forsyth, Dwyer, Pham, Spurr, Hoque 2011), as well as
taxes such as GST (Goods and Services Tax) which it levies on all the goods and services
that tourists buy, such as accommodation, meals and transport fares.
Should the price of inbound tourism be reduced by reducing taxes paid by tourists? The
problem with this option is that it will decrease the price that Australia receives for its
tourism services. If for example Australia were to reduce its taxes on inbound tourism (say by
reducing the incidence of the GST on tourists), it will gain through additional benefits from
tourism, but lose from a reduction in taxes paid by foreigners. Given that Australia does not
tax tourism highly, it will be a net loser from any reduction in tourism taxation. Thus one of
the most obvious ways of mitigating the effects of the Dutch Disease is ruled out. There is
scope for destinations to reduce different charges paid by tourists, including infrastructure
charges and environmental charges. Governments have little influence over real wage rates
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which reflect the destinations stage of development and the workings of the labour market.
Destinations can influence price levels through monetary policy but this is not a very well
targeted way of influencing destination competitiveness especially since low home prices
tend to be associated with higher exchange rates (with corresponding Dutch disease
effects).While governments can influence the productivity of different industries including
tourism, in the main this influence is indirect via competition policy which stimulates
efficiency. Again, however, economy wide productivity improvements will tend to result in
exchange rate rises and no gain in export competitiveness (Dwyer and Forsyth 2011).
A contrary argument is that since Australia has market power in tourism, it is in the national
interest to make use of this. For example it could levy a tax on outbound tourism to reduce
the unwelcome effect of Dutch Disease to induce greater departures of Australian residents
offshore. In fact, Australia already has a departure tax (Passenger Movement Charge) in
operation which has just been increased from $47 to $55 for each outbound traveller (foreign
or Australian resident). A recent study of the implications of an increase in the Passenger
Movement Change finds that while the Australian tourism industry is a net loser, there are
gains in Gross National Income, Gross Domestic Product and employment to the wider
economy (Forsyth et al 2011).
Recently, a proportion (10%) of the revenues raised by the increase in PMC has been
earmarked for assistance to the tourism industry in the form of additional funding to
Australia‟s national tourism organisation, Tourism Australia ($61 million over 4 years) to
assist with their push into Asia through an Asian Marketing Fund. No detailed study has been
done as to what is the optimal mix of tax and promotion. An appropriate tax/marketing mix
might be useful at a time in which Australia is coming to grips with the resource transfers
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16
which the Dutch Disease brings about. It will reduce the outflow of resources from tourism-
which will be welfare enhancing. It is a second best policy, and one which does not
necessarily need a Dutch Disease effect to be in place.
Inbound Tourism Promotion
With goods and services that are sold at the world trade price, there is no need for the
producer to promote their product. When a producer or country has market power, however,
the issue of promotion can become significant. Thus while for some goods and services, such
as for standardised goods, promotion may not be worthwhile, in the case of differentiated
goods and services, however, it may be very worthwhile for the seller to advertise or promote
them. Promotion can lead to increased sales, and, possibly, to increased profits. Thus it may
not be sensible for a country to advertise its wheat, but sensible to advertise its tourism
attractions.
Both producers and countries promote their tourism products, and Australia is a heavy
promoter of its tourism product. Over the years there is empirical evidence that expenditure
on tourism promotion has been effective (Kulendran and Dwyer, 2009). In fact, it is quite
possible that Australia‟s destination marketing effort has averted a bigger fall in inbound
tourism associated with the mining boom
One might question why governments need to become involved- after all, government
promotion is not expected for cars or medical supplies. This is an involved issue- one reason
might be that tourism firms are too small to promote their wares effectively, and another is
that promotion can be seen as an offset against some of the taxes that tourism, but not other
exports, pay. The arguments put forward by tourism stakeholders for government support for
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17
tourism promotion typically are based on the standard economic justifications of government
support for private sector activity in circumstances of market failure, ie., externalities/non-
appropriability of benefits, risk and uncertainty, the presence of distorting taxation, and
indivisibilities (Dwyer and Forsyth 1993b; Dwyer, Forsyth and Dwyer 2010:563-564).
