Economic Impact of Tourism and Globalisation in ...

Economic Impact of Tourism and Globalisation in Indonesia Guntur Sugiyarto, Adam Blake, M. Thea Sinclair 1

Abstract The issue of whether globalisation is beneficial remains controversial. Knowledge about its effects is only partial, as globalisation policies are often examined without consideration of their interactions with key sectors of the economy, notably tourism. This paper uses a computable general equilibrium model of the Indonesian economy to examine the effects of globalisation via tariff reductions, as a stand-alone policy and in conjunction with tourism growth. The results show that tourism growth amplifies the positive effects of globalisation and lessens its adverse effects. Production increases and welfare improves, while adverse effects on government deficits and the trade balance are reduced.

Keywords: Tourism, globalisation, taxation, economic impact, SAM, CGE, welfare, distribution. JEL classification: C68, D58, E62, L83, O53

1). The authors are respectively Research Associate, Research Fellow and Professor at the Christel DeHaan Tourism and Travel Research Institute, Nottingham University Business School, Jubilee Campus, Nottingham NG8 1BB, UK. http://www.nottingham.ac.uk/ttri

1

Economic Impact of Tourism and Globalisation in Indonesia Guntur Sugiyarto, Adam Blake and M. Thea Sinclair

INTRODUCTION In recent years, tourism and its associated economic repercussions have taken place within a wider context of globalisation of the world economy. Macroeconomic policymakers have been concerned to decrease barriers which impede international flows of goods, services and financial capital and to ensure flexibility of exchange rates, interest rates and wages, with the aim of inducing markets to operate more efficiently. The introduction of such macroeconomic policies has been a source of some controversy because of the implications for income and employment, as well as income distribution and the welfare of local populations. Policies to promote trade liberalisation are a case in point. Trade liberalisation is occurring in conjunction with World Trade Organisation, IMF and World Bank pressures for lower tariffs and the elimination of import quotas, and also as part of the process of integration within regional trading blocs. Although trade liberalisation is supposed to bring about long-term benefits by allowing countries to reap gains from specialisation in production on the basis of their comparative advantage, a number of problems may occur. The first can take the form of a balance of trade deficit, as consumers purchase increasing quantities of the cheaper imports. The second involves a government budget deficit, as the government receives less revenue from the lower tariffs. The third concerns the effects of trade liberalisation on the distribution of income and levels of welfare of the local population. The issue addressed here is, therefore, whether the growth of tourism can help to resolve these problems.

2

This issue has received little attention from macroeconomic policy-makers, who have tended to formulate and implement policies without taking account of their predicted effects in the context of tourism growth, even in countries whose economies are highly dependent on tourism. Nor has the issue received much attention in the tourism literature, which has tended to concentrate on the income and employment impacts of tourism per se, rather than on its wider range of economic impacts, including those on distribution and welfare, in alternative macroeconomic contexts. Therefore the aim of this paper is to develop existing research in the area by examining the economic impacts of tourism within the macroeconomic context of globalisation in the form of increasing trade liberalisation, as well as in the context of lower domestic taxation. The issue will be examined for the case of Indonesia, the fourth largest country in the world in terms of its population of over 210 million inhabitants. As one of the former ‘Asian tigers’, Indonesia is an important emerging economy which has experienced both growth in tourism and a push towards increasing trade liberalisation in recent years. It has a wide range of tourist attractions and natural resources. The growing international demand for these assets, in the context of decreasing levels of trade protection, has significant implications for domestic income and employment generation, income distribution and welfare. This paper will examine these effects in the cases of tourism, trade and tax policies in Indonesia. The paper will build on previous contributions to research in the area of tourism impact analysis, which has been undertaken using direct and indirect income changes (Gartner and Holecek 1983), input-output models (Archer 1995; Archer and Fletcher 1996; Fletcher 1989; Johnson and Moore 1993) and, subsequently, by using a social accounting matrix (Wagner 1997) and computable general equilibrium (CGE) models

