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1
INTRODUCTION
1.1-INTRODUCTION
Tourism comprises the activities of persons traveling to and staying in places outside their usual
environment for not more than one consecutive year for the purpose of leisure, business, and other
purposes. Different categories of tourism are; Leisure, Cultural, Nature-based, Scientific/Educational,
Business Traveler and Services.
In this global era tourism has been found as a potential engine of growth for a country. Tourism
is considered as a vital source of reducing current account deficit through foreign exchange
earnings and growth for a country. It has gained currency in the international relation as a basis
for improving political, cultural and economic ties among the nations. However, its economic
impacts supersede all its bearings on other fields. Tourism ensures inflow of foreign exchange
that can be used to import capital goods and hence capital formation in the country.
It has been found in various studies that tourism and economic growth has profound link. It
improves country’s balance of payments accounts by reducing current account deficit. Most of
the LDCs like Pakistan have low competitiveness in their exports in international market. Their
current account witnesses a persistent deficit due to meager exports and high inelastic imports.
Chapter 1
2
However, this can be redressed if a greater emphasis is put by these countries on the service
sector especially tourism.
One of the chief reasons that governments support and promote tourism throughout the world is
that it has a positive impact upon economic growth and development. Tourism should generate
employment and income, lead to a positive tourism balance of payments, stimulate the supplying
sectors of tourism, and lead to a generally increased level of economic activity in the country.
Thus, tourism should have an impact on the frequently used quantitative measure of the
economic development, gross domestic product. As a result, a specialized literature has
developed to measure the impact of tourism gross domestic product upon to deal with
measuring how tourism contributes to economic growth.
Tourism’s economic impacts therefore have an important consideration in state, regional and
community planning and economic development. Economic impacts are also important factors in
marketing and management decisions. Communities therefore need to understand the relative
importance of tourism to their region, including tourism’s contribution to economic activity in
the area. An economic impact analysis of tourism activity normally focuses on changes in sales,
income, and employment in a region resulting from tourism activity.
The relationship between tourism specialization and economic growth is one of the main topics
under discussion in the growing field of tourism economics. The tourism sector investments in
the country are dominated by private sector with the role of public sector mainly as a facilitator.
Almost the entire hotel, restaurant, travel agency and tour operator business is in the private
sector. The Pakistan Tourism Development Corporation (PTDC) is also operating a limited
number of hotels and roadside facilities in areas where the private sector has been reluctant. The
3
Department of Tourist Services (DTS) is responsible for maintaining the standard and
categorization of hotel industry. The Ministry of Tourism looks after the entire public sector
interventions including formulation of policies and overseeing the legal and regulatory
framework.
Tourism activities are considered to be one of the major sources of economic growth. It can be
regarded as a mechanism of generating the employment as well as income in both formal and
informal sectors. Tourism supplements the foreign exchange earnings derived from trade in
commodities and sometimes finance the import of capital goods necessary for the growth of
manufacturing sectors in the economy. On the other hand, rapid economic growth in the
developed economies attracts foreign travels (Business travels), which leads to an increase in the
foreign reserve of the country. The rapid growth of tourism led to a growth of household
incomes and government revenues directly and indirectly by means of multiplier effects,
improving balance of payments and provoking tourism promoted government policies. As a
result, the development of tourism has generally been considered a positive contribution to
economic growth.
In the field of tourism, Pakistan offers many allures in the developing world. The historical and
cultural heritage of the nation presents a testimony for glory of this ancient land, the country
inherits numerous tourist attractions at Swat, Kalam, Malam, Jaba, Shangla, Balakot, Ayubia,
Murri, Chitral, Gilgit, Naran and Kaghan valleys, and other mountains ranges, historical, and
archaeological places in the other parts of the country. There are few places on the earth that
posses the majesty and grandeur of the northern region of Pakistan. Northern Pakistan remains a
land of contrasts, unique in its legacy of landlocked civilization and blessed as no other
4
destination with an amazing array of some of most beautiful valleys, lakes, rivers and mountains.
The junction of four of the world’s most formidable mountain ranges Karakoram, Hindukhsh,
Himalayas, and Pamir’s forms a unique point in the northern areas, it has climbers, trekkers,
mountaineers, hikers and unheeding rock, the flow of countless glacial streams, which attracts
millions of tourists annually. Few areas in the world offer such a unique blend of breath taking
natural beauty and a rich diversity of culture, socioeconomic traditions, history and lifestyle as in
the Hindukush-Himalayan region of Pakistan. Furthermore, Pakistan has a tremendous potential
in the fields of echo and safari tourism.
