CONTENT. Executive summary Background... 2

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2 CONTENT Executive summary Background Methodology Used in Estimating Tourism s Contribution to GDP Definition of Tourism Methodology Data Issues, Limitations and Assumptions Foreign Tourism Expenditure Domestic Tourism Expenditure Empirical Analysis Calculating Tourism s Contribution to the Economy Direct and Indirect Contribution Tourism s Contribution to the Economy by Sector Tourism Contribution to Gross Value Added (GVA) Benchmarking the Results Determining Tourism Indicators Domestic Tourism Expenditure Tourism Expenditure from Foreign Air Markets Conclusion APPENDIX A Growth Accounting Changes in Capital Changes in Labour Changes in Total Factor Productivity All together Appendix B Table B1: List of Variables Estimated Equations References... 48

3 Executive summary The importance of the tourism sector in South Africa (SA) can never be overemphasised. The sector has a broad impact upon many other industry sectors and generates a significant number of jobs in the South African economy. However, the difficulty encountered in measuring the spill-over or indirect effects of this sector make it hard to assess the impact of tourism on the economy with accuracy. This paper is aimed at providing an interim solution to this problem while the tourism satellite account (TSA) is being compiled. That said, it is worth noting that this piece of work is not a substitute for the TSA. If anything this exercise seeks to complement the latter. In the current study, a demand-side approach has been utilised to assess the impact of tourism expenditure on capital and labour demand in the economy. Our analysis reveals that tourism expenditure by either foreign or domestic tourists has a positive impact on fixed capital formation and employment. To illustrate, when foreign tourism expenditure rises by 1%, fixed capital formation on average, increases by 0.41% while employment increases by about 0.15%. Domestic tourism elasticities are 0.22% and 0.18% for fixed capital formation and employment respectively. Using a Cobb-Douglas production function we find that capital accounts for 71% of GDP whilst labour contributed 29% of GDP from These results confirm the findings of other previous studies which asserted that labour contribution in developing countries is far less than capital contribution despite the country being highly endowed with labour. This highlights the much-talked-about supply-side constraints that are a feature in the South African economy in particular the issue of human capital or skills shortage and that labour in South Africa has been unionised for a number of years now. Tourism contribution to employment stood at 4.8% in 1994 and rose to 6.7% in Out of this robust growth, direct tourism contribution stood at 2.6% in 2007, whilst the rest resulted from spill-over effects. With regard to tourism contribution to GVA the total effect grew from 9.4% in 1994 to 9.8% in The direct effect of tourism to GVA stood at 2.49% in 2007, whilst the remaining 7.3% can be attributed to indirect effects. Pan-African Investment & Research Services August

4 In addition to the size of tourism in the economy, some indicators are identified that drive both foreign and domestic tourism. This can serve as preliminary indicators of tourism s impact on the economy before official data is released. 1. Background Tourism is an important industry in the economy. Given its size, compared to other industries and sectors in the South African economy, very little is known about the tourism industry. The main reason for this is that it is not captured explicitly in the System of National Accounts. As a consumption-based services industry, tourism does not produce an explicit product but rather uses products of other industries that are classified in the National Accounts. This results in the contribution of tourism towards the economy being accredited towards other industries under the current macroeconomic and statistics accounting framework. When calculating the impact of tourism on individual sectors, and the domestic economy as a whole, there are sectors that where tourism will have a greater impact than others. These sectors in most cases are obvious and include sub-sectors such as accommodation. However, in many cases there are indirect or secondary effects in certain sectors that are induced by tourism. These effects are less obvious and not so easy to calculate. These sectors include retail and manufacturing. One way to quantify these effects is to establish a separate account from the National Accounts, or a so-called Tourism Satellite Account (TSA). This account is made up of 10 tables, some are more difficult to compile than others due to data constraints. Although South Africa is in the process of developing up a TSA, the benchmark will not be available until In the absence of a TSA, other econometric techniques can be used to estimate the contribution of tourism in the economy. This report is aimed at analysing the role of tourism in the aggregate economy. More specifically, the following objectives and outcomes have been set: 1. Determine if there is a relationship between GDP and tourism; 2. Determine the strength and size of the relationship; 3. Determine the role of domestic and foreign tourists on SA growth; Pan-African Investment & Research Services August

