Abstract
Tourism has grown to become Jordan’s largest service export, representing a third of total exports prior to the pandemic. We present evidence that tourism fluctuations are an important source of business cycle variation in Jordan, with a negative tourism shock reducing growth and inflation and rising unemployment. More importantly, we document significant positive complementarities of tourism with other sectors, especially finance, restaurants and hotels, construction, and manufacturing, suggesting that further expansion in tourism is unlikely to have net Dutch disease effects.
Engine of Growth? Tourism in Jordan's Economy1
Tourism has grown to become Jordan’s largest service export, representing a third of total exports prior to the pandemic. We present evidence that tourism fluctuations are an important source of business cycle variation in Jordan, with a negative tourism shock reducing growth and inflation and rising unemployment. More importantly, we document significant positive complementarities of tourism with other sectors, especially finance, restaurants and hotels, construction, and manufacturing, suggesting that further expansion in tourism is unlikely to have net Dutch disease effects.
1. Tourist receipts have grown to become the most import service export for Jordan. Net tourist receipts have grown from only 4 percent of GDP in the early 2000s to around 10 percent in 2019, displacing remittances as the most important source of services receipts. Moreover, this expansion of tourism has taken place against a backdrop of weaker GDP growth, with disruptions to trading partnerships related to geopolitical tensions after 2010. The increase in tourism shares in GDP has in part been supported by an expanding market share beyond the region, where EU shares in tourist arrivals has risen from an average share of around 7 percent in 2010–16 to 12 percent prior to the pandemic, coinciding with the expansion of low-cost European airlines to the region.
2. Tourism sector growth provides an import source of employment. In 2019, the tourism sector directly contributed to the employment of approximately 54,000 people (4 percent of total employment). This number is likely to be underestimated as it does not take into account those who work in the informal sector, those who work in other sectors that indirectly service tourists, or those who have not registered their businesses with the Ministry of Tourism and Agriculture. The impact of the COVID-19 on employment in the tourism was severe, where around 14,000 employees reportedly lost their jobs due to restaurant and hotel closures.2
3. The beneficial impact of tourism growth may be dampened or amplified depending on the nature of spillovers to other sectors. Tourism generates foreign demand for non-tradable goods and services, raising their price and the real exchange rate, and potentially creating ‘Dutch disease’ dynamics for other exports in traded goods sectors such as manufacturing and agriculture (Copeland, 1991). However, those negative spillovers are likely to be weaker in the face of significant unemployment, especially if the tourism sector is more labor intensive.3 In contrast, by increasing local services production, tourism can generate positive spillovers to traded goods by improving access to local business services (such as finance, consulting, and accounting services), facilitate business networks, as well as directly reduce credit constraints through tourism revenues (Faber and Gaubert, 2019). Our findings emphasize the latter mechanism in Jordan, with evidence of positive spillovers to other industries, higher levels of credit to GDP, and no evidence of REER appreciation.
4. The impact of tourism on the broader economy is assessed through idiosyncratic variation in arrivals from source countries. We employ the results of Redl, Xin and Bi (forthcoming) who use an identification scheme following Gabaix and Kojin (2021), where shocks to tourist receipts are identified using granular data on receipts by source country. Specifically, changes in tourism receipts from large sources countries are correlated with aggregate receipts4 (because they are large) but if there are also changes that are not reflective of a general trend in Jordanian tourism demand (e.g., because of higher global incomes leading to more tourism or a general increase in the attractiveness of Jordan), they are then idiosyncratic demand from those large countries which is plausibly exogenous. Source country data for inbound receipts is taken from the UN World Tourism Organization.5 The impact of tourism shocks on other variables is measured using local projections following Jorda (2005) where tourism recipients is instrumented by the granular instrumental variable described above.