Pakistan has great attractions in the form of scenic beauty such as sun, ocean, mountains, flora
and fauna, lakes and in particular the hospitality of its people that may compel the tourists to visit
Pakistan. They have the opportunities to escape from the fretfulness and monotony of daily life
and can relax in an ideal climate and perfect conditions. The rich cultural heritage of Pakistan
comprise of Mohenjo-Daro cradle of ancient Indus Valley and Gandhara Civilization. The three
great mountain ranges, the Himalayas, the Hindukush and Karakoram meet in this land. It is a
blend of old and modern civilizations. The Nature has bestowed Pakistan a diverse topography,
demography, culture and traditions paving the way for investment in the tourism sector giving
the strength to boost the economy.
5
1.2 -OBJECTIVE OF STUDY
Following are the objectives of the studies:
i. To find impact of tourism on development of Pakistan.
ii. To provide suitable policy implication based on empirical finding.
1.3-Organization of the Study
The study is organized as follows: After a brief introduction in chapter 1, chapter 2, is devoted to
review of literature on tourism model, chapter 3 outlines the model, methodology, and data used.
Sec chapter 4 presents results from an estimated model and its interpretation, and the last chapter
5,gives the concluding remarks and policy implications.
6
LITERATURE REVIEWVarious studies both theoretical and empirical have investigated the tourism industry and its
impacts on economy. These studies demonstrate different results. Some of reviewed studies are
as follows:
Ivanov and Webster (2006) examine the relationship between tourism development and
economic growth but do not state how much of the economic growth is a consequence of tourism
development. As the results, the economic growth generated by tourism and generated by other
industries derives the impact of tourism on it.
Surugiu , Fren and M. Surugiu (2009) use various instruments for measuring the impact of
tourism in an economy, such as multipliers and Input Output Analysis. In the case of Romania
the Input Output method was applied to measure the impact of tourism upon the economic
growth. Backward and forward linkage coefficients for output, earnings, value added and
employment were used to underline how the changes in final demand for hotels, restaurants and
travel agencies sector will affect the entire economy.
Kweka (2004) indicates that tourism expansion has substantial impact on the Tanzania economy
as shown by increases in real GDP, total welfare and exports. Improvement of infrastructure
appreciably amplifies the effects of tourism expansion and tourism taxation has an clear
favourable impact on tax revenue and welfare. As LDCs lack sufficient resources to enhance
Chapter 2
7
growth, tourism may provide as a source of tax revenue to finance infrastructure projects that
will benefit the economy as whole as well as tourists.
Fayissa , Nsiah and Tadesse (2009) show that revenues from the tourism industry positively
contribute to both the current level of gross domestic product and the economic growth of LACs
as do investments in physical and human capital. The findings imply that Latin American
economies may enhance their economic growth by strategically strengthening the tourism
industry while not neglecting the other sectors which also promote growth.
Balaguer and Jorda (2010) examines the role of tourism in the Spanish long-run economic
development. The results indicate that, at least, during the last three decades economic growth in
Spain has been sensible to persistent expansion of international tourism. The analysis shows,
then, that a long-run stable relationship between economic growth and tourism expansion exists.
The earnings from international tourism affect positively the Spanish economic growth.
Kareem,Idowu (2008) examine the direction of causality between tourism-exports and
economic growth in Africa and at the same time show whether there is long run relationship
between them. There is long run relationship between tourism-exports and economic growth in
Africa, which simply means that tourism, could be used by African countries to drive economic
growth in the continent.
8
Carrera , Brida and Risso (2007) reveal that international tourism expenditure positively
impacts Mexican economic growth. Tourism expenditure and Real Exchange Rate are weakly
exogenous to real GDP. Analysis shows that a shock in tourism expenditure produces a short fall
and then a positive effect on growth.
Catty and Serju (2006) argue that the tourism sector is viewed as one of the most important
engines of growth and development in the Jamaican economy and as such, is a key focus in the
Government’s industrial strategy. In relation to employment, agriculture transport, storage &
communication, construction, and distribution are the primary beneficiaries from a dollar spent
within the tourism industry. The importance of entertainment to the tourism industry and the
Jamaican economy in general necessitates more emphasis on the proper measurement of this
sector in the national accounts, as well as a greater focus on harnessing the creative skills of the
people.
Kreishan (2010) suggests that government should focus on economic policies to promote
international tourism as a potential source of economic growth in Jordan. The study shows that
there is a positive relationship between tourism development and economic development in the
long-run. The results suggest that promoting tourism via developing a long-term tourism
strategic plan will contribute to economic growth in Jordan.