A recent study (Dwyer, Pham, Forsyth and Spurr, 2011) using a CGE approach indicates that
additional promotion raises GDP and welfare in Australia. But are the benefits worth the cost
of the additional expenditure? To resolve this, one needs to measure the benefits from
additional inbound tourism expenditure and compare them with the full costs of promotion.
Evaluating this necessitates also distinguishing the gainers and losers from an expanding
tourism industry (Dwyer, Forsyth, Madden and Spurr 2000). This issue has been discussed in
theoretical terms, though not in empirical work (Dwyer and Forsyth, 1993a).
Strategies to consider in high exchange rate environments could include recognising those
markets that have strong economic growth and high consumer confidence. These markets
will most likely provide the strongest inbound markets in the future, for example the strong
economic growth in many countries in Asia. Another strategy would involve identifying
markets where positive aviation changes are occurring – either in terms of pricing or
additional capacity. It needs to be recognised also that not all inbound markets are equally
affected by Australia‟s high exchange rate (Dwyer and Forsyth 2011). Over the last decade
the Australian dollar has appreciated most strongly against the US dollar (and tied
currencies), the Euro and the UK Pound, but less so against the Japanese Yen, New Zealand,
Singapore and Canadian dollar, and has depreciated against the Indian Rupee. At the same
time some segments may be less impacted upon by exchange rates e.g. international youth
travellers (Tourism Research Australia 2011b).
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18
Promote domestic tourism
Another option is promotion of domestic tourism. To the extent that domestic and outbound
tourism are substitutes, this will have the effect of reducing outbound tourism. From a
national point of view, promoting domestic tourism is not necessarily welfare enhancing,
though it can be if it reduces outbound tourism. Tourism Australia presently has a „no leave
no life‟ campaign targeted at domestic tourists (Tourism Australia 2011: 24, 25). If additional
promotion of domestic tourism passes the cost benefit test, then there will be a benefit to the
economy from a reduction of outbound tourism. Thus there would be some reduction in the
negative effect of the Dutch Disease.
Improving the tourism product
There has been a slowdown in investment in Australian tourism over recent years, resulting
in a „tired‟ product offered to the world. Australia‟s national long term tourism strategy
recognises that innovative investments with continuous improvements and renewal are
needed to ensure that the Australian tourism product remains competitive in the global
marketplace (Australian Government 2009). Some argue that the lack of investment is the
reason for the stagnation in inbound and domestic tourism and that an increase in investment
would lead to better products and stimulate demand. If this is the reason, it is not clear why
investment has fallen. While there have been several disincentives to invest (such as tax
depreciation arrangements and planning controls), these factors have been present for many
years.
An alternative view is that the causality is the other way around. Because tourism producers
and their financiers do not see a good future for their industry, they do not see the need for
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19
investment- thus they do not invest. It is only when suppliers are convinced that growth is
resuming that they will be prepared to invest again. It should be noted that tourism is a
footloose industry, and this applies to investment as well. Other countries, as well as
Australia, are competing for investment projects. The lack of investment in the industry is
almost certainly largely a symptom of, rather than a cause of, the lack of demand growth.
Investment is needed to ensure Australian tourism product remains competitive in a global
marketplace. The Jackson Report (2009) suggests that greater investment in tourism plant
and infrastructure will build productive capacity, drive long-term profitability, innovation and
growth in the sector. The ability of a tourism destination to attract investment in tourism
infrastructure is influenced by a complex number of characteristics. Ensuring that Australia
achieves and maintains competitive advantage requires the development of quality tourism
business products and services from tourism operators committed to innovation, continuous
improvement and renewal (Dwyer and Kim 2003).
Several reasons underpin under-investment in Australian tourism including a history of low
rates of return; a lack of basic market data limiting awareness of investment opportunities;
cautious investors; the inherent cyclical and/or seasonal nature of tourism; complexities
dealing with multi-level government project approval processes; a lack of a coherent vision
and direction by governments. Tourism businesses depend on surrounding public and private
infrastructure and amenities to provide a quality tourism experience to visitors. This need for
supporting infrastructure, which is outside the scope or control of tourism operators, often
adds an extra complication and increases the uncertainty associated with tourism investment
proposals.