5 4. Determine the possible impact of tourism on employment; and 5. Put all results in relevant context. South Africa has a diverse economy with no single sector completely dominating production in the economy. Gross Domestic Product (GDP) growth is derived from production in the following sectors: 1. Agriculture, forestry and fishing; 2. Mining & quarrying; 3. Manufacturing; 4. Electricity, gas and water; 5. Construction; 6. Wholesale & retail trade, hotel and restaurants; 7. Transport, storage and communication; 8. Finance, real estate & business services; 9. General government & personal services. These sectors are all captured in the South African National Accounts. This system of accounts captures the relationships between sectors and classifies production activity accordingly. Pan-African Investment & Research Services August

6 Figure 1: The Real Composition of GDP by Sector during 2007 (%) General government services, 13.7% Agriculture, forestry & fishing, Personal services, 5.8% 2.4% Mining & quarrying, 6.1% Manufacturing, 17.7% Electricity, gas & w ater, 2.3% Finance, real estate & business, 22.2% Construction, 3.8% Transport, storage & communication, 10.7% Wholesale, retail trade, hotels & restaurants, 15.4% Source: Statistics South Africa (StatsSA) Based on the 2007 data, finance, real estate and business services had the largest share of GDP at 22.2% followed by manufacturing with 17.7% and wholesale, retail trade, hotel & restaurants at 15.4%. Tourism, a potentially important contributor to GDP is excluded from this traditional accounting system. Tourism is a consumption-based sector and cannot be wholly classified under a single code as it cuts across various sectors. Its contribution to GDP is divided and accounted for between the 9 sectors of the National Accounts. Tourism also plays other critical roles in the country s economy given the influence of other economic indicators such as the rand exchange rate. For instance, a stronger foreign currency relative to the rand increases the purchasing power of individuals from abroad (and hence tourism demand) and this has a positive impact on the fiscal balance as the government collects more tax revenue. By the same token, an increase in tourism earnings has a desirable impact on the balance of payments; namely that an Pan-African Investment & Research Services August

7 increase in (foreign) tourism earnings increases foreign reserves, which have a positive effect on the trade balance. 2. Methodology Used in Estimating Tourism s Contribution to GDP 2.1. Definition of Tourism For the purpose of this research tourists were defined according to data availability. 1. Foreign tourists: Foreign tourists are defined as total foreign arrivals excluding workers and contract workers in South Africa as reported by the Tourism and Migration Release of StatsSA. This exclusion is made to get to as close an approximation of foreign tourists as the data available allows. SA Tourism has further categorised foreign arrivals into two sub-categories: a. Air markets those countries where at least 60% of arrivals from the country arrive by air b. Land markets those countries where at least 60% of arrivals from the country arrive by land. The countries are Botswana, Lesotho, Mozambique, Malawi, Swaziland, Zambia and Zimbabwe. To conform to official definitions, shuttle trade and capital spending by foreign tourists has been excluded from total expenditure by foreign tourists. 2. Domestic Tourists: Domestic tourists are defined as South African residents travelling on a trip within South Africa that lasts more than one night but less than one year and the purpose of the trip is not for an activity that is remunerated. Domestic tourism is measured by the Domestic Tourism Survey of SA Tourism. 3. Total Tourists: The sum of domestic and foreign tourists Pan-African Investment & Research Services August

8 2.2. Methodology There are various methods of estimating the economic impact and size of the tourism sector in an economy. Use of time-series data is one approach and an input-output analysis is another. An input-output analysis traces the flow of goods and services, income and employment among related sectors of the economy. This approach measures direct, indirect and induced effects of tourism related transactions in the economy. This impact is a snapshot of the economy during a certain year. Due to the information constraints experienced with input/output analysis, this type of analysis can only be updated every few years, normally 4 to 5 years. A time series analysis is another approach, which has been utilized in this study as we believe that tourism impacts on the variables of our choice, namely the gross value added (GVA) and employment, and that a long term relationship exists amongst variables that a one year snap shot given by an input output analysis does not capture. Another reason is that we did not want to duplicate efforts by following the approach already utilized by StatsSA in the compilation of the Satellite Account for tourism. This study is therefore complimentary to the one conducted by StatsSA and not a substitute. The primary objective of this report is to estimate the impact of tourism expenditure on South African GDP. More specifically, we followed four steps in calculating the contribution of tourism to GDP: 1. Estimate the elasticity of capital formation in South Africa with respect to changes in tourism expenditure. This will indicate magnitude of derived demand for investment relative to changes in tourism expenditure. 2. In like manner, the labour elasticity measures how much additional labour is demanded in response to changes in tourism spending overtime. 3. Estimate a production function for South Africa with capital and labour 1 as production factors. This will allow inference on how GDP changes via capital and labour when tourism expenditure changes. 4. Calculate the contribution of tourism in South Africa to GDP. 1 Capital refers to capital formation and labour to total employment as defined by StatsSA - LFS. Pan-African Investment & Research Services August

