Economic leakage is a major problem in the tourism industry. Destinations develop and grow their tourism industries with high hopes of making a significant income from the various tourism-associated activities. However, in many destinations, this is simply not the case.
Examples of economic leakage are everywhere: a low-cost airline such as Ryanair bringing tourists to a destination but taking its profits back to Ireland, an international hotel chain sending profits to its headquarters in the USA, or imported branded orange juice being served in restaurants even though perfectly good juice is produced locally.
This article explains how economic leakage in tourism occurs, why it is a problem and how tourists can become more responsible tourists by thinking carefully about how they spend their money.
- What is economic leakage in tourism?
- Why is economic leakage a problem?
- Where does your money end up?
- Booking local
- The impact of multinational corporations
- Foreign employment
- Enclave tourism
- Wider economic leakage (the butterfly effect)
- How you can reduce economic leakage in tourism
- Conclusion: Economic leakage in tourism
- Further reading on economic leakage in tourism
What is economic leakage in tourism?
Economic leakage is the act of money leaving the host country and ending up elsewhere.
Due to the international nature of the tourism industry, along with the world that we live in becoming increasingly globalised and monopolised by the most successful multinational corporations (MNCs), economic leakage is becoming more and more prevalent. According to the UN Environment Programme (UNEP), in most all-inclusive package tours around 80% of travellers’ spending goes to airlines, hotels and other international companies rather than to local businesses and workers, and in many developing countries leakage is estimated at 40-50% of gross tourism earnings.
Economic leakage can occur in a number of ways. Here are a few examples:
- Imported goods
- Foreign employment
- Foreign ownership
- Currency conversion
Video: What is economic leakage in tourism?
Why is economic leakage a problem?
Most destinations choose to develop and grow their tourism industries with the aim of making money. Unfortunately, the income that destinations receive from their tourism industry often isn’t as high as they would like it to be. In severe cases, the destination receives only a small fraction of the income from tourism.
- This raises important ethical questions:
- Is it fair that tourists use a destination’s natural resources (beach, mountain, jungle etc) but the host community receives very little money in return?
- Is it fair that tourists leave litter and local people have to pay to clean it up?
- Is it fair that tourists use up local water supplies (which is often scarce in hot countries)?
- Is it fair that the price of real estate rises because the land is in demand, meaning that local people may be displaced and have to move areas?
The tourism industry contributes to all of these issues and more, yet in many cases very little money is directed towards the destination to help deal with such problems.
The economic problems resulting from leakage go even further than this. Many destinations will give up their traditional ways of making money, for example through farming, in exchange for tourism. They see tourism as a quick route to prosperity.
However, this is not always the case. If managed well, destinations can maximise their income from tourism and minimise economic leakage, but many tourism stakeholders lack the experience or resources to do so. Common problems include:
- Welcoming multinational corporations without conditions
- Offering airlines very cheap deals to operate at their airports
- Stocking the international products that tourists are familiar with instead of local products
- Employing staff from overseas instead of training local people
- Failing to recognise these impacts, resulting in a thriving multi-million-dollar tourism industry that makes the destination very little profit
What’s more, if the destination did give up their traditional ways of making money in exchange for tourism, then they no longer have the income from this industry either. In effect, the destination may actually be worse off than before it developed their tourism industry!
Where does your money end up?
When people travel, it is important to think about where their money ends up- yet this is not something that most tourists consider.
Many people simply go to Expedia or a comparison site such as Icelolly.com and find a holiday. It is quick and simple to book. For most people, that’s the end of the road. Aside from working out how much spending money they need and changing their currency, they don’t give another thought to money matters.
Tourists who want to be more sustainable can think about where their money goes. While it is impossible to know where every penny ends up, there are things tourists can do to help reduce economic leakage.
Booking local
Booking with a locally owned tour operator, tour company or hotel means that more of the money stays in the local economy.
When planning a tour of a country such as Sri Lanka, for example, travellers can choose between international operators and locally owned companies. Booking locally often has several benefits:
- More of the money stays in the country
- Local companies often have better knowledge of the destination
- It can be cheaper, as there is no middle man
However, international operators and travel agents can offer financial protection (such as ATOL protection in the UK) and support if things go wrong, so the best choice depends on the type of trip. Many travel agents and tour operators work directly with locally owned suppliers in the destination, which helps to reduce leakage.