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20
Australia‟s tourism competitiveness depends on its exchange rate. When the exchange rate
was low, as it was prior to 2000, Australia was competitive in tourism (Dwyer, Forsyth and
Rao, 2000), but since then it has become much less competitive. What is more, tourism
productivity growth tends to be slow. Between 1997-98 to 2003-04, tourism productivity
growth, at 1.0%, was slower than the whole of the market sector, at 1.4%, and from 2003-04
to 2008-09, tourism productivity fell by 0.8%, while it fell by 0.7% for the market sector
(Australian Government 2009). Tourism is a service orientated sector, with labour
productivity an important factor in driving overall tourism productivity growth. Increasing
productivity within the tourism industry can enhance the rate of return on tourism investment
and lift the profitability and competitiveness of the industry. Putting investment in a
productivity context helps to clarify what investment needs to do in order to be efficient and
effective in helping to foster destination competitiveness. The firms that prosper will be
those that are committed to continuous improvement through innovation and those that are
enterprising and skilled enough to offer a differentiated product or service to maintain their
competitive advantages. If Australian tourism can increase its productivity, it will make its
product more competitive in international inbound markets, along with making it more
competitive as a substitute in outbound markets.
CONCLUSIONS
This paper examined how Australian tourism is affected by the country‟s mining boom. The
experience of the tourism industry in Australia fits very well with the Dutch Disease theory.
However, different parts of the industry have fared differently. Tourism can be broken down
into the inbound (export) industry, the domestic industry, and the outbound (import) industry.
Domestic tourism and outbound tourism are imperfect substitutes for one another. The
patterns of impacts are interesting. The inbound tourism growth rate has declined compared
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21
to that experienced in the past two decades. Domestic tourism has fallen, while outbound
tourism has grown remarkably. This fits in well with what we would expect, taking into
account that there has been a large spending effect taking place, not just an exchange rate
effect.
The various processes associated with Australia‟s mining boom are essentially shifts of the
economy to new equilibria. It could be that most of this adjustment has now taken place.
Thus it may well be that the exchange rate has gone as high as it is likely to go and the terms
of trade, on which the income effect of the boom depends, has stabilised (Gregory and
Sheehan, 2011). In fact the terms of trade have fallen since 2011 (though not the exchange
rate), though it is not clear whether this is an emerging trend or just volatility. If this is the
case, then the adjustment period for tourism, as for other industries, could be coming to an
end and the earlier growth patterns of tourism might gradually re-emerge. Inbound tourism
will return to growth following a near ten year pause. Outbound tourism will continue at a
higher level, but its growth is likely to resume its historical rates. Assuming that the growth in
the Australian economy returns to its long term trend, domestic tourism may start to grow
modestly again. If some predictions of the mining boom‟s duration are correct, however, it
may last for two decades.
In the long term, the main implication of an appreciating exchange rate is structural change
within the Australian economy. Since a strong Australian dollar means that Australian
exports become more expensive, traditional export industries will effectively become less
competitive in the world market. This results in the release of labour and capital previously
utilised by uncompetitive businesses, which will be reallocated to the expanding mining
industry. The reallocation of resources to an area of production in which they are being used
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22
more efficiently results in higher productivity growth and increased economic growth. This in
turn leads to higher real incomes for Australians, and higher living standards. While the
appreciation of the dollar has many implications for the economy and the tourism industry,
ultimately, it will have an expansionary effect on the Australian economy in the long term,
largely through the instigation of structural change.
Regardless of the duration of the mining export boom, this paper has argued that particular
strategies can be developed to reduce some of its adverse impacts on the tourism industry.
The strategies discussed are not the only ones that can be actioned but they do present
tourism stakeholders with some opportunities to be proactive in confronting the challenges
posed by the (non tourism) booming sector. The strategies rely on some special
characteristics possessed by the tourism industry particularly some market power
internationally. There is no magic solution for tourism given its role as a „lagging sector‟ in
the Australian economy, but these strategies should receive serious consideration in the
tourism industry‟s response to the present situation.
A subsequent impact of the appreciation of the real exchange rate is the shift towards a
narrow export base as a result of structural change within the economy. Consequently,
Australia becomes more vulnerable to external shocks, such as a downturn in the Chinese
economy. Australia is also exposed to large fluctuations in commodity prices, which
substantially influence export earnings, leading to increased volatility in the current account
deficit. These are further good reasons for Australia to develop the identified strategies to
support its tourism industry. The discussion thus has implications for destinations worldwide
which are experiencing booms in commodities other than tourism.