9
Figini and Vici (2007) identify the conditions under which tourism specialization brings a better
economic performance than industrial development, and empirical evidence showed that tourism
is an independent factor enhancing growth in a cross-section of countries. The theory shows the
conditions under which a tourism-based growth process can flourish despite a lower.
Segun and Odularu (2008) estimates the relationship between economic growth and growth in
tourist arrivals conditional on main macroeconomic variables, it recommends that the role of
tourism cannot be over-emphasized in the sustainable economic development in West Africa.
The result suggests that the role of tourism cannot be over-emphasised in the sustainable
management of tourism is necessary in order to reap maximum benefit of topical relevance to
West African macroeconomic performance. Furthermore, it suggests that Tourism as the main
objective of this study does matter in West African economic performance.
Rafiq and Shafiqullah (2007) examine the valuation of tourism’s benefits in Chitral Valley. The
study employs Zonal Travel Cost Method (ZTCM). They use the double log functional form for
estimating the value of the recreational visits. The findings of the study help the local
government for imposition of an optimal entry fee and efficient resource allocation.
In conclusion, it seems that there is a clear empirical consensus in the literature that tourism
promotes economic growth. More specifically, it seems that the role of tourism in economic
growth is larger for smaller developing countries than for the developed countries.
10
DATA AND METHODOLOGYReal per capita GDP is the function of tourist receipts, gross fixed capital formation, foreign
direct investment, terms of trade and labor force participation rate. We specify a Cobb-Douglass
production function as:
Y= f (TR, GFCF, FDI, TOT, LFP)
3.1-Definitions of the Variables
Y= Real per capita GDP
Real GDP divided by Population. This is the "average" output of the economy per person
measured in a base year prices. This ratio is often used as a measure of standard of living in
comparisons over time of one country, or between different countries when measured in the
same currency.
TR=Tourist Receipts
Foreign Tourists
According to the United Nation World Tourism Organization (2009), the definition of foreign
tourist for Pakistan is prescribed as: “The term ‘foreign tourist’ is used to describe a person
irrespective of his/her nationality, race, age, sex, language or religion, etc; who visited Pakistan
Chapter 3
11
for any reason other than seeking gainful employment, and whose duration of stay was for 24
hours or more but not more than one consecutive year. All Overseas Pakistanis travelling on
foreign passports whose usual place of residence is outside the country, and who visited Pakistan
during the period under report, fell within the purview of this definition. Excursionists and transit
passengers whose stay was less than 24 hours are excluded. Every visit or entry of a tourist to the
country meeting the above definition, have been counted as arrival”.
Tourism
According to the United Nation World Tourism Organization (2009), Tourism comprises the
activities of persons travelling to and staying in places outside their usual environment for not
more than one consecutive year for leisure, business and other purposes.
GFCF= Gross fixed capital formation
Gross fixed capital formation (GFCF) refers to the net increase in physical assets (investment
minus disposals) within the measurement period. It does not account for the consumption
(depreciation) of fixed capital, and also does not include land purchases. It is a component of
expenditure approach to calculating GDP.
12
FDI= Foreign direct investment
FDI or Foreign Direct Investment is any form of investment that earns interest in enterprises
which function outside of the domestic territory of the investor.
FDIs require a business relationship between a parent company and its foreign subsidiary.
Foreign direct business relationships give rise to multinational corporations. For an investment to
be regarded as an FDI, the parent firm needs to have at least 10% of the ordinary shares of its
foreign affiliates. The investing firm may also qualify for an FDI if it owns voting power in a
business enterprise operating in a foreign country.
TR=Tourist Receipts
The receipts of a country in the form of consumption expenditures or payments for goods and
services made by foreign visitors out of foreign currency resources.
LFP= Labor Force participation rate
The labor force participation rate is the percentage of working-age persons in an economy who:
Are employed
Are unemployed but looking for a job
Typically "working-age persons" is defined as people between the ages of 16-64. People in those
age groups who are not counted as participating in the labor force are typically students,
homemakers, and persons under the age of 64 who are retired.