3

(Adams and Parmenter 1995 for the Australian economy; Zhou et al. 1997 for Hawaii; Alavalapati and Adamowicz 2000 for the environmental impacts of tourism in Canada; Blake 2000 for Spain; and Dwyer et al. 2000 for the Australian economy). All of these approaches have the advantage of taking account of the interrelationships between tourism and other sectors of the economy. This paper will use a CGE model, which has the advantages of incorporating the full range of feedback between the different sectors of the economy, along with flexibility of prices and factor substitutability. It is well suited for examining the effects not only of tariff reductions but also of domestic taxation, which is a topic of growing concern in the tourism literature (Jensen and Wanhill, 2002). The paper is organised as follows. The next section of the paper will be concerned with explaining recent trends in tourism in Indonesia and outlining the types of trade liberalisation that have been undertaken. The following section will set out the main characteristics of the Indonesian Social Accounting Matrix (SAM), which is used to characterise the flows between different sectors of the economy. The computable general equilibrium (CGE) model which is used to undertake the analysis will then be developed, enabling the full range of economic impacts to be quantified within a multi-sectoral framework. The model is particularly useful for understanding the characteristics of the economy and for quantifying the effects of alternative policies in relation to tourism, trade liberalisation and taxation. The results from using the model to measure the effects of trade liberalisation per se and of trade liberalisation combined with decreases in domestic taxation will be compared with the results obtained from implementing these policies in a context of tourism growth. The final section of the paper will provide some policy implications and conclusions.

4

TOURISM AND ECONOMY

TRADE

LIBERALISATION

IN

THE

INDONESIAN

Indonesia is the largest archipelago in the world, stretching 5.110 km along the equator from east to west and 1.888 km from north to south. It consists of five mayor islands (Java and Bali, Sumatra, Kalimantan, Sulawesi and Irian Jaya) and about 30 smaller groups, with more than 17,000 islands in total. The chain of islands divides the Indian and Pacific Oceans and is enriched with natural resources and diverse cultures, offering a vast range of tourism activities. It has long been a popular tourist destination. Foreign tourism is an integral part of the Indonesian economy. For the decade prior to the crisis of 1997 the tourism industry experienced strong growth, with large increases in arrivals of foreign tourists, tourist spending and investment. The growth of foreign visitors was more than 15% per year, contributing to an increase in foreign currency receipts as both foreign tourists’ expenditure and their length of stay increased. The number of foreign visitors in 1997 was 5.2 million, contributing around 6.6 billion US$ to foreign income - about 3 % of GDP (World Bank, 2002). In 2005, the number of arrivals from abroad is expected to be around 11 million, generating foreign currency receipts of over $15 billion. Tourism contributed 16% of total job creation in 1995, and in 2007 it is estimated that 1 of every 11 new jobs will originate from tourism (Kompas, 06/02/1999). Despite many criticisms of its adverse effects (see, for instance, Copeland 1991; Pleumarom 1999a, 1999b), tourism in Indonesia is expected to play a more important role in the future, especially in the face of the declining role of oil and dependence on low wage, labour-intensive sectors. The increasing reliance on the tourism sector is also demonstrated by the government’s efforts to attract more foreign investment in the tourism industry, by allowing 100 %

5

foreign ownership, introducing a tax holiday and welcoming foreign professional workers in the tourism sector (Kompas, 30/01/1999). Other policies pursued by the Indonesian government have been concerned with trade liberalisation. Decreases in the world prices of oil and other primary products, along with the international debt crisis of 1982, resulted in deterioration of the current account of the balance of payments and encouraged the Indonesian government to introduce remedial measures. These included cuts in the number of tariffs from 25 to 11 and a reduction in the top tariff rate from 225% to 60%. Following the fall in the price of oil in 1986, many import licenses were converted to tariffs and the licensing procedures for hotels and other tourism facilities were simplified. During the 1990s, there were further reductions in tariffs in line with Indonesia’s membership of AFTA (the ASEAN Free Trade Agreement) and APEC (the AsiaPacific Economic Co-operation) Agreement. After the Asian crisis of 1997, import tariffs on over 150 goods were decreased, import subsidies on some goods were eliminated and import quotas were replaced by tariffs. Thus, the policy is one of moving away from an import substitution strategy towards an outward-oriented economy. However, various problems remain. The trade balance remains highly vulnerable to changes in world prices of oil and other natural resources and the government has also incurred budget deficits. Employment levels, poverty and income distribution worsened considerably following the crisis. The question of whether a policy of further trade liberalisation combined with tourism growth can contribute to alleviating these difficulties will be examined in the following sections.

