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“Economic Man”: The Tourist?

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
March 1966
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Andreas S. Gerakis

FOR MANY COUNTRIES, tourist receipts are a significant and growing fraction of foreign exchange earnings. Thus, to mention one example, in 1954 Spain earned $90 million from tourism, almost one fourth of its total export earnings. By 1964, Spanish tourist receipts were approaching the $1 billion mark and were almost equal to exports. Admittedly, this is an extreme example, but it does demonstrate how important tourism can become. It underlines, too, the need for a thorough study of the tourist industry in all its aspects.

No doubt, tourist receipts depend on many factors acting on both the demand and the supply side of tourist services. Among them, however, relative prices are obviously important. When tourists compare notes, the notes are often about prices, and the people who paid least for their comfortable rooms, friendly service, food and wine, and sunshine generally find a good deal of satisfaction in the comparison.

But what about the country where these tourists lived so cheaply? How did it fare in the bargain? Many people might suppose that in a cheaper country tourists would spend less. My argument here is that a decrease in relative prices could, under the right conditions, stimulate foreign exchange earnings from tourism, and that an increase in such prices could have the opposite effect. The evidence is derived from the experience gained from seven recent devaluations and revaluations of the tourist rate of exchange, which I believe supports the thesis that tourist receipts are in fact very sensitive to the price factor.

Theoretical Argument

Suppose that, in planning his trip abroad, Mr. A, a U.S. tourist, decided to earmark $100 for his stay in country Y. Assume, moreover, that when he gets to Y, Mr. A finds things a lot cheaper than he expected, say because of a devaluation in that country just before his arrival. What will A normally do? Will he spend less than his budgeted $100? Or will his reaction be to spend more than that sum? If he is a calculating, “economic man,” he will see that it will pay him to take advantage of Y’s inexpensiveness and buy there many of the things that he would have to purchase in his own country later on. Thus, his calculating nature will lead him to spend more. On the other hand, if A is not the calculating type he may do even better from the point of view of the host country, since in addition to what he “really needs,” he may be tempted into buying many souvenirs and other “bargains.” (Mr. A’s spending may also, of course, be influenced by tax measures in his own country designed to discourage spending abroad.)

Again, Mr. B, another U.S. tourist visiting Y but also intending to travel in Z, a neighboring country, may be prompted to shift part of his planned expenditure from Z to Y. Moreover, Mr. C, a resident of Z, who had considered spending his holidays in his own country, may, on hearing that Y has become cheaper, change his mind and decide to do some foreign traveling in Y instead. Not only that, but Messrs. D, E, and F, residents of Z, may find that it pays them to cross the border into Y and do much of their regular shopping there.

Over the longer haul the word of Y’s inexpensiveness will get around, and, as long as this inexpensiveness continues, there will be an increasing number of foreigners who will go there. Once the inflow of visitors in Y picks up momentum, it is likely to be fed by a sort of demonstration effect: many people whose friends travel in Y will want to do the same, and Y may become internationally popular on a really large scale. For these reasons, tourist receipts over a longer period of time may prove even more sensitive to the price factor than in the short run.

Before the argument can be carried further, three points are worth noting. First, the term “tourist receipts” is used here in a broad sense, including not only the traveler’s living and transportation expenses but also his purchases of souvenirs and other goods, and even real estate transactions if any were involved. This may be too broad a definition to satisfy some people. It has been adopted here for two reasons. On the one hand, existing statistics conform to the broad concept, and one would have trouble finding figures if one were working with a narrow one. On the other hand, it can hardly be denied that all the expenditure that a traveler incurs during his stay in a foreign country is induced directly or indirectly by his stay and is very unlikely to have taken place without it.

Second, the argument has been put in terms of a decline in relative prices. However, if the arguments used are valid, they should also be applicable in reverse to the case of a rise in relative prices.

Lastly, it should be noted that changes in relative national price levels are considered to exert their effects through an extensive type of substitution at the expense of other countries—those in which the travelers reside and those which are the closest competitors of Y for the tourist money. On both these counts it would seem that Y’s neighbors would be most affected. So a statistical investigation of the effects of exchange rate changes should be primarily an examination of the extent to which this substitution takes place.