9 This approach captures both the direct and indirect effect of tourism expenditure on the South African economy. Given data limitations, we were not able to estimate the contribution to GDP as we did not have data on subsidies and taxes per sector. Therefore, the analysis only can estimate the contribution to GVA. In estimating the contribution of tourism to GVA, the above mentioned steps were followed and nine sectors were considered namely: agriculture; mining; manufacturing; utilities; construction; trade; transport; finance; and services. A standard Cobb-Douglas production function specification was utilised to estimate production in the sectors. Although alternative specifications were considered, such as the Translog or Constant Elasticity of Substitution specifications, we decided to use the Cobb-Douglas production function for its simplicity and robustness. Direct and indirect contributions of the sectors were estimated and the overall contribution was calculated. A summary of the sector results reveals how each sector contributed to the total contribution of tourism gross value added. Pan-African Investment & Research Services August

10 Figure 2: Schematic illustration of the methodology Foreign Tourism Domestic Tourism Tourism Expenditure Fixed capital formation = Labour =! Fixed capital stock = + Production function = ( ) Tourism contribution to GDP Pan-African Investment & Research Services August

11 3. Data Issues, Limitations and Assumptions Data on tourism has not been compiled and documented over time, making it difficult to do time series analysis without interpolating and extrapolating data to obtain the missing observations. The monthly schedules on tourism and migration published by StatsSA only contains information on the arrivals to South Africa. SA Tourism s Departure Survey is the only source of foreign tourist expenditure and this was started in Very little is known about domestic tourism patterns. Currently, SA Tourism is the only organisation that measures domestic tourism. SA Tourism started surveying the market in 2005 and therefore data on domestic tourism expenditure is only available from The Labour Force Survey (LFS) published by StatsSA is a bi-annual household survey designed specifically to measure the labour market. The LFS presents time series data on employment for the period 2001 to Previous data sources on labour were discontinued and it was difficult to relate one data source to the other. The series was interpolated in order to obtain the past observations. As mentioned previously, data on imports and taxes per sector was not available to allow us to understand the impact of tourism on GDP. Thus, the study is confined to measuring tourism s impact on GVA Foreign tourism expenditure The foreign tourist market has been categorized into two groups, namely, tourists from land markets and tourists from air markets (see Definition of tourism on page 5). The distinction was made following an analysis of the spending patterns of all foreign tourists in SA. Air tourists spent on average R10,200 per person per trip in 2007; those from land markets spent on average R5,800 per person per trip in the same period. However, the averages used in the analysis exclude money spent on capital goods and shuttle trade in line with the global definition of foreign tourism expenditure. Based on the assumption that spending by foreigners is mainly driven by their income, the amount spent was adjusted backwards to 1980 using real GDP growth of the SADC countries and the G7 Pan-African Investment & Research Services August

12 countries respectively. This provided the estimated spending pattern of foreigners earlier than Foreign arrivals to South Africa are available on a monthly basis from This data includes the number of arrivals, but excludes the amount spend by individuals. Foreign arrivals increased from less than a million in the 1980s to about 9 million in For purposes of estimating tourism s contribution to GDP, total amount spent is required. Figure 3: The Number of Foreign Arrivals in South Africa Number of arrivals Source: StatsSA Using data from StatsSA on the number of foreign arrivals in South Africa (excluding workers and contract workers) and the estimated amount spent by foreigners (excluding capital and shuttle trade) sourced from SA Tourism s Departure Surveys, a series of total spend by foreign tourists was constructed for the period of 1980 and Figure 4 shows the historical tourists spending by place of origin, i.e. land markets and air markets. Tourism expenditure has been rising since the early 1990 s. In 2006 to 2007, the trend in tourism expenditure from foreign land markets started to decline, meanwhile expenditure from foreign air markets stabilised in that period. One of the effects could be the rising of interest rates that prevailed in 2007 which brings along a negative effect on households spending patterns. Pan-African Investment & Research Services August

