Prepared for the Irish Tourist Industry Confederation by Tansey, Webster, Stewart and Company, Economic Consultants
The objectives of the Report are: to outline Tourism’s substantial contribution to economic development, to identify the competitive threats to Tourism growth and recommend a strategy for returning the Industry to sustained expansion.
1. LONG-RUN TRENDS IN IRISH TOURISM
Since the 1960s, the Irish tourism industry has grown very considerably in scale. Between 1965 and 2000, the number of overseas visitors to Ireland increased almost fivefold while foreign exchange earnings from tourism advanced by a factor of forty. Within this period, tourism growth has been concentrated in the years 1985-2000, a span which saw the number of overseas visitors climb from under two million to well over six million. These increases in visitor numbers, and the associated growth in tourist spending, have provided the foundations on which the tourism industry’s enhanced contribution to the national economy have been built. However, the pattern of tourism growth has been uneven over time. The substantial growth seen in the 1960s stalled during the 1970s and early 1980s. The prolonged tourism boom dating from the late 1980s has now lost impetus. Visitor numbers fell in 2001. Industry experience over the past four decades shows
clearly that continuous future growth in tourism cannot be taken for granted.
2. TOURISM ADDS TO DOMESTIC CONSUMER SPENDING
Spending by out-of-state visitors on Irish goods and services injects new cash into the domestic economy, raising levels of domestic consumer spending as a result. Visitors have accounted for almost 6 Euro out of every 100 Euro of consumer spending in Ireland in recent years. Purchases of goods and services in Ireland by non-residents ranged between 5.5% and 6.0% of total Irish consumer spending each year between 1995 and 2000. The tourism boom thus supported the surge in consumer spending seen in Ireland in the second half of the 1990s. Out-of-state visitors spend their cash on a wide array of goods and services, many of which are not immediately identified with tourism. In 2000, overseas visitors spent 21% of their budgets on Shopping, 9% on Internal Transport and 7% on Sightseeing and Entertainment. Thus tourist spending is important in supporting business activity levels amongst a wide range of retailers and service providers outside the traditional tourist industry domain. In assessing the impact of tourism on domestic consumer spending, a conservative approach has been adopted. Only the spending of out-of-state visitors has been counted. Spending by residents on domestic trips or home holidays has been treated as a reallocation of domestic spending towards tourism rather than as an injection of new cash into the economy.
3. TOURISM’S ROLE IN GNP: CURRENT SPENDING
In assessing the scale of current tourism spending relative to expenditure on Gross National Product (GNP), three categories of expenditure have been included. These are: (i) spending by out-of-state visitors in the domestic economy; (ii) receipts accruing to Irish carriers from the passenger fares paid by those visiting Ireland; (iii) spending by residents on domestic trips and home holidays. On this basis, current tourism spending stood equivalent to 5.4% of spending on GNP in 1987. In the ensuing five years, this share increased to 6.7% of GNP. After 1992, current tourism spending fell back gradually as a proportion of GNP, reaching 5.4% again in 2001. However, the declining ratio of current tourism spending to GNP since 1992 does not indicate any long-run contraction on the industry’s part. Real, inflation-adjusted tourism spending
increased by almost three-quarters (72.7%) between 1992 and 2001. The reason for tourism’s relative decline since 1992 lies in the exceptional growth experienced by the national economy over the past decade. Real GNP advanced by almost 90% between 1992 and 2001. Thus, while tourism experienced sustained strong growth through the 1990s, the rest of the economy grew even faster, powered by the expansion of high-technology enterprises financed by foreign direct investment.
4. TOURISM’S ROLE IN GNP: INVESTMENT SPENDING
Tourism’s impact on the level of spending in the economy is not confined to the current expenditure of today’s tourists. Over the past decade, the tourism industry, aided by the public authorities, has invested heavily in expanding the size and raising the quality of Irish tourism’s productive capacity. In the decade to 1999, capital spending in the industry is estimated at Irish Pounds 3.4 billion at current prices. This investment spending embraces additions to accommodation capacity; investments in visitor attractions and tourism services; and capital spending on passenger transport. Almost two-thirds of this investment total (64.8%) has been financed by the private sector. For the four years 1996 through 1999, annual investment in the physical infrastructure of the tourism industry averaged 1% of Gross National Product.
5. TOURISM’S TOTAL SPENDING IMPACT
When current and capital spending on tourism are combined, total tourism spending stood equivalent to an average of 6.8% of expenditure on Irish GNP for each of the years 1995 through 1999. More appropriate from an economic perspective, total tourism spending averaged 3.6% of Final Demand in the Irish economy each year between 1995 and 1999. Final Demand comprises consumer, investment, current government and export demand.