13
TERRORISM AND ITS EFFECT ON PAKISTAN ECONOMY
World has been replaced with the synonym of “global village”. Tourism industry had been a
symbol of recreation, global integration and economic prosperity of a nation. But this scenario
was solely reversed when terrorist activities haunted the minds of travelers and tourists with a
fear of insecurity after the terrorist attacks of 9/11 in America. Pakistan has been blessed with
natural endowments and historical glory in the form of architect. Northern areas are the most eye
catching parts of the Pakistan and had been the focal attention of tourists from all over the world
but the wave of terrorism has faded that attraction and specifically in those beautiful northern
areas and tourism industry has almost been ruined in Pakistan. The only source of income in
Chitral and Northern Areas of Pakistan. The attack on Afghanistan by the U.S.-led coalition
forces has almost ruined the tourism industry in Pakistan and the people attached with it are
finding it very difficult to survive as they have lost their only source of income. The main hotels
in Peshawar, the capital of the khyber pakhtoonkhwa (KPK) bordering Afghanistan, are deserted
and very few foreign tourists can be seen. The tourism industry in Pakistan has been severely
affected by terrorism, as foreign countries and international airlines have branded Pakistan an
“unsafe destination”.
Resultantly in the year of 2009 only 0.855 million foreign tourists and 46.8 million domestic
tourists visits tourists sites and contributed and amount of $ 241 million (only 0.3% of GDP)
with an annual growth of just 2.9%. There was continues decrease observed, like in the year of
2007 total earning from tourism was $276.1 million and in 2008 $ 240.6 million (Tourism in
Pakistan, 2009). Due to war on terrorism educational activities has also been shattered as
reported by NWFP Department of Education, 65% of the schools in Swat valley have been
14
destroyed and 35% are closed in other regions of Buner, Upper and Lower Dir, Shangla and
Malakand Districts (other regions being part of war against terrorism) (Pakistan Situation Report,
2009). Thus the adverse impacts of terrorism has been observed on tourism industry; educational
sector and ultimately on the overall economy of Pakistan.
Nobody knows the time period for which this downfall will last with the tourism industry and
same is the case with the terrorist threats. Hopes were residing with the war against the terrorism
but that also went unfruitful. Need of the hour is the collated efforts of all the nations to combat
and fight against the terrorism and to sustain the confidence of potential tourists. To save the
economy, important sectors must be fetched back to their normal pace of growth. Hence
terrorism must be wiped out to save the educational sector and tourism industry so that Pakistan
may keep a step towards economic and social progress to be the part of global progress.
Tourism is an important sector and contributes a lot towards the economic development like
according to report of World tourism forum’s Report on the tourism economic impact (2011),
tourism’s expected total contribution for year 2011 is 13.87% towards world’s GDP with
increase of 4.5% than 2010 and it will create 258 jobs around the globe. Its expected contribution
to Pakistan economy is 6.5% for the year of 2011 while its direct contribution would be 3.02% to
total GDP. Tourism will employee 1456000 persons in the year of 2011 (2.6% of the
employment), and it will offer 3.8% of the exports (visitors exports). But due to terrorism waves
in the country there has been an advice by the states to their citizens to be aware while moving to
Pakistan, which has restricted tourists and visitors to put their feet on the land of Pakistan. These
instructions have also negatively affected the business transactions between Pakistan and other
15
countries and now business activities are shifted to other neighboring countries i.e. India, china
and Singapore.
Impact On GDP
Pakistan’s GDP has been one of the main economic factors that have been affected by the
terrorism exposed to the country. Consumers who were used to going out on a regular basis and
purchasing high volumes of merchandise have been afraid to do in the recent years. This has
caused a large decrease in consumer spending, which in turn has had a negative impact on the
Pakistan economy. “As the GDP growth rate has gone down from 8.40% in 2004-05 to 5.80% in
2007-08 and more recently it has reduced to 2.10% in 2008-09” (The Business Exchange).
According to experience curves and studies that have been conducted, it has been concluded that
it will take the Pakistan economy 33 years to double its size.
Impact on Exports
Pakistan conducts most of its trade with the United States and the European Union and
furthermore, according to sources, 50% of its exports are to these two locations. However, due to
terrorism threats on and from Pakistan, foreign governments have discouraged its citizens to visit
Pakistan. Several big companies who have had interest in procurement of textile (Pakistan’s
largest export product) have taken their business to neighboring countries such as: India, Hong
Kong, and Singapore. Pakistani business men have been denied a visa or scrutinized greatly
before they have been granted access to travel abroad and this has had a huge effect on their
exports. “The foreign buyers have exploited the situation to procure goods at lowest values.
Pakistani knitwear is better in quality than its competitors but fetch the lowest rates due to the
16
denial of direct contact with outside businessmen” (Pu.edu). Exports are said to have gone down
from $19.22 billion to $6.1 billion dollars amidst the reduction of imports. The trade
balance/deficit is -4.5(billion $) and one of the reasons for this is because of the public global
image that has been portrayed of Pakistan.