The impact of multinational corporations
MNCs, also known as transnational corporations, are large businesses that operate across different countries. MNCs are often very powerful organisations that are worth billions of dollars. However, the money that they make is most commonly returned to the country where they are based, which is usually in Western countries such as the USA or the UK.
If you are interested in learning more about how powerful MNCs are and how they operate, see Multinational Corporations and Foreign Direct Investment: Avoiding Simplicity, Embracing Complexity, which provides some excellent explanations and case studies.
Here are some examples of companies that tourists commonly encounter:
Hotel chains
- Hilton
- Radisson
- Travelodge
Tour operators
- Jet2holidays
- TUI
- Various subsidiaries of the companies named above
Fast food
- Pizza Hut
- KFC
- McDonalds
- Domino’s Pizza
Restaurants
- Planet Hollywood
- Hard Rock Cafe
Coffee shops
- Starbucks
- Costa Coffee
- Caffè Nero
Foreign employment
Many organisations, particularly those that are foreign owned, will choose to recruit staff from overseas instead of those who live in the local area.
Organisations have several reasons for this. To begin, foreign staff may be native English speakers, whereas the local people may not be. Staff are likely to be familiar with the brand and with Western customs. Staff hired from abroad may already be working for the company and may have a more qualified CV than local people.
However, there is a well-known saying:
‘You give a poor man a fish and you feed him for a day. You teach him to fish and you give him an occupation that will feed him for a lifetime.’
Hiring foreign people is really just short term gain. It would actually make more sense to teach the local people how to do the job. They can then teach the next generation of people in the area and so on and so forth.
After all, local people usually know more about their own country than foreigners do.
Thomas Cook was a good example here. For many years they used predominantly British Holiday Reps in their mass tourism holiday resorts overseas. They would fly them in to the destination and provide the staff with accommodation and a salary, paid into a UK bank account. The person would pay UK taxes. The British Holiday Reps would need to learn about the destination they were placed in on their arrival, taking a crash course or learning on the job.
Imagine a tourist on holiday in Jamaica who asks their holiday rep where to eat authentic Jamaican food, about local politics or about the history of a nearby monument. A local rep is far more likely to know the answers than someone who arrived from the UK a few weeks earlier.
Thomas Cook and many similar companies sent foreign staff to advise on destinations that they knew relatively little about compared with the local population, although Thomas Cook did change this in many destinations before its collapse in 2019.
Furthermore, by not hiring local people, tourism businesses and their staff may become unliked by the local community. The local people may even begin to resent them. This can cause all sorts of wider issues such as rises in thefts and hate crimes.
Enclave tourism
Enclave tourism is tourism that is all-encompassed by the tour operator.
Tourists are encouraged to stay put. They are often encouraged not to leave their hotel. This is generally associated with the all-inclusive holiday, whereby tourists purchase a holiday package that includes everything they need from transport to food, drink and entertainment. The tourists have no need to leave the resort, and they often don’t.
In cases of enclave tourism, very little money reaches the destination. UNEP has estimated that, on average, of every US$100 spent on a holiday by a tourist from a developed country, only around US$5 actually stays in a developing-country destination’s economy, and leakage in some small island destinations, such as parts of the Caribbean, has been estimated at around 80%.
One destination which has suffered from this is The Gambia. The Gambian government banned all-inclusive holidays in 2000, but when tour operators threatened to take their business elsewhere, the ban was reversed the following year.
Wider economic leakage (the butterfly effect)
Have you ever heard of the butterfly effect?
This is when one thing happens, which causes another to happen, which then has a knock on effect on something else and so on. It demonstrates how everything is interconnected and how things that may not seem important, may have important consequences.
The idea comes from chaos theory and is popularised in books such as The Butterfly Effect: How Your Life Matters by Andy Andrews.
This matters for economic leakage in tourism.