6. EMPLOYMENT SUPPORTED BY TOURISM
All available evidence points to a substantial increase in tourism supported employment during the 1990s:-
- Total tourism employment, derived from CERT employment surveys and comprising those working in visitor attractions, tourism services, self-catering accommodation, hotels, guesthouses and restaurants, increased from 74,870 in 1992 to 137,443 in 2001, a jobs advance of 83.6%. As a result, tourism supported employment raised its share of the national workforce from 6.4% in 1992 to 8.0% in 2001;
- The numbers working in hotels and restaurants rose from 68,400 in 1994 to 104,800 by 2001, representing a 53.2% increase in the hotel and restaurant workforce in the space of just seven years. Those employed in hotels and restaurants accounted for 5.6% of all those at work in 1992. By 2001, this proportion had risen to 6.1%. These figures are taken from CSO annual labour force surveys and the Quarterly National Household Survey conducted by the Central Statistics Office.
With an estimated workforce of over 137,000 in 2001, tourism was the nation’s sixth biggest employer, ranking behind construction but ahead of farming. However, both CERT employment surveys and CSO data show that the numbers working in tourism-related businesses slipped back between 2000 and 2001. Recently released CSO data shows that employment in Hotels and Restaurants remained static between the second quarters of 2001 and 2002.
7. TOURISM’S CONTRIBUTION TO THE BALANCE OF PAYMENTS
Tourism earns cash for the country by turning in a consistent balance of payments surplus. Net foreign exchange earnings from tourism make a positive contribution to balance of payments stability. Foreign exchange earnings from tourism increased by Irish Pounds 1 billion between 1997 and 2001, reaching Irish Pounds 3.1 billion at the latter date. After deducting the spending of Irish visitors abroad, the tourism and travel sector have generated net foreign exchange earnings averaging Irish Pounds 615 million annually for each of the years 1997 through 2001. This surplus on tourism and travel is assuming increasing importance since the national balance of payments on current account slipped back into deficit in 2000.
8. TOURISM AS AN ENGINE OF REGIONAL BALANCE
Unlike most industries, where goods and services are transported to the consumer, in the case of tourism, consumers travel to the location of the product in order to enjoy it. It is this differentiating feature of tourism
that provides its strength as an agent of regional dispersion. Many of Ireland’s most popular tourism destinations are located in the country’s West and South West regions. Spending by tourists in these regions thus acts to narrow regional gaps in incomes and employment. Regional disparities in per capita disposable incomes widened in Ireland in the second half of the 1990s. These income gaps would have become even wider in the absence of tourism. Thus:-
- Two regions, the West and the South West, geographically peripheral to the Dublin metropolis, account for just one-quarter of the national population but generate almost two-fifths of total tourism revenue;
- Dublin and its Mid-East hinterland, which account for almost 40% of the national population, capture just over 30% of all tourism revenues;
- Tourism spending comprises a much larger share of economic activity outside Dublin than within it. In 1999, tourism spending stood equivalent to just 2.6% of the regional GDP of Dublin and its environs, where it reached 8.3% in the West, 5.5% in the South West and 4.9% in the Mid West.
However, tourism expansion has bypassed some of the country’s poorest regions. The Midland region, the poorest in the country, supports 5.6% of the national population but captures just 3.2% of tourism revenue.
9. THE TAX TAKE FROM TOURISM
Tourist spending is concentrated on goods and services that are highly taxed. As a result, tourism generates a substantial stream of taxes for the government. The total tax yield from tourism has been estimated by Bord Fáilte at Euro 2 billion in 2000. Of this total, some Euro 1.6 billion was generated by foreign tourism. When all income and spending effects are factored in, each Euro of foreign tourism spending ultimately generates over 47 cent in taxes for the Exchequer.
10. OVERALL ECONOMIC IMPACT
Tourism is an industry largely populated by indigenous enterprises. It is an industry that is deeply rooted in the fabric of Irish economic life, urban and rural. It has a relatively low dependence on imports. These attributes help to explain why the economic impact of tourism growth has been so positive. When tourism is growing, it generates strongly expansionary effects on employment, incomes, spending and taxes. Between 1987 and 2000, Irish tourism exhibited sustained strong growth, conferring wide-ranging benefits on the economy as a whole. Industry growth was built on the twin foundations of rising visitor numbers and increased tourist spending. However, no industry enjoys an automatic guarantee of future growth. The pattern of Irish tourism development since the 1960s has itself been uneven. The numbers visiting Ireland fell during 2001 and the initial indicators for 2002 season do not suggest that strong growth has been resumed. It is important, not only to tourism enterprises themselves, but to the national economy that a course be charted that will return tourism to a sustained growth path in the years ahead. In order to secure a return to that growth path, it is essential to identify the factors that determine industry growth.
