THAILAND - Unseen’ Thai tourism: Where does the baht go?

Bangkokpost, October 3rd, 2006

The importance of tourism to the Thai economy from the government’s viewpoint can be seen in budget allocations and corresponding predictions of tourism receipts. By spending just 2.5 billion baht to stimulate tourism in 2005, the Thai government expected to gain 450 billion baht in revenue from 13.38 million inbound tourists.

The government has used tourism as part of its broad development strategies based on two assumptions: tourism is a major source of foreign-exchange earnings and thereby contributes to economic growth; and labour-intensive tourism improves income distribution and alleviates poverty for low-income households.

While the first assumption is well-founded, the second is an illusion.

According to national account data and the Thai Tourism Satellite Accounts produced by World Travel and Tourism Council, on average between 1998 and 2005, international and domestic tourism directly and indirectly accounted for 13% of GDP (655 billion baht), 10% of employment (three million jobs), 13% of exports (417 billion baht), 12% of investment (117 billion baht) and 3% of the government budget (13 billion baht).

As for the optimistic assumption of income-distribution improvement, it is true that tourism expansion creates jobs for unskilled workers and has a direct impact on poverty alleviation. But recent empirical work shows that much of the gain from tourism growth accrues to factors other than unskilled labour.

Moreover, low-skilled jobs in other sectors may be destroyed and returns on agricultural land, from which the poor derive a considerable share of their income, may fall as the tourism industry expands.

Apparently, income distribution is far from effective as tourism grows.
The empirical work implements the Computable General Equilibrium (CGE) approach with the Social Accounting Matrix (SAM) and several parameters for Thailand to investigate the effects of tourism growth on income distribution.

The evidence reveals that although tourism growth benefits all household classes in terms of an increase in overall consumption, income and welfare, much fewer benefits are distributed to the poor.

Specifically, if we examine the income-distribution effects of tourism within the same income level, households in the non-agricultural sector actually gain more benefits than those in the agricultural sector. Within the same sector, high-income households gain more benefits than low-income households.

A case in point: while tourism expands at an average growth rate of 10%, welfare gains in the money metric of low-income agricultural households increase slightly by 3.2% but those of high income non-agricultural households jump by 7.6%.

This implies that tourism expansion in Thailand is neither pro-agricultural nor pro-poor. Why?
The explanation lies on the answers to these questions: What are the major factors of production in the Thai tourism industry? Who are the major owners of those factors? What are the effects of tourism growth on wages and returns?

The empirical evidence shows that non-agricultural capital and non-agricultural labour are major factors of the Thai tourism industry. Non-agricultural capital is mainly owned by business corporations and high-income households. Tourism expansion considerably widens the differential between the agricultural and non-agricultural sectors in terms of labour wages and rates of return on capital.

This means business corporations are the first winners and high-income non-agricultural households are the second winners in the race for tourism benefits.
So, what is in it for the poor? The last finishers? What, then, should the government and policymakers do?

The government should tax, not subsidise, tourism industries, the biggest beneficiaries from tourism expansion; indirect tax forms such as excise, sales and import tax may be imposed on tourism-related goods and services.

The tax revenue could then be used to fund pro-poor and pro-agricultural projects.
Furthermore, more benefits of tourism expansion can be distributed to low-income and agricultural households if the government increases their involvement with tourism.

For instance, tourism industries may consider proper and fair payments to farmers for the provision of agricultural landscape services and the preservation of the agricultural countryside, payments to local people for the conservation of indigenous culture and tradition.
In the end, such policy efforts could contribute to the financial strength of the society and the sustainable preservation of national assets.