Impact on FDI
In the country where macroeconomic indicators are plunging as a result of political turmoil and
terrorism, it is obvious that not only foreign investors but local investors will be petrified about
investing to get profit. As a result of this, the Pakistan FDI has reduced by about 1.475 billion or
52.8% during its last fiscal year(Pakistan News Watch). Some of the reasons that have been
stated for this sharp decline are as follows: future uncertainty, poor law and order, and power
shortages.
The war on terrorism declared by the United States after the September 11, 2001 suicide attacks
has badly affected tourism in Pakistan,
The exchange rate has gone up from 60.5(Rs/US$) to 84.5 (Rs/US$) which has a bad
effect on the economy.
According to recent surveys, it cost Rs340 billion on terrorism which has caused the
economy more than$35million in lost export, revenue, opportunities e.t.c
The inflation rate is currently at a high of 18.85%.
Pakistan tourism industry suffered a loss of 44 million dollars in the past year and has
gone down by 6% despite various campaigns.
17
3.2-The Economic Growth Model with Tourism.
To investigate the responsiveness of income growth rate to revenues generated from tourism and
the typical sources of economic growth such as investment in physical and openness of the
economy as often measured by the terms of trade (or typically by ratio of the sum of imports and
exports to the GDP), and foreign direct investment, and, we specify a double log-linear Cobb-
Douglass production function as:
Consider the model
ln PCI=α0+α 1 lnTR+α 2 lnGFCF+α3 ln FDI+α 4 lnTOT +α 5 ln LFP
Real GDP per capita income is the dependent variable and tourist receipts, gross fixed capital
formation, foreign direct investment; terms of trade and labor force participation are independent
variable.
Summary of the Variables
18
Variable Name Variable Description
lnPCI Natural log of real GDP per capita.
lnTRP
Natural log of tourist receipts per capita.
lnGFCF
Natural log of gross fixed capital formation
lnFDI
Natural log of foreign direct investment
lnTOT Natural log of terms of trade
lnLFP Natural log of Labor Force participation rate
19
VARIABLE EXPECTED RELATIONSHIP
TOURIST RECIEPT Positive Relationship With Per Capita Income
FOREIGN DIRECT INVESTMENT Positive and Negative Relationship With Per
Capita Income
LABOUR FORCE PARTICIPATION Natural log of foreign direct investment
GROSS FIXED CAPITAL FORMATION Natural log of terms of trade
TERM OF TRADE Natural log of Labor Force participation rate
3.3-Expected Relationship of Variable
20
3.4-Sources of the Data
The data used for this study are taken from economic survey of the ministry of finance and
International Financial Statistics. Some information has been taken from fifty years statistics for
Pakistan published by the Federal Bureau of Statistics. The time series data for the period from
1980 to 2008 is used.
Chapter 5
21
CONCLUSION AND POLICY IMPLICATION
In our study we try to check the relationship between per capita income and its determinants. Our
explanatory variables are tourist receipt, foreign direct investment, term of trade, gross fixed
capital formation, labor force participation. Conclude that tourist receipt have positive effect on
per capita income because this increase in receipts is very important for the economic
significance of tourism. The increase of real per capita international tourism receipts also implies
an income increase of the tourist from the countries they come from. As the income of tourists
increase, they will spend more, and they are more likely to look for destinations with higher
tourist products. The foreign direct investment (FDI) both positively and
negatively related with the real per capita (GDP) growth rate. Labor force
participation has positive effect on per capita income, which increases the
consumption level. In today’s era human resources are as important as
financial resources to any organization.
Pakistan has several unique opportunities for different types of tourism. Its geographical location
has made it a historical and cultural hub for the tourism. Pakistan has great potential in coastal
tourism, mountain climbing and layout tourism adventures trip and tremendous opportunities in
the areas of echo and safari tourism. So, the following suggestions are put forward for the growth
of tourism industry in Pakistan.
Government should concentrate on the means of transportation, communication and
power for the promotion of tourism industry in Pakistan.
22
To attract the foreign travelers, the security issues should be handled in a best way.
Tax structure plays a vital role in industrialization process. The government should give
tax incentives to the air fares, hotels and other tourism related industries.
The cultural and traditional festivals should be organized to create attractions for tourists.
The Journals, Brushers with maps and proper guidance should be placed in all the
important hotels and tourists gateways so that the tourist from any country can benefit
from it without any language barrier.
The electronic and print media can also play an important role in enhancing the demand
for tourism in Pakistan.
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