6

THE CGE MODEL FOR TOURISM IN INDONESIA Despite the important role of foreign tourism in the Indonesian economy, there has been a lack of comprehensive studies of its economic impacts, especially in the form of economy-wide modelling using the CGE approach. Previous applications of CGE modelling to the Indonesia economy were not concerned with tourism (Azis 1996; Behrman et al. 1989; Devarajan et al. 1997; Roland-Holst 1992; Thorbecke et al. 1992; Robinson et al. 1997). Therefore, this is the first attempt at developing such a model, in line with similar research on different economies (for instance Adams and Parmenter 1995, Zhou et al. 1997 and Blake 2000). In addition to these ‘flexible price’ CGE models, there have been some economic impact studies using ‘fixedprice’ input-output or SAM-based multiplier models (for instance Bergstrom et al. 1990; Fletcher 1989; Heng and Low 1990; Khan et al. 1990; West 1993; Loomis 1995; Wagner 1997; Huse et al. 1998). The tourism-CGE model that will be developed for Indonesia will permit a range of analysis relating to ongoing economic issues related to tourism. The model’s development and its use in policy analysis (comparing simulation results with benchmark conditions) is directed towards, first, encapsulating the main characteristics of the Indonesian economy, especially with regard to the current level of foreign tourism and the globalisation process. Second the model will facilitate analysis of the economy-wide effects and distributional implications of globalisation and the growth in foreign tourism. The results that are obtained from the model should provide useful implications for future economic policy-making, which is also compatible with the growth of foreign tourism and the overall development of the economy.

7

In the model, foreign tourists consume a range of exported commodities, particularly services. This assumption is in line with the World Tourism Organisation recommendations on Tourism Satellite Accounts (TSA) that some parts of exports should be attributed to foreign tourism. Given the way that foreign tourism is modelled, it is important to note that this study does not aim to measure the ‘actualdefinitive’ magnitude of the tourism impacts (as commonly estimated in fixed-price input-output and SAM-based models, for instance Archer 1995; Archer and Fletcher, 1996), but rather to measure the ‘overall-indicative’ directions of the effects, especially on production activities, factor markets, foreign trade, the welfare of domestic residents and income distribution, i.e. the general equilibrium economywide effects (see Greenaway et al. 1993; Shoven and Whalley 1992; and Robinson et al. 1999 for fuller discussions of CGE modelling). The globalisation process is modelled by a combination of appropriate functional specifications used in the modelling development and in the policy scenarios introduced in the simulations. The modelling specifications capture various transactions between the domestic economy and the rest of the world. These include factor payments coming to and going from the domestic economy, capital injections from the rest of the world to the domestic economy (i.e. for financing the savingsinvestment gap) and transfers from the rest of the world to the government and domestic firms (i.e. as part of the open capital account policy adopted by the Indonesian government). The policy scenarios are modelled by classifying the process into two stages: partial and far-reaching globalisation. The former is represented by changes in government policies towards more open international trade, while maintaining other taxation and an open capital account to balance the domestic saving-investment gap

8

and the domestic current account deficit. The move towards greater trade liberalisation seems inevitable, given the Indonesian government’s commitments to the World Trade Organisation (WTO), Asia-Pacific Economic Co-operation (APEC) and Association of South East Asian Nations (ASEAN) agreements to liberalise international trade. The lowering of tariffs is then combined with reduction in the indirect taxation levied on the domestic economy in the far-reaching stage. The tariff reduction, in conjunction with other measures such as domestic tax reform and the replacement of quantitative restrictions by tariffs, has been part of the policy package of the IMF/World Bank conditional loans in which the Indonesian government is currently involved.