Empirical Analysis

In an attempt to show that my theoretical arguments are borne out by the facts, four devaluations of the tourist rate were studied: the French franc by two steps in August 1957 and December 1958; the Spanish peseta in July 1959; the Canadian dollar by a gradual process initiated early in 1960; and the Yugoslav dinar by two steps in February 1961 and January 1962. Moreover, three revaluations were investigated: those of the Finnish markka in September 1957 and the German mark and Netherlands guilder in March 1961.

The French devaluation raised the official tourist dollar from 350 to 494 francs; that by Spain from 42 to 60 pesetas; that by Canada from 95.09 Canadian cents in March 1960 to an average of 106-89 cents in 1962; and that by Yugoslavia from 400 dinars to 750 dinars. The Finnish revaluation was a very small change (from 325 markkas to 320 markkas) in the value of the tourist rate. It was combined, however, with a devaluation of other rates, which reinforced to some extent existing inflationary pressures. Thus, Finland’s exchange reform involved a noticeable appreciation of the markka insofar as the foreign tourist was concerned. The German revaluation lowered the dollar rate from 4.2 deutsche mark to 4.0 deutsche mark; that by the Netherlands from 3.8 guilders to 3.62 guilders. Spain devalued her tourist rate in April 1957 from 38.95 pesetas to 42 pesetas to the dollar. This devaluation has been neglected in this paper in the belief that it was too small—in relation to the existing overvaluation of the peseta and the rate of inflation then in process—to influence the country’s tourist receipts materially.

The changes in tourist receipts before and after these exchange reforms are indicated in Table 1. For each of the countries studied, the table spans a period of nine years divided into three subperiods of equal length: an initial subperiod, the subperiod preceding the exchange reform, and the one following it. Average tourist receipts over each subperiod are shown in the table. So are (a) the percentage changes in this average from each subperiod to the next and (b) the difference between the two percentage figures thus obtained.

Table 1.Tourist Receipts of Seven Countries, Their Keenest Rivals, and Close Competitors(Values in millions of U.S. dollars)
CountryInitial

Period

(1)
Period

Prior to

Exchange

Reform

(2)
Per Cent

Increase

(3)
Period

After

Exchange

Reform

(4)
Per Cent

Increase

(5)
Acceleration

in Per Cent

Increase =

Col. (3)—

Col. (5)

(6)
A. France1952-541955-571958-60
France146.2201.4 1+37.8354.4 1+76.0+38.2
Keenest rival 2131.7283.1+115.0554.7+95.9−19.1
Close competitors 3729.11,307.9+79.41,859.7+42.2−37.2
B. Spain1953-551956-581959-61
Spain93.6111.0 1+18.6280.0+152.3+133.7
Keenest rival 414.823.5+58.826.5+12.8−46.0
Close competitors 5186.5400.0+114.5669.0+67.2−47.3
C. Canada1954-561957-591960-62
Canada329.5382.0+15.9477.6+25.0+9.1
Keenest rival 6651.3837.3+28.6902.7+7.8−20.8
D. Yugoslavia1955-571958-601961-63
Yugoslavia7.912.3+55.734.9+183.7+128.0
Keenest rival 733.943.1+27.179.8+85.2+58.1
Close competitors 8431.7798.8+85.01,275.8+59.7−25.3
E. Finland1952-541955-571958-60
Finland10.412.4+19.214.0+12.9−6.3
Keenest rival 937.746.1+22.362.6+35.8+13.5
Close competitors 1099.9136.2+36.3199.7+46.6+10.3
F. Germany, Fed. Rep.1955-571958-601961-63
Germany363.2461.4+27.0551.6+19.5−7.5
Keenest rival 11697.51,071.9+53.71,741.8+62.5+8.8
Close competitors 12250.7328.5+31.0465.9+41.8+10.8
G. Netherlands1955-571958-601961-63
Netherlands61.9107.1+73.0182.4+70.3−2.7
Keenest rival 1374.096.0 1+29.7143.3+49.3+19.6
Close competitors 14467.6607.1+29.8822.4+35.5+5.7
Source: International Monetary Fund, Balance of Payments Yearbooks.

Estimated.

Italy.

Belgium and Luxembourg, Federal Republic of Germany, Italy, Switzerland, and the United Kingdom.

Portugal.

Italy and Portugal.

United States.

Greece.

Austria, Greece, and Italy.

Sweden.

Denmark, Norway, and Sweden.

Switzerland.

Austria, Belgium and Luxembourg, Denmark, France, and Switzerland.

Belgium and Luxembourg.

Belgium and Luxembourg, Denmark, and the United Kingdom.