5. A 1 percent decline in tourism receipts to GDP results in a sizable demand shock reducing growth, raising unemployment, and reducing inflation. A 1 percent of GDP decline in tourism receipts leads to a three-year cumulative decline in GDP of 2.5 percent and a 1.7 percentage point increase in the unemployment rate. Inflation declines by 1.2 percent after two years, but the effect is temporary and not significant after 3 years. Thus, a contraction in tourism affects the domestic economy as a demand shock with a temporary drag on inflation.
6. Importantly, higher levels of tourism produce positive spillovers to other sectors. Turning to sectoral spillovers, we estimate the impact of tourism shocks on sectors given significant complementarities in Jordan with financial and insurance services as well as manufacturing.6 We find that there are also strong effects for sectors providing direct inputs to tourism such as retail, and restaurants and hotels.
7. Jordan’s tourism strategy for 2021–25 aims to return revenues, employment, and tourist arrivals back to 2019 levels. The Jordan Tourism Strategy focuses around five strategic objectives namely: increasing faith-based and wellness tourism, as well as domestic and medical tourism; developing the capacity of employees in the sector through TVET initiatives as well as re-skilling and upskilling; restoring, rehabilitating, and maintaining sites; reviewing bylaws and regulation to remove hurdles in terms of doing business and investment; and improving marketing efforts. To achieve the goals laid out in the strategy, JD 50 million has been allocated to the budget of the Ministry of Tourism and Antiquities to be distributed over 2021–25.
Cumulative Impact of Negative 1 Percent Tourism-to-GDP Shock
Citation: IMF Staff Country Reports 2022, 222; 10.5089/9798400215582.002.A002
Sources: UNWTO, Redl, Xin and Bi (forthcoming), and IMF staff calculations.Note: Shaded regions represent 68 percent confidence intervals.8. Tourism is amongst the sectors where Jordan has a comparative advantage with several opportunities for growth, but there are also risks that need to be considered. Developing new areas such wellness and faith-based tourism as well as medical tourism is a welcome step, but more needs to be done regarding expanding access to new source countries and markets (such as Asia and Sub-Saharan Africa) and prolonging length of stay. There are also risks factors that have the potential to impact tourism growth, which need to be factored into the broader tourism strategy of Jordan. These risks include further political instability in the MENA region, increased competition from neighboring countries (Egypt, Saudi Arabia, and the UAE for example), a slowdown in global growth and supply chain disruptions, and the potential adverse impact of tourism development on natural resource demand including water.
References
Copeland, T., B.R., 2019, “Tourism, Welfare and De-Industrialization in a Small Open Economy,” Economica, Vol. 58, pp. 515–29.
Faber, B. and Gaubert, C., 2019, “Vulnerable Growth,” American Economic Review, Vol. 109, pp. 2245–93.
Gabaix, X. and Koijen R.S.J., 2021, “Granular Instrumental Variables,” mimeo.
Primiceri, G. and Lenza, M., 2020, “How to Estimate a VAR after March 2020,” Journal of Applied Econometrics (forthcoming).
Redl, C., Xin, W., and Bi, C., 2021, “International Tourism Shocks,” forthcoming.
Prepared by Chris Redl and Rayah Al Farah with research assistance from Jonathan Saalfield.
Jordan Strategy Forum, Jordan’s Tourism Sector—Post COVID-19 Road Map for Recovery (March 2021).
It does not follow from the presence of unemployment that the government should promote tourism, as noted by Copeland (1991), there may be better policies to address this directly, especially if negative spillovers from tourism are present.
First stage regressions reveal an incremental F-stat for this instrument of 114 which far exceeds the Stock and Yogo (2005) critical value of 16.83 for a weak instrument.
The UNWTO organization data covers annual data for 1996-2018 and thus excludes the pandemic shock. However, this is desirable since the scale of that shock will dominate the sample and skew the true relationship since the COVID-19 shock is unlikely to be representative of past and future tourism shocks, see Lenza and Primiceri (2021).
This analysis echoes Faber and Gaubert’s (2019) findings for Mexico.
