Economic and financial crises often have persistent and devastating macroeconomic impacts. For instance, they usually result in lower GDP growth and rising unemployment. Crises originating in one sector of the economy tend to spread to different economic sectors. Tourism is one sector that is often adversely hit by economic and financial crises. However, studies trying to evaluate the impact of economic and financial crises focus only on a few major financial crises, such as the Asian Financial Crisis or Global financial crisis disentangling these major events into different types of crises.
Studies have highlighted the importance of distinguishing economic and financial crises into different types, namely inflation crises, sovereign debt crises, banking crises, and stock market crashes. This is primarily because, in some cases, a crisis relates only to one of these categories, however, in most cases, it relates to more than one category. For instance, a sovereign debt crisis is often triggered by a banking crisis, forcing the national government to take over debts in the banking sector. Similarly, a debt crisis may result in the depreciation of the local currency and spillover into an inflation crisis, as a country facing insolvency tends to engage in expansionary monetary policies to reduce the debt burden.
Consequently, the impact of an economic or a financial crisis on international tourism will eventually depend on the nature of the crisis, such as whether it is a stock market crash, inflation, debt or banking crisis, or a mixture of crises. Arguably, some types of economic or financial crises can have more severe or even stimulating effect on international tourism than others. The debt crisis, for instance, may result in the devaluation of the currency, making tourism services cheaper and hence increasing tourism flows. In contrast, an inflation crisis may make tourism services more expensive, resulting in lower tourism flows. Therefore, it is crucial to distinguish between various types of crises.
In my paper (co-authored with Luke Okafor and Muhammad Shafiullah) titled ” The Effects of Economic and Financial Crises on International Tourist Flows: A Cross-Country Analysis,” published in the Journal of Travel Research, we investigate the effect of different economic and financial crises, such as inflation crisis, stock market crash, debt crisis, and banking crisis on international tourism flows using a panel gravity data set of 200 countries over the period 1995 to 2010.
The results of the study indicate that some economic and financial crises adversely affect international tourism, whereas other types of crises increase international tourism or have no effect. Destination countries face an almost 12.89% drop in international tourist arrivals when experiencing an inflation crisis; a 2.66% drop when experiencing major multi-year stock market turmoil; an 11.74% increase during a domestic debt crisis; and a 5.07% decrease during a banking crisis, relative to countries not experiencing these crises. Originating countries’ demand for international tourism services sees a 13.15% decrease during an inflation crisis; no statistically significant change during major multi-year stock market turmoil; a 6.85% decrease during a domestic debt crisis, but a positive impact during an external debt crisis; and a 2.50% decrease during a banking crisis, relative to countries not experiencing such a crisis. The results also vary by world region, such that a banking crisis depresses international tourism flows in host countries situated in regions such as America and Latin America and the Caribbean, whereas its impact on originating countries located in regions such as Asia and the Middle East is non-significant.
Overall, the findings suggest that an inflation crisis has a dampening effect on international tourism flows in both the host and origin countries. This is expected because an inflation crisis erodes consumers’ purchasing power as the real income of potential tourists is substantially reduced. Consequently, the demand for tourism services decreases as consumers reduce discretionary spending. A sharp drop in discretionary spending translates into a sharp decline in tourism spending. On the other hand, a domestic debt crisis encourages international tourism arrivals in the host countries, but yields a negative impact on demand for international tourism services in originating countries. As a devaluation of domestic currency usually accompanies a domestic debt crisis, it makes the destination countries more attractive to tourists, while lowering the spending power of tourists in the originating countries.
These findings have important policy implications for the tourism sector. Policymakers should develop macro-prudential policy measures to prevent and/or minimize systemwide risks in the economy in general and the financial sector in particular. For example, a wide range of system risk indicators could be used to monitor and predict wide systemic risks. However, in the event that a crisis is irreversible, policymakers should implement policies that create an enabling environment for the tourism sector to take advantage of any opportunities. An enabling environment may include, but not be limited to, avoiding visa restrictions and higher taxes on travel- and tourism-related services in the wake of domestic crises, budget shortfalls, etc.
It is essential that tourism thrive because when a host country faces a domestic crisis, it often becomes more attractive to international tourists because of an increase in their purchasing power. The tourism sector will thus be able to help mitigate the adverse effects of the crisis on the host economy through tourism receipts and employment generation. If the tourism sector is able to seize the opportunities left behind because of some domestic crises, the host economy would quickly correct itself with the least amount of government intervention and the associated market distortions. Consequently, government policy should be “proactive” instead of “reactive” and must be formulated with the participation of the relevant stakeholders as well as to be suitable for the particular situation/region/country.
To cite this article: Khalid, U., Okafor, L. E., & Shafiullah, M. (2020). The effects of economic and financial crises on international tourist flows: A cross-country analysis. Journal of Travel Research, 59(2), 315-334.
Link to this article: https://doi.org/10.1080/10242694.2017.1388066
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Usman Khalid, PhD 