13 Figure 4: Total real spend by Foreign Air Markets, & Foreign Land Markets (Rand) ,000,000,000 30,000,000,000 25,000,000,000 20,000,000,000 Air Markets Land Markets 15,000,000,000 10,000,000,000 5,000,000, Pan-African Investment & Research Services August

14 3.2. Domestic Tourism Expenditure Past behaviour of domestic tourism expenditure is a much greater unknown than foreign tourism expenditure. For domestic tourism expenditure, the only data available is from SA Tourism s Domestic Tourism Surveys which started in 2005, These observations can hardly be enough as a base for any meaningful inference. Given the difficulty experienced with domestic data, the following methodology was used in calculating domestic tourism expenditure: The official data closest to tourism is the national accounts data on recreational, entertainment and culture as well as spending on hotels, cafes and restaurants. This is not expenditure on tourism, but is more likely to track expenditure on tourism than total household expenditure. The household spending on recreational, entertainment and culture plus spending on hotels, cafes and restaurants includes many aspects that are not tourism. To exclude non tourism expenditure from these accounts, the portion spend on tourismbased activities on the domestic expenditure figure was calculated. The results showed that for 2005, expenditure on tourism was approximately 40% of the spending on recreational, entertainment and culture plus spending on hotels, cafes and restaurants. Due to data limitations on direct tourism related activities, we did not include transport (passenger services, road and rail) and taxes and subsidies. The results on domestic tourism expenditure we believe to be a conservative estimate. This ratio was assumed to stay constant over time. This means that domestic tourism expenditure in SA follows the same path as the spending on recreational, entertainment and culture plus spending on hotels, cafes and restaurants, but at a smaller magnitude. The ratio was then applied to the national account data retrospectively and deflated using the headline CPI index. In 2006 as figure 5 illustrates, domestic tourism spending fell significantly, however in 2007 domestic tourism spending saw an upward trend as outlined in the Domestic Tourism Survey conducted by SA Tourism. Pan-African Investment & Research Services August

15 The results reveal estimated total contribution of all sectors to GVA. Figure 5: Total real spend by domestic tourists (Rand) ,000,000,000 16,000,000,000 14,000,000,000 12,000,000,000 10,000,000,000 8,000,000,000 6,000,000,000 4,000,000,000 2,000,000, Source: SA Tourism - Domestic Tourism Survey & Own Calculations A comparison between spending by foreign air tourists and domestic tourists reveal that although there are much more domestic trips undertaken than trips by foreign air tourists, the total amount spent by the foreign air market exceeds that of domestic tourists in rand terms Empirical Analysis Background to Fixed Capital Formation: One of the major inputs into production process is capital. Fixed capital formation in South Africa, has been fairly stagnant during the 1980s. In the mid-1990s capital formation started to increase rapidly and is still in the rise. Figure 6: Gross Fixed capital formation (constant prices) Pan-African Investment & Research Services August

16 Rand million Source: South African Reserve Bank (SARB) Economic theory dictates that capital formation in the economy is driven mainly by two factors, namely: 1. The user cost of capital (UCC). The user cost of capital is a combination of the long term interest rate, the corporate tax burden and the rate of depreciation of capital stock. The higher the UCC, the more expensive it is to invest and the lower the fixed capital formation. 2. Prevailing investment conditions or opportunities in the country. These conditions are driven by many factors such as economic, socio-political and political issues. In this case the conditions are proxied by the price/earnings ratio of the Johannesburg Stock Exchange (JSE). For the purposes of this study we have added a third driver of capital stock, namely total expenditure on tourism. This expenditure captures the causality between tourism expenditure and fixed capital formation while controlling for the other main drivers mentioned above. Examples of fixed capital formation driven by tourism spending are airports, certain extensions to harbours and train stations. Background to Labour: Pan-African Investment & Research Services August