11. THE DETERMINANTS OF INDUSTRY GROWTH
For a given set of consumers’ tastes and preferences, the demand for Irish tourism in the future will depend principally on three factors:-
(i) The real incomes of consumers and potential visitors;
(ii) The prices of Irish tourism products, in both absolute and relative terms;
(iii) The quality of Irish tourism products, including service quality.
12. CONSUMERS’ REAL INCOMES
Spending on international tourism is sensitive to changes in the levels of consumers’ real disposable incomes. In turn, national rates of economic growth usually provide a reasonably reliable guide to trends in consumer spending power. Economic growth in the principal source markets for Irish tourism weakened appreciably in 2001 and no substantive recovery is yet in evidence in 2002. In itself, the economic slowdown in the industrial world provides a partial explanation for the deterioration in Irish tourism conditions since 2000. However, as a small economy possessing trivial market power, Ireland cannot influence the pace of international economic growth. As a result, while these trends will dictate the size of the market available to
Irish tourism, they are wholly outside the control of Irish policymakers.
13. INDUSTRY COMPETITIVENESS
Ireland cannot influence the size of the international market for tourism, nor determine the rate of its expansion. However, Ireland can influence the share of the available market commanded by Irish tourism. Ireland’s share of international tourism markets will be determined ultimately by its competitiveness. Overall competitiveness comprises many components including domestic prices, access costs, product availability, product quality and service quality.
14. TOURISM’S PRICE COMPETITIVENESS
Irish tourism has suffered a deep deterioration in price competitiveness since 2000, and for three reasons:-
(i) The domestic rate of inflation has accelerated sharply. By June 2002, average retail prices were 16.1% higher than they had been in 1999. The competitive environment for all indigenous industries including tourism, has deteriorated as a result. Since 1996, inflation in tourism-related market segments has been faster than the national average;
(ii) Since the mid-1990s, and particularly after 1999, Irish inflation has outstripped the rate of price increase both in competing markets and in those countries from which we aspire to attract visitors. By May 2002,
average consumer prices in Ireland were 21.7% higher than in 1996. Over the same period, average retail prices rose by 11.3% in the EU, by 9.0% in Germany and by 8.4% in France.
As a result of these two trends, Ireland is now an expensive destination for Eurozone tourists. A recent Forfas report found Ireland to be the second most expensive country amongst the twelve members of the Eurozone, less expensive than Finland but “marginally more expensive than France and Germany”.
(iii) Outside the Eurozone, Irish tourism was sheltered against the effects of high domestic inflation by the Euro’s decline against the US dollar and sterling. However, current Euro exchange rates against both the US
dollar and sterling are higher now than in 2000. As a result, the exchange rate is no longer affording competitive protection for Irish tourism in US and UK markets.
15. PRODUCT AND SERVICE QUALITY
The scenery, the people and the unspoiled environment are the product characteristics of an Irish holiday most highly rated by foreign visitors. Judged by visitor ratings, the product competitiveness of Irish tourism
improved markedly during the mid-1990s, but slipped back somewhat towards the end of the decade. The same broad trend is evident in visitors’ assessments of tourism services and facilities. Ratings for the quality of service received remain high, with over 90% of foreign tourists rating service received in tourism-related businesses either as expected or as better than expected. However, on the crucial question of value for money, 23% of foreign visitors surveyed in 2001 felt that there was scope for improvement in the overall value for money offered in Ireland.
16. THE NEED FOR A TOURISM DEVELOPMENT STRATEGY
Ireland’s tourism industry has reached a turning point. After more than a decade of sustained expansion, growth in the tourism industry has stalled since 2000. The industry needs a medium-term development strategy that will return it to a growth path for the future. Such a strategy needs to take account not only of the immediate problems affecting current industry operations but of the broader issues in the economic environment which will shape tourism performance into the future.
17. THE RATIONALE FOR A TOURISM DEVELOPMENT STRATEGY
The rationale for formulating a tourism development strategy is based on the following five factors:-
(i) What’s Good for Tourism is Good for the National Economy.
Tourism growth makes a substantial positive contribution to national and regional economic development. The industry’s performance during the years 1987-2000 demonstrates its capacity to generate employment, increase income and spending in the economy, narrow regional differences, contribute to balance of payments stability and raise large amounts of tax for the Exchequer. Reviving growth in tourism would assist in raising the pace of national economic development.
(ii) A Self-Starting Revival in Tourism is Not Automatically Guaranteed.