The Social Accounting Matrix used in the Model A Social Accounting Matrix (SAM) is a system of representing the economic and social structure of a country (region) at particular time, by defining its economic actors and recording their transactions. It is an accounting record for a whole economy. The disaggregation level and choice of representative actors depend on the motivation underlying its development and the availability of data, so that there is no 'standard SAM'. In a statistical system, a SAM provides complementary economic indicators, which concern not only the macroeconomic aggregates of the System of National Accounts (SNA) but also the socio-economic structure and distributional aspects of the economy. Accordingly, it can be thought of as a further development of input-output accounts, which concentrate only on the production side of the economy. Entries in a SAM can be categorised into two groups, one that reflects flows across markets (i.e. representing product and factor markets) and the other that reflects nominal flows or transfer payments. The transactions are presented in a square matrix,

9

with rows representing receipts and columns recording expenditures. It then follows that every income has its corresponding expenditure, and the inflows and outflows of any account always balance. It must be noted that every SAM provides a static image or 'snapshot' of an economy. Nevertheless, it can provide the statistical basis for the development of plausible models when more than a static image is required (see Pyatt and Round 1985; Drud et al. 1986; Pyatt 1988; de Melo 1988; Robinson and Roland-Holst 1988 for fuller discussions about a SAM and modelling based on a SAM) A schematic representation of the SAM for Indonesia is shown in Table 1. The SAM captures the circular flows of income from activities to factors and then to institutions, which create demand for goods and services. The factor accounts receive factor incomes from both domestic activities and the rest of the world (ROW), while current transfers are recorded in the intersection of rows and columns of institutions (households, firms, government and ROW). These transfers constitute the non-factor incomes, which augment the factor incomes to yield the income of institutions. By representing transactions in this way, factor classifications may be set independently of institutions, enabling the underlying characteristics and policy concerns about factor markets and domestic institutions to be accommodated simultaneously. This provides useful information and increases the versatility of the models developed subsequently. The separation of commodity accounts from production accounts is especially useful for models that focus on international trade (Robinson, 1989). The disaggregation of commodities into domestically produced and imported also provides a good background for modelling imperfect substitutability characteristics between the two goods (Armington, 1969).

10

Production activities are classified into 18 categories and the commonly used assumption that one sector produces one good is adopted, so that classifications for sectors and commodities are the same. Each production activity employs different kinds of labour and capital. Labour is categorised into eight groups based on a combination of sector, type of workers and job status, namely wage and non-wage. The former refers to employees while the non-wage category includes employers, self-employed and family workers. In the Indonesian economy context, the former tends to be associated with higher income groups as most of the latter consists of selfemployed and unpaid family workers. On the capital side, capital is disaggregated into five categories based on ownership and the nature of the capital. Land and other agricultural capital, for instance, are combined into one category, while private domestic capital is an aggregation of corporate and non-corporate private capital. The other two categories of capital are government and foreign capital. Households are classified into 10 groups, based on a combination of income sources, area of residence and job status of the head of household or the highest income earner. First, households are divided into agricultural and non-agricultural households. The former is then split into employee landless farmers, small farmers (land size < 0.5 hectare), medium farmers (between 0.5-1.0 hectare) and large farmers (>1.0 hectare). For the non-farmers, the disaggregation is based on area of residence (urban and rural), level of income and a combination of occupation and job status. Based on these variables, the non-farmers in each area are then classified into low, dependent and high-income groups. The dependent term refers to the households whose highest income earner (head of the households) is not in the labour force, relying instead on transfer incomes from relatives, friends and the government. The household classification has been developed based on ‘real’ variables, which can

11

easily be identified for policy targeting, as commonly suggested in the development of a SAM.

Main Characteristics of the Model Production/Supply Side In the model, output was specified as an input-output function of intermediate input and value added. The intermediate input consumption was set as a constant elasticity of substitution (CES) aggregation of domestically produced and imported commodities (allowing imperfect substitution between the two commodities, with a different degree of substitution for each type of commodity, as reflected by the value of elasticity used) in the form of:

[

INTi = A α d Di(σ i −1)/σ i + (1 − α d ) M i(σ i −1)/σ i

]

σ i / ( σ i −1)

(S.1)

where A = scale parameter, αd = share parameter for domestically produced commodities as a share of total commodities available in the domestic economy (0