Source: International Monetary Fund, Balance of Payments Yearbooks.

Estimated.

Italy.

Belgium and Luxembourg, Federal Republic of Germany, Italy, Switzerland, and the United Kingdom.

Portugal.

Italy and Portugal.

United States.

Greece.

Austria, Greece, and Italy.

Sweden.

Denmark, Norway, and Sweden.

Switzerland.

Austria, Belgium and Luxembourg, Denmark, France, and Switzerland.

Belgium and Luxembourg.

Belgium and Luxembourg, Denmark, and the United Kingdom.

Under the figures for each one of the seven countries covered, Table 1 gives comparable figures for the neighboring country which was judged to be its keenest rival in international tourist trade. For six of the seven countries studied, but not for Canada, the table shows similar data for the group of neighboring countries which were considered as competing closely with it for foreign tourists. The keenest rival mentioned above is included in this group of close competitors. Any country which initiated exchange reforms similar to those of the country studied is excluded, even though it is an obvious competitor.

How the Table Was Compiled

The preparation of this table posed a number of problems. First, there was the question of how long the initial, the prereform, and the postreform periods should be. It was decided that three years would be reasonable—long enough to permit the full effects of price factors to manifest themselves, but perhaps short enough to exclude the effects of factors other than prices, acting in the longer run.

There was the problem of choosing the keenest rivals and close competitors of the countries studied. It must be admitted that the selection of keenest rivals was necessarily somewhat arbitrary. On the other hand, simple geography made the choice of close competitors comparatively easy. Keenest rivals are included in the groups of close competitors, so that “close competitors” comprise all countries with which the seven principals of this study compete directly for the foreign tourist currency.

Thirdly, since annual data were used (of necessity), the question arose whether the reform year itself should be included in the prereform or the postreform period. The “reform” year here means the year in which an exchange rate was changed, or—if this was done in two steps or gradually over a period of time—the year in which the change was initiated. This was decided by reference to the part of the year that really mattered for this study—the active tourist season. When the change was launched before or relatively early in the tourist season, the reform year was considered as part of the postreform period; otherwise it was treated as part of the prereform period. On this basis, the devaluation years of Canada and Yugoslavia, and the revaluation years of Germany and the Netherlands, were classed in the postreform period, while the years in which Finland and France changed their tourist rates were included in their prereform period. There was one ambiguous case, that of Spain, whose devaluation was announced in mid-July, right in the middle of the tourist season. In this instance, the year of the devaluation, 1959, was classified in the postreform period.

The Brussels Fair in 1958 was a special event whch boosted the tourist receipts of Belgium and Luxembourg above what they would normally have been, and an adjustment was made to normalize, so to speak, the 1958 data for Belgium and Luxembourg. That figure was estimated as equal to the average of the tourist receipts for these two countries for 1957 and 1959—a reasonable adjustment since the receipts of these two countries were characterized by a gradual upward movement throughout the years surveyed. 1

Lastly, there was a difficulty of another kind. The available official data did not always reflect accurately the tourist receipts of the countries concerned. In the predevaluation periods in France and Spain, owing to the overvaluation of the franc and the peseta, much tourist exchange was sold on the black market and was not reported in the official statistics. If no adjustment were made for this factor, the prereform data would have been grossly understated and, as a result, the increase in receipts between that period and the postreform period overstated. This, of course, would have been tantamount to biasing the results in favor of the arguments I am presenting. It seemed right, therefore, to make an allowance in the figures for the amount of foreign exchange which, in this way, leaked into the black market. This allowance was based, for Spain, on data published by French and U.S. authorities, respectively, on expenditures by French and U.S. residents in Spain. To find actual tourist receipts in the black-market years, 1956-58, officially recorded Spanish receipts for 1954-55 (a period in which black-market activity in the country was at a low ebb) were increased by the same percentage as the sum of expenditures by French and U.S. residents in Spain increased over the periods in question. A comparable allowance was made for France. Here, however, the adjustment had to be based on U.S. data only.

Table 1 indicates clearly the effectiveness of the devaluations and revaluations studied. It shows that, after the devaluations, the rate of increase of tourist receipts accelerated in the four devaluing countries and, with one exception,2 slowed down in their keenest rivals and close competitors. On the other hand, it will be seen that, subsequent to the revaluations, the rate of increase in receipts from tourism fell off in the three revaluers and picked up momentum in their keenest rivals and close competitors.