In current conditions, there is no guarantee of an automatic revival in tourism. Long-run performance trends show that the industry has experienced prolonged periods of stagnation over the past forty years – in the 1970s, due to the Northern Troubles and in the first half of the 1980s due to diminished competitiveness resulting from excessive domestic inflation.
(iii) Tourism’s Future is Not Within its Own Hands.
Tourism industry performance is conditioned by a number of key national economic variables over which the industry itself can exert little or no control. These include trends in national price and cost competitiveness, rates of taxation levied on tourist spending, the availability of access transport, the quality of national infrastructure and the state of the physical environment.
(iv) Tourism is an Indigenous Industry Populated Principally by SMEs.
Tourism enterprises are embedded in the national economy. For the most part, they are neither foot loose nor mobile. As the process of globalisation progressively diffuses foreign direct investment across a wider array of newly-industrialising countries, the Irish economy will come to depend to a
greater extent on indigenous industries such as tourism to deliver future economic progress. Tourism is comprised principally of small- and medium-sized businesses, many of which have invested heavily in the industry’s future over the past five years. A prolonged downturn in the industry’s fortunes would not only threaten the existence of many individual tourism businesses, but the consequent dislocation would undermine the medium-term viability of the industry as a whole.
(v) Tourism Offers Genuine Prospects for Commercial Regional Development
Most modern industries want to locate close to major population centres, large labour markets and international transportation hubs and networks. It is difficult to induce such industries to locate in rural areas or in geographically peripheral regions. Tourism is one of the few international growth industries that has demonstrated a capacity to promote regional growth. In the Irish case, regional incomes in the West and the South West have benefited extensively from tourism expansion. Tourism, as an industry, is thus strongly placed to contribute to the government’s stated goal of achieving more balanced regional development.
18. A PROPOSED FRAMEWORK FOR STRATEGY FORMULATION
Given the demonstrable economic importance of tourism and the severity of the problems now afflicting the industry, the preparation of a Tourism Development Strategy should be afforded a high priority and should be completed as quickly as is feasible. To meet these requirements, it is proposed that:-
(i) The strategy should be prepared under the aegis of the Government.
(ii) The strategy should be prepared and completed within a seven month timeframe and should mirror the approach adopted by the Industrial Policy Review Group in 1991/1992.
(iii) The strategy group should be numerically small, of very high calibre and should contain members drawn from within and outside the tourism industry.
(iv) The strategy should have a strong operational bias.
(v) Subsequent to its completion, there should be scope for consultation on the implementation of its findings both with relevant government departments and with industry representatives.
19. PROPOSED STRATEGY CONTENTS
The strategy should, inter alia, review and make recommendations on the following areas with the objective of improving the Irish tourism industry’s competitive positioning in the medium-term:-
(i) OPERATING ENVIRONMENT, including deteriorating national price and cost competitiveness, the increasing expensiveness of Ireland as a tourism destination, perceptions of diminished product quality due to congestion, inadequate infrastructure, the taxation of tourism, the degradation of the
(ii) INTERNATIONAL MARKETING, recognising the increasing competitive challenges facing Irish tourism, ensuring the industry’s ability to deliver strong, clear and focused messages to a diverse range of target markets;
(iii) ACCESS TRANSPORT, including the adequacy of access transport infrastructure at both national and regional levels; assessment of the role of regional airports as agents of regional development; sufficiency of routes and access points to Ireland; access fares; and taxes on travel;
(iv) ENTERPRISE DEVELOPMENT, with a particular emphasis on defining modes of meeting and supporting the developmental needs of tourism SMEs across the range of business functions;
(v) PRODUCT INNOVATION, recognising that scaling the value chain represents a defence against deteriorating price competitiveness, assessing industry capability for introducing new products, developing joint products and integrating existing products into more marketable packages;
(vi) SERVICE QUALITY, including the development of management capability within tourism SMEs; access to training and skills development for those already working in the industry; strategies for the recruitment and retention of adequately skilled staff;
(vii) DEVELOPING NEW TOURISM REGIONS, assessing the viability of developing new tourism regions with a view both to relieving congestion, and hence diminished product quality, in established tourism centres while simultaneously seeking to achieve greater regional balance within the context of the National Spatial Strategy;
(viii) DEFINING THE STATE’S ROLE IN SUPPORTING TOURISM DEVELOPMENT with particular emphasis on identifying the scale and incidence of future state financial supports for the industry.
(ix) UPGRADING RESEARCH AND INFORMATION FACILITIES to support future industry development including improving the comprehensiveness and timeliness of the information available on Irish tourism performance.