17 Employment series was sourced from Statssa s Labour Force Survey (LFS) simply because of its wider coverage compared to other employment surveys. However, this series like other employment series, was not long enough for a time series analysis, hence extrapolation of data points outside the actual series was done in order to obtain the number of observations long enough to conduct a time series analysis. Thus, this assumption must be taken into account when analysing the outcome of the results. Figure 7: Total employment in the non-agricultural sector Total Employment Number Source: StatsSA Labour Force Survey & Own calculations Pan-African Investment & Research Services August

18 Derived labour demand is driven mainly by: 1. Output Gap, which refers to the difference between the actual GDP and potential GDP. Thus, when the actual GDP is below the potential GDP, there is room for further output growth; hence employment is likely to rise. 2. Labour productivity. The more productive labour is, the less demand for additional labour. In addition to these two factors we have added total tourism expenditure as an explanatory variable. Tourism is a labour intensive industry and one can reasonably expect that there exists a positive relationship between tourism expenditure to employment creation. Background to the production function In order to estimate a production function for South Africa, a Cobb-Douglas functional form was used. The Cobb-Douglas production function has been the standard work horse in empirical studies for South Africa (and many other countries). The specification used assumes that capital and labour are the two major production inputs and that constant returns to scale prevails. Although technology is also an input into the production process, it is assumed to be the residual item in this specification. Traditionally empirical research has found that labour is responsible for two thirds of GDP growth and capital for the other third. The role that capital and labour play in South African production has been researched extensively in the past. However, contrary to most countries, due to structural reasons, South African labour contributes less to growth than capital does i.e. South Africa is more capital intensive. 2 Empirical results The elasticities of fixed capital formation and labour were estimated after controlling for the main drivers of these two variables. 3 In each case we have distinguished between foreign and domestic spending. The estimated elasticities are presented in Table 1. " Fedderke (2002). 3 The data range used was For the estimation equations see Appendix B. All equations were estimated using standard residual based cointegration techniques. Pan-African Investment & Research Services August

19 Table 1: Elasticities with respect to tourism expenditure Fixed Capital Formation Labour Tourism Expenditure from foreign air markets Tourism Expenditure from foreign land markets Domestic Tourism Expenditure The interpretation of the elasticities is as follows: A 1% change in tourism expenditure from foreign air markets will, on average, result in a 0.07% increase in fixed capital formation. A 1% change in tourism expenditure from foreign land markets will, on average, result in a 0.05% increase in fixed capital formation. A 1% change in domestic tourism expenditure will, on average, result in a 0.17% increase in fixed capital formation. A 1% change in tourism expenditure from foreign air markets will, on average, result in a 0.04% increase in labour employment. A 1% change in tourism expenditure from foreign land markets will, on average result in a 0.02% increase in labour employment. A 1% change in domestic tourism expenditure will, on average, result in a 0.14% increase in labour employment. From the results outlined above, it is clear that there is some difference in the effect that foreign air markets, foreign land markets and domestic tourism expenditure have on the economy. Domestic tourism expenditure tends to have almost double the impact of foreign tourism expenditure on fixed capital formation. Foreign land tourism expenditure appears to have a slightly smaller impact on employment than to fixed capital formation. This might be that they are closer to the South African borders and can import capital to their countries at a cheaper rate. Labour demand tends to respond more to domestic tourism expenditure than to tourism expenditure from foreign air markets. This could be because tourists from foreign air markets require more investment in tourism related activities where economies of scale are possible, thus resulting in smaller employment requirement while this may not necessarily be the case with domestic tourism. Due to Pan-African Investment & Research Services August

20 their large number, domestic tourists are likely to generate more jobs than tourists from air markets especially in the transport sector. A production function was also estimated to determine the average contribution of capital and labour in the production process. For the sample period of 1980 to 2007, our results show that labour contributes 29% to GDP growth and capital accounts for the remaining 71% Table 2: Elasticities of capital and labour to GDP Capital Labour Share of GDP These estimates are in line with previous studies that have found that labour contribution to growth is by far less than that of capital in South Africa s case Calculating Tourism s Contribution to the Economy Once the elasticities of fixed capital and labour with respect to tourism expenditure as well as the ratios that enter into production process are known, the contribution of tourism to the aggregate economy is calculated. Figure 8: Contribution of total tourism expenditure to total employment 9% 8% 7% Labour 6% 5% 4% 3% 2% 1% 0% Labour 4.8% 4.9% 5.5% 5.4% 6.1% 6.4% 6.7% 7.0% 7.8% 7.3% 7.2% 7.0% 6.9% 6.7% Pan-African Investment & Research Services August