It demonstrates how the tourism industry is, in effect, an economic system. The different parts of the ‘ tourism system‘ are connected in many different ways. So if one part of the system is changed, this will have a knock on effect on other areas in the system.
For example, imagine the following scenario:
A large tour operator decides that next season it will hire only local holiday reps. As a result, recruitment takes place in the destination, instead of back in the UK. Money is spent on hiring a venue in the destination to hold interviews and interviewers (or their employer) spend money on aspects such as accommodation, food and entertainment. All of this is money that the destination did not receive the year prior, when recruitment took place in the UK.
When local staff are employed they are given training. This provides the local community the opportunity to acquire skills that they otherwise wouldn’t be able to learn. They can then teach these skills to their friends or family, who can use them in other areas of their lives, perhaps enhancing their own employment prospects.
Local staff will pay local taxes. These taxes will be collected by the Government and (hopefully) reinvested in the community. Areas such as healthcare and education benefit from this boost in money. Children now receive a better education because there is more money in the system. This improves their future employment prospects.
The story continues…
How you can reduce economic leakage in tourism
Economic leakage is not a good thing to the destinations which host tourism. The only people who benefit from economic leakage are the large MNCs and the staff who work at the top end of these businesses.
Whilst this is a huge issue, there are things that individual tourists can do to help prevent economic leakage in tourism.
Here are some examples:
- Book with locally owned tour operators and guides
- Stay in locally owned accommodation, such as family-run guesthouses, and book direct where possible
- Use local transport options (e.g. local buses, trains or locally owned taxis)
- Buy from local shops
- Eat in locally owned restaurants and buy local produce rather than imported brands
- Buy locally made souvenirs and crafts rather than imported goods
Conclusion: Economic leakage in tourism
Economic leakage is a big problem in the tourism industry. However, many tourists are unaware of how much impact their travel decisions can have on the economy of the destination that they are visiting.
With a little more awareness, tourists can help to maximise the economic potential from tourism for local communities and reduce economic leakage.
Tourism businesses, governments and destination management organisations also have an important role to play, through policies that support local ownership, local employment and local supply chains.
The texts below are a good starting point for further reading on economic leakage and tourism management.
Economic leakage in tourism: FAQs
Below are answers to some of the most common questions about economic leakage in tourism.
What is economic leakage in tourism?
Economic leakage in tourism is when money spent by tourists leaves the destination instead of benefiting the local economy- for example, through foreign-owned hotels and airlines, imported goods, foreign staff and profits sent back to overseas headquarters.
What causes economic leakage in tourism?
The main causes are foreign ownership of tourism businesses, imported food, drink and other goods, the employment of foreign staff, all-inclusive and enclave tourism, and payments to international booking platforms and tour operators.
How much tourism money leaks out of developing countries?
According to UNEP, in most all-inclusive package tours around 80% of travellers’ spending goes to airlines, hotels and other international companies, and on average only around US$5 of every US$100 spent by a tourist from a developed country stays in a developing-country destination.
How can economic leakage be reduced?
Leakage can be reduced by encouraging local ownership, training and employing local staff, using local suppliers and produce, and limiting all-inclusive development. Tourists can help by staying in locally owned accommodation, eating in local restaurants and booking local guides.
What is an example of economic leakage?
An example is an all-inclusive resort owned by an international company that imports its food and drink, employs managers from overseas and sends its profits abroad, so that very little of the money paid by guests benefits the local community.
Further reading on economic leakage in tourism
- Basic Economics, Fifth Edition: A Common Sense Guide to the Economy– Drawing on lively examples from around the world and from centuries of history, Sowell explains basic economic principles for the general public in plain English.
- The Business of Tourism Management– an introduction to key aspects of tourism, and to the practice of managing a tourism business.
- Managing Sustainable Tourism– tackles the tough issues of tourism such as negative environmental impact and cultural degradation, and provides answers that don’t sacrifice positive economic growth.
- Enclave tourism explained
- What is pro-poor tourism?
- The economic impacts of tourism
- Tourism Management: An Introduction– An introductory text that gives its reader a strong understanding of the dimensions of tourism, the industries of which it is comprised, the issues that affect its success, and the management of its impact on destination economies, environments and communities.
