Constraining Factors on the Contribution of Tourism to General Economy

Abstract

Tourism has been considered as a motor for economic development, and for such reason, many countries, including Latin American countries, have tried to promote tourism sector. However, not all the tourism revenue is not multiplied and contributes directly to its general economy because some of the revenue outflows to foreign countries. This so-called leakage effect has been discussed as an impediment to economic development in developing countries. To investigate the determinants of leakage effect, this research employs Keynesian multiplier as a measurement of leakage and runs regressions to verify the relationship between the tourism sectors Keynesian multiplier and other important economic factors such as production process sophistication, foreign ownership, infrastructure quality, and size of economy. This research confirms the definition of economic leakage and identifies imports as percentage of GDP, production process sophistication, and quality of infrastructure as significant determinants at the global level. According to the result of regression analyses, at the global level, a country with higher percentage of imports and less sophisticated production process is likely to have a higher degree of leakage in its general economy. Prevalence of foreign ownership is turned out not to be a significant determinant of leakage at the global level, while it can help offset the leakage in Latin America. Quality of infrastructure has a positive impact on Latin American economies while the negative spillover effects can contribute to increase in leakage effect in the neighboring regions.