High Economic Growth Through Tourism

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A 1% change in tourism earning will change the gross domestic product by 20%. It indicates that an increase in tourism earnings by, say Rs 100, will increase Nepal’s GDP by Rs 2000.
 
--By Prof Dr Kamal Raj Dhungel
 
Economic development requires stable political environment with a high quality of good governance. For the past several years, unsettled political issues have created havoc in our society. Corruption, insecurity, irresponsibility and unaccountability have marred our economic development since the beginning of the decade-long armed insurgency. The insurgency ended more than eight years ago but all these factors have found continuity at a time when political players are winners while the rest of society is suffering. 
 
The economic stagnation or its further deterioration is the combined effect of this situation. Nepal’s economic development has been a victim of unstable political situation. Unsettled political issues have put our economic progress in a cage, pushing the people deeper into poverty and breeding frustration and pessimism in them. In order to overcome this situation, Nepal urgently needs to introduce an integrated development approach to improve the living condition of its people on a par with that of the peoples of the neighboring countries. It has to identify resources currently available that have comparative advantage.
 
Both China and India are trying to take their economy to newer heights.  Both have identified the potential indigenous resources to be tapped in order to catch up with the global market on the basis of comparative advantage. China has focused on the manufacturing sector, utilizing the abundant cheap labour while India is doing well in the service sector, particularly the IT industry.  But the pace of development of these two countries hasn’t been parallel over the years. India is far behind. However, reforms in these countries have led to anticipated results which are gradually enabling their peoples to enjoy a descent life. One question that crops up here is where does our comparative advantage lie? It certainly doesn’t lie in manufacturing as in China or in IT as in India. Then where? In my opinion, it’s tourism. If we focus on our tourism industry and develop it to its potential, then our economy is bound to take a great leap forward and we can walk together with our neighbours. Tourism has the potential to take Nepal to the group of prosperous nations.  
 
Past trend of tourism earnings
The tourism industry has been playing a significant role in the Nepali economy in terms of earning foreign exchange and providing gainful employment. However, the annual growth rate of tourism income during the period 1976-86 was 19.6% and reached 22.5% in the period 1986-96. But this rate fell to 7% in the period 1996-2006, indicating the lowest performance during the period under review. The period under consideration was plagued by the Maoist insurgency. Back then, insecurity was prevalent. Fear was rampant. A larger number of people were internally displaced. Abductions and even killings were common. The situation in Nepal made the international community afraid of visiting Nepal. 
 
With the end of the insurgency, the flow of tourists coming to Nepal has begun to increase. During the period 2006-12, the annual growth rate of tourism income was 12.7%. This growth rate is still far less than the growth rate of the period 1986-96. In the given situation, it will take another decade to reach the growth rate of 1986-96. Figure on the next page exhibits the growth rate of tourism income in different time periods.
 
Scope of tourism 
At present, the contribution of the tourism sector to the country’s GDP is minimal at around 2%. This is far from satisfactory, given Nepal’s tourism potential. The share of tourism is significant in the GDPs of even the developed countries. Nepal has great potentials in tourism because of its topographical, cultural and religious diversity, social harmony, natural abundance, distinct demographic characteristics and great biodiversity. In fact, all this makes Nepal a tourism rich country. If there is sufficient public investment to build infrastructures such as airports, rope-, rail- and road ways, and if there are policies favourable to the private sector, private investment – both domestic and foreign - will come in the country. Hotels and other necessities will be developed. It will attract a large number of tourists to visit Nepal. However, as mentioned earlier, infrastructure is a must. Without enhancing connectivity by building adequate physical infrastructures, it’s going to be difficult to convince tourists to visit Nepal. 
 
A sector of high return
In Nepal, tourism is a sector of fast and high returns. If developed rationally, tourism can attract FDI to develop other industries which complement it, such as industries which produce distinct goods targeted to meet the requirements of tourists. This will create new employment opportunities and thus encourage youths to stay and work in their own country, instead of flying to Malaysia and the Middle East in search of jobs. This will help to carry out development endeavours at a greater speed and hence enable the economy to grow at a faster rate. An annual growth rate of 7-8% for the several years to come is required to make Nepal a prosperous nation. This, in turn, will require an integrated development approach which will prioritize the tourism industry along with the power sector. 
 
 
Relation between tourism income and economic growth
This writer has tried to estimate the tourism income elasticity –the percentage change in GDP in response to a corresponding percentage change in tourism income. Ordinary least square method has been employed to see the functional relationship between tourism earning and GDP, a proxy variable for economic growth. The estimated coefficient over the time period of 1974 to 2012 is 8.79 which exhibits two important features. One, the positive relationship between tourism earning and gross domestic product (both move in the same direction) and two, a unit change in tourism earning will change the GDP by 8.79 units.  
 
Similarly, the tourism income elasticity coefficient is 0.2. It reveals that a 1% change in tourism earning will change the gross domestic product by 20%. It indicates that an increase in tourism earnings by, say Rs 100, will increase Nepal’s GDP by Rs 2000. Thus, if Nepal wishes to achieve high economic growth rate as fast as possible, it should focus on the specialization of the tourism industry. 
 
Conclusion
Neither Nepal can produce competitively cheaper goods and services to intervene the global market as China and India have done, nor does it have enough resources that have comparative advantage. Given this limitation, Nepal should take firm initiatives to unlock the development of its tourism industry which has immense comparative advantage and which doesn’t face the “geographical barrier”. At present, the remittance to the country’s GDP ratio is over 25%, while the contribution of tourism in GDP is less than 2%. Nepal should be able to reverse this trend, reducing remittance to GDP ratio from 25% to 2% and increasing tourism contribution to GDP to 25% from the current 2%. The tourism income elasticity has proved that the tourism sector has immense scope to increase Nepal’s GDP. This, in turn, will create more employment opportunities, automatically reducing the number of youths going abroad in search of employment.
 
The author is Professor of Economics at the Tribhuvan University.

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