Economic leakage in tourism explained

Jul 2, 2019 | Learn about tourism, Tourism management

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(Last updated on: 23/10/2020)

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.

I have seen economic leakage first-hand throughout almost all of my travels. Whether it’s Ryanair bringing the tourists to the area yet taking their money back to Ireland, Hilton Hotel taking the tourist Dollar back to the US or the imported Minute Maid orange juice that is sold in shops and restaurants (even though there is perfectly good orange juice made in-country), economic leakage in tourism is everywhere you look!

In this post I will explain to you how economic leakage in tourism occurs and how you can be a more sustainable tourist by thinking carefully about how you spend your money.

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.

photo of man holding a mcdonald s paper cup
Photo by Alexandro David on Pexels.com

Economic leakage can occur in a number of ways. Here are a few examples:

  • Imported goods
  • Foreign employment
  • Foreign ownership
  • Currency conversion

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.

  • If you think about it, it’s actually quite unethical!
  • Is it fair that we use their natural resources (beach, mountain, jungle etc), but that they receive very little money from us in return?
  • Is it fair that we leave litter on their streets and they have to pick up the bill to clean it up?
  • Is it fair that we use up their water supply (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.

cheerful multiracial friends enjoying watermelon slices on sandy sea shore
Photo by Kaba Camara on Pexels.com

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 Dollar signs- they think tourism is where the money is at!

But they are misled, misguided or simply uneducated in basic economics to realise that this is, in actual fact, not always the case. If managed well, destinations CAN maximise their income from tourism and minimise economic leakage. BUT, many tourism industry stakeholders do not have the experience or education to realise this.

  • They welcome the MNCs with open arms.
  • They give the airline a ridiculously cheap deal to operate in and out of their airport.
  • They stock the (international) products that tourists are familiar with instead of using local products
  • They employ the staff from overseas instead of training their own people
  • They don’t realise the impacts of their actions, and before they know it, they have a thriving multi-million Dollar tourism industry that makes the destination very little profit. Ironic, huh?

What’s more, is that 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 they were BEFORE they developed their tourism industry!

Where does your money end up?

When we travel, it is important that we give a thought to where our money ends up. Yet, for the average tourist, this is not something that will typically cross their mind.

We hop on over to Expedia or a comparison site such as Icelolly.com and find a holiday. It’s all organised for us, making it really simple. Just get your credit card and click 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.

If you want to be a more sustainable tourist, give some thought to where your money goes. Whilst you will never truly know where every Penny that you spend ends up, there are things that you can do to help to avoid economic leakage.

Booking local

If you book with a local tour operator, local tour company or local hotel you know that your money is going to a local business.

When I was planning our tour around Sri Lanka, I received quotes from several tour operators. Some were local and some were not. What I quickly realised, however, was that there were actually several benefits to booking local.

  1. I knew my money would stay in Sri Lanka.
  2. The Sri Lankan company had better knowledge of the country
  3. It was cheaper

If you think about it, it actually makes little sense to book with a foreign owned company. Who knows more about the local area than the locals themselves? Plus, if you cut out the middle man then you save money too. That’s a win, win in my book!

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 multi-million Dollar businesses. 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, I recommend 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 you might come across on your travels:

Hotel chains

  • Hilton
  • Radisson
  • Travel Lodge

Tour operators

  • Thomas Cook
  • TUI
  • Various subsidiaries of the companies named above

Fast food

  • Pizza Hut
  • KFC
  • McDonalds
  • Dominoes Pizza

Restaurants

  • Planet Hollywood
  • Hard Rock Cafe

Coffee shops

  • Starbucks
  • Costa Coffee
  • Cafe Nero
Source: India TV

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 are probably 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…. have you ever heard this 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.

And like I said before, surely the locals know more about their own country than any foreigner?

person throwing fish net while standing on boat
Photo by Quang Nguyen Vinh on Pexels.com

Thomas Cook is 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.

Lets say I am on a holiday in Jamaica. I ask my Rep where is the best place to eat authentic Jamaican food, or to tell me a bit about local politics. Maybe I want to know directions to a place or I’d like a a background history on one of the monuments that I saw near the hotel. Who is more likely to know the answers to such questions? A Brit or a local?

To me, it seemed crazy that Thomas Cook, and many organisations like them, would be sending over foreign staff to advise on a destination that they know little about in real terms compared to the local population (fortunately Thomas Cook did changes this in many destinations, but not all, prior to their 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 within which the tourism takes place. In cases such as the Maldives or the Caribbean, there have been reports of as much as 95% of the money made by tourism leaving the country via economic leakage.

One destination which has suffered from this is The Gambia. The Gambian Government even tried to ban all-inclusive resorts, but when the tour operators threatened to take their business elsewhere, the ban was retracted.

Below is a video that I have shown every year to my students when teaching them the economic impacts of tourism. Whilst it is a bit dated now, it is a very good example of how tourism can thrive in an area, yet there is very little economic benefit to the community who host the tourists.

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 butterfly effect is actually a very interesting concept and if you are interested, then I recommend the book The Butterfly Effect: How Your Life Matters. It’s written by New York Times best-selling author Andy Andrews who shares a compelling and powerful story about a decision one man made over a hundred years ago, and the ripple effect it’s had on us individually, and nationwide, today. It’s a story that inspires courage and wisdom in the decisions we make, as well as affect the way we treat others through our lifetime.

Anyway, I digress…. back to economic leakage in tourism…

So the reason this is relevant is because 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.

Let me give you an example…

TUI decides to change its policy and next season they 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

As you can see, 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 we can do as individual tourists to help prevent economic leakage in tourism.

Here are some examples:

  • Book your holiday through a local tour operator
  • Use independently, locally owned accommodations, such as Airbnb
  • Use local transport options (i.e. take a taxi instead of booking a transfer before you leave home)
  • Buy from local shops
  • Buy local produce (forget Minute Maid and buy locally squeezed juice- it will probably taste nicer anyway!)
  • Don’t purchase imported goods

Conclusion: Economic leakage in tourism

As you can see, 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.

And hopefully this post has done just that!

For more information, I recommend some of the texts below. I also have a discount code for Airbnb if you fancy trying it out! Get your discount code here.

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.
  • 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.
3 Comments
  1. Sydney Clinton

    What a brilliant piece! Most tourists don’t give a thought about what and where they are spending their money and they go back home thinking that they’ve helped the local economy.

    Reply
    • Hayley

      Thanks Sydney, sadly that is very true!

      Reply
  2. Lisa Lascelles

    This was very informative! Thanks Sydney

    Reply

Trackbacks/Pingbacks

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Hi, am Dr Hayley Stainton

I’ve been travelling, studying and teaching travel and tourism since I was 16. Through Tourism Teacher I share my knowledge on the principles and practice of travel and tourism management from both an academic and practical perspective.

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