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23
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What is the contribution to knowledge, theory, policy or practice offered by the paper?
Australia’s tourism industry is affected by the mining boom. Tourism is a tradable service,
and thus will be affected by the rise in the exchange rate, and the various spending effects
coming about as a result of the boom. This boom leads to a contraction in other tradable
goods and services- the Dutch Disease effect.
There has been some discussion of Dutch Disease in the tourism literature but it has been in
the context of tourism as the booming sector. A major difference of this paper is that it
considers tourism as the disadvantaged sector from the Dutch Disease effect. To our
knowledge this is the first paper to address this issue. The paper is also the first that we are
aware of to distinguish the spending effect and the exchange rate effect which is so essential
to analysing Dutch Disease in the tourism context.
The paper is novel in its discussion of the ways in which tourism differs from other industries
in a Dutch Disease context. It highlights some significant differences in the way tourism has
been affected by the mining boom as compared to most tradable industries. These differences
have significant implications for policy.
How does the paper offer a social science perspective / approach?
The paper addresses issues in tourism economics, a social science. It discusses the effects of
Dutch disease on different tourist market segments and makes recommendations for policy to
improve visitor numbers and to enhance destination competitiveness. The effects of Dutch
Disease affect the community in many ways, economically, socially and environmentally. In
its discussion of policy, the paper addresses multi-disciplinary issues, intersecting political
theory, economics, planning, investment and innovation, marketing and management
disciplines.
*Statement of Contribution
The authors are grateful to Karl Flowers, Max Corden and Tien Duc Pham for many helpful
suggestions. Any errors are our own.
Acknowledgement
Table 1 Selected Tourism Statistics, Australia, 2000-01/2012
Inbound
visitor
arrivals
(‘000)
Annual
change
(%)
Outbound
departures
(‘000)
Annual
change
(%)
Domestic
visitor
nights
(millions)
Annual
change
(%)
TWI Annual
change
(%)
2000-
01
5031 n/a 3577 n/a 291.6 n/a 53.3
2001-
02
4768 -5.2 3368 -5.9 288.7 -1.0 49.7 -6.8
2002-
03
4656 -2.4 3293 -2.2 302.3 4.7 52.3 5.2
2003-
04
5057 8.6 3937 19.5 295.9 -2.1 59.4 13.6
2004-
05
5408 6.9 4591 16.6 289.7 -2.1 59.1 -0.1
2005-
06
5484 1.4 4835 5.3 280.4 -3.2 64.5 9.1
2006-
07
5641 2.9 5127 6.0 289.1 3.1 62.2 -3.6
2007-
08
5629 -0.2 5699 11.2 285.5 -1.3 68.9 10.8
2008-
09
5541 -1.6 5843 2.5 263.4 -7.7 73.4 6.5
2009-
10
5692 2.7 6770 15.9 264.3 0.3 64.7 -11.9
2010-
11
5907 3.8 7443 9.9 266.2 0.7 67.3 4.0
2011-
12
5981 1.2 8037 8.0 284.0 6.7 77.8 15.6
2012 76.5 -1.7
Source: Tourism Research Australia (2012a), Australian Bureau of Statistics, Overseas Arrivals and Departures,
Australia (ABS CAT. No. 3401.0). TWI from Reserve Bank of Australia (2012)
Table
Figure 1: Export values (in original terms)
Sources: Australian Bureau of Statistics International Trade in Goods and Services, June quarter 2012 (Cat. No.
5368.0). Tourism Research Australia (2012b), figure 2.
0
50
100
150
200
250
300
350
400
450
500
Index June qtr 2000 = 100
Mining exports Goods exports ex mining Services exports
Figure
Figure 2: Growth in GVA for tourism, mining and all industries
Source: Australian Bureau of Statistics Australian National Accounts, Tourism Satellite Accounts 2010–11, Cat.
No. 5249.0. Tourism Research Australia (2012b), figure 3
0
50
100
150
200
250
300
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
Index 2004-05 =100
Mining Tourism All industries
Figure
Figure 3: Tourism and mining exports and imports (in volume terms) and the Australian
dollar
Source: Tourism Research Australia (2012b), figure 7.
80
100
120
140
160
180
Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12
Index June qtr 2005 = 100
Mining exports Tourism exports
Tourism imports AU$ (in US$ terms)
Figure