21 As Figure 8 above shows, tourism contribution to employment growth has been rising steadily since 1995, reaching a peak in 2002 before decelerating thereafter. However, the slight moderation in job creation by tourism spending in the recent years does not imply that tourism has been shedding jobs, rather other economic sectors have started creating more job opportunities than before, resulting in tourism s share declining. It is also clear that during the period when most sectors were shedding jobs the share of tourism s contribution to total employment was as high as 7.8% in During that time, South Africa was also experiencing a depreciation in the rand i.e. the rand was cheaper. This drove up tourism expenditure as South Africa had now become an attractive tourism destination. The overall effect resulted in very high increase in employment contribution. Currently the estimated 2007 tourism contribution to employment is standing at 6.7% from 4.8% in This robust figure represents both direct and indirect tourism impact and the split of this impact is discussed in the subsequent section, where our results reveal that tourism expenditure accounted for about 2.6% of total direct employment in 2007, and 4.1% was spill-over effects. Figure 9: Direct and indirect contribution of total tourism expenditure to total employment 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Indirect 3.6% 3.6% 3.9% 3.8% 4.2% 4.4% 4.6% 4.7% 5.2% 4.8% 4.7% 4.5% 4.3% 4.1% Direct 1.2% 1.3% 1.5% 1.6% 1.8% 2.0% 2.1% 2.3% 2.6% 2.4% 2.4% 2.6% 2.6% 2.6% Figure 10 below illustrates the contribution of different segments of the tourism market to total employment creation. Employment creation in this sector was driven largely by foreign air markets tourism contribution, followed by domestic tourism and then foreign land markets. Foreign air markets tourism spent accounted for 16.1% in 2002 and a moderate share of 13.3% by Tourists from foreign land markets contributed a mere 1% to job creation in 1994 to 4.6% in 2002, and in 2007 contribution slowed down Pan-African Investment & Research Services August

22 to 4.5%. In 2005 and 2006, this contribution went up to 5.1% and 5.2% respectively following this category s increasing number to SA and the rising average spend. Domestic tourism contribution to job creation has been steadily rising over time, from 5.3% in 1994 to 9.1% in 2004 before easing to 7.5% in Figure 10: Contribution to total employment per tourist category 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% Air Markets Land Markets Domestic 0.0% Land Markets 1.0% 1.6% 2.5% 3.3% 4.1% 4.2% 4.1% 4.1% 4.6% 4.4% 4.3% 5.1% 5.2% 4.5% Domestic 5.3% 6.0% 6.3% 6.2% 7.0% 7.6% 8.3% 8.5% 8.5% 8.6% 9.1% 9.0% 7.4% 7.5% Air Markets 10.8% 10.0% 11.3% 10.8% 11.8% 12.5% 12.9% 13.7% 16.1% 14.2% 13.5% 12.7% 13.8% 13.3% As far as tourism s contribution to GVA is concerned, a robust 11.3% contribution was achieved in 2002, which moderated slightly thereafter, settling at about 9.8% in This figure represents the overall contribution, which means direct and indirect impact of each individual producer, industry or sector in the economy. Pan-African Investment & Research Services August

23 Figure 11: Contribution of total tourism expenditure to GVA 12% 10% GVA 8% 6% 4% 2% 0% GVA 8.4% 8.4% 9.0% 8.9% 9.5% 9.9% % Once again, if one looks at the contribution to GVA per tourist category, an interesting pattern emerges. Tourism spending by the foreign air market contributes the largest share of GVA, followed by domestic tourism spending, and lastly foreign land tourism spending. In 2002, tourism spending from foreign air markets contributed 5.7% to SA GVA; this contribution moderated in Contribution by domestic tourists moderated to 3.9% in 2006 and 2007 from a 4.5% in Foreign land tourism spending on the other hand has been strengthening since 1994 from 0.7% to 1.3% in 2006 only in 2007 that it moderated to 1.2%. The average spend per trip and the frequency of these trips can be highly attributed to the observed pattern particularly in Pan-African Investment & Research Services August