What the Table Means

On the basis of the figures given in Table 1 it is possible, in various ways, to estimate the gain or loss of tourist exchange which accompanied the reforms. The method used here can best be understood by going step by step through the calculations made for one of the countries concerned, in order to obtain the results shown in Table 2. Thus, to use France as an example, in the prereform period French tourist receipts rose by 37.8 per cent. Now, it can be calculated from the data in Table 1 that, for the entire market in which France competes for foreign tourist receipts, including France herself and her close competitors, these receipts increased by 72.4 per cent in the predevaluation period and by 46.7 per cent in the post-devaluation period. In other words, the rate of expansion of tourist receipts slowed down in the latter period; France and her competitors were all finding the going a little stiffer than before. If, therefore, France had not improved, but had simply maintained, her relative performance in the postdevaluation years, her tourist receipts would have increased, not by 37.8percent,butbyonly37.8×46.772.4=24.4 per cent. France’s tourist earnings would have thus risen to $250.5 million. In fact, however, they rose to $354.4 million. Consequently, the difference between $250.5 million and $354.4 million, i.e., $103.9 million, may be regarded as a measure of France’s gain in the post-devaluation period and is entered in the appropriate column of Table 2. Again, $103.9 million expressed as a percentage of $250.5 million, i.e., 41.5 per cent, is entered in the second column of Table 2 and represents that same gain in relative terms. It will be seen in Table 2 that all four devaluing countries registered gains after their exchange reforms, three of them substantial ones ranging from 42 per cent to 112 per cent. The three re-valuers, on the other hand, experienced losses of 8 per cent to 9 per cent.

Table 2.Gains and Losses of Devaluing and Revaluing Countries in Post-Reform Period
CountryGains (+) or Losses (−)
Millions of

U.S. dollars
Percentage
Devaluers
France+ 103.9+ 41.5
Spain+ 147.6+ 111.5
Canada+62.7+ 15.1
Yugoslavia+ 17.6+ 101.7
Revaluers
Finland−1.4−9.1
Germany−48.2−8.0
Netherlands−15.8−8.0
Source: See Table 1.
Source: See Table 1.

Conclusions

In considering the evidence I have been able to produce, two points must be borne in mind. On the one hand, these results should not be interpreted to mean that changes in relative prices, devaluations, and revaluations can be expected to affect tourist receipts under all conditions. Conditions must be right—the countries concerned should be so situated as to be able to take full advantage of the switch of tourist expenditure. This is not true of all countries. An isolated. country, or even one which lies in a region where the tourist trade is not much developed, cannot hope to attract tourist receipts from elsewhere; and it is doubtful whether by devaluing it would create tourist trade.

The data used are not wholly reliable. There are statistical imperfections and all sorts of special factors other than prices to be dealt with. An effort was made to eliminate these difficulties, but inevitably with limited success. Indeed, knowing that I could not be entirely successful in allowing for such outside influences, I have leaned over backwards, in order to make sure that any bias left in this analysis be against, rather than in favor of, my thesis.

It seems, however, that we are left with a reasonable conclusion for which there is good, if imperfect, evidence: that tourist money is spent where it goes farthest, and that countries offering cheap vacations score at the expense of countries offering dearer vacations. The thesis, if true, has implications that reach beyond the tourist looking for a hotel, and beyond even the government tourist organization preparing its brochures and posters, for it provides one more argument in favor of a government’s holding down prices and maintaining a realistic exchange rate.

This article is summarized from a more detailed one by the same author in IMF Staff Papers, Vol. XII, No. 3 (November 1965), pp. 365-84.

Finance and Development is published quarterly, in English, French, and Spanish, by the International Monetary Fund and the International Bank for Reconstruction and Development, Washington, D.C. Opinions expressed in articles and other material are those of the writer or writers; they are not statements of Fund or Bank policy.

The contents of Finance and Development may be freely quoted provided that due acknowledgment is made.

The unadjusted tourist receipts of Belgium and Luxembourg over the period 1954-63 were as follows (in millions of U.S. dollars):

195447.4195990.0
195560.01960110.0
195676.01961136.0
195786.01962136.0
1958124.01963158.0

Greece, the keenest rival of Yugoslavia, is the exception in question. The rate of increase of Greek tourist receipts accelerated after the devaluation of the dinar, but much less so than that of Yugoslav receipts.

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