24 Figure 12: Contribution to GVA per tourist category 12.0% 10.0% Air Markets Domestic Land Markets 8.0% 6.0% 4.0% 2.0% 0.0% Land Markets 0.7% 0.8% 0.9% 1.1% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.2% 1.3% 1.3% 1.2% Domestic 3.4% 3.6% 3.7% 3.7% 3.9% 4.1% 4.3% 4.4% 4.4% 4.4% 4.5% 4.5% 3.9% 3.9% Air Markets 4.2% 4.0% 4.4% 4.2% 4.5% 4.7% 4.8% 5.0% 5.7% 5.1% 4.9% 4.6% 4.9% 4.7% 3.5 Direct and Indirect Contribution Whilst the above section looked at the impact of tourism expenditure in aggregate terms, the current section distinguishes direct from indirect impact of tourism expenditure in the entire economy. To illustrate, from 1994, more than half of estimated South Africa s growth (in GVA terms) resulted was from spill over effects (indirect effects) and the rest was attributed to direct effects of tourism expenditure (See Figure 13) Figure 13: Growth (in GVA) due to direct and indirect spending from all tourists 12% 10% Direct Growth Indirect Growth 8% 6% 4% 2% 0% Indirect Grow th 6.2% 6.2% 6.7% 6.6% 7.1% 7.4% 7.6% 7.8% 8.4% 7.9% 7.8% 7.7% 7.5% 7.3% Direct Grow th 2.13% 2.18% 2.31%2.29% 2.45% 2.55% 2.64% 2.71%2.86% 2.74% 2.73% 2.70%2.56% 2.49% Pan-African Investment & Research Services August

25 Of the 9.8% growth in GVA, tourism spending accounted for 2.49% directly in The remainder can be attributed to spill-over effects. Tourism s direct and indirect impact has been rising over time from 1994 to a peak in The impact thereafter moderated in Tourism s Contribution to the Economy by Sector In estimating the contribution of tourism to GVA, we analysed the impact at a sector level and then aggregated the results to get the total contribution to the economy. Nine sectors were considered namely: agriculture; mining; manufacturing; utilities; construction; trade; transport; finance; and services. The standard process involved the estimation of elasticities of fixed capital formation and labour in each sector after controlling for the main drivers of these variables. Based on the estimated elasticities, the contribution of tourism expenditure 4 to the sector was calculated and the results are shown below. Table 3: Elasticities: Production Function and Tourism Expenditure Production Tourism Expenditure Function Sector K L K L Domestic Foreign Foreign Domestic Foreign Foreign Air Land Air Land Agriculture Manufacturing Electricity Construction Trade Transport Finance Government Personal See Appendix C on page 25 for a detailed approach followed to measure tourism contribution in SA economy. Pan-African Investment & Research Services August

26 Table 3 depicts the elasticities of the individual sectors. Generally, the elasticities for the production function show that the South African economy is capital intensive. For instance capital contributes about 82% of total output in the agricultural sector whilst labour contributes about 18%. With respect to tourism expenditure, gross fixed capital formation in the sectors of agriculture, electricity, trade, transport and personal services is more responsive to domestic tourism expenditure than it is to tourism expenditure by foreign air markets and foreign land markets. For instance in the agricultural sector, a 10% increase in domestic tourism expenditure increases gross fixed capital formation by about 0.9%, ceteris paribus, whilst a similar increase in foreign air markets tourism expenditure increases gross fixed capital formation by about 0.1%. Foreign air tourism spending seems to have relatively more influence on employment when compared with foreign land tourism spending as shown by the higher coefficients in the agriculture, manufacturing, electricity, trade, finance and government sectors. For instance, a 10% increase in foreign air tourism expenditure increases employment in the transport sector by about 1.8%. Figure 14 shows tourism expenditure in 2007 in the trade sector contributed the highest to employment with 7%, the highest contributions when compared with the other sectors despite the high level of interest rates that prevailed during This is an expected result since the trade sector is the face of all industries i.e. every commodity that is produced in the economy has to be sold to consumers mainly in this sector. Transport and government services have the highest tourism GVA, which measures the value of tourism-produced goods and services, estimated at 11.6% for both sectors. This contribution was largely driven by domestic tourism expenditure which has gained momentum in the recent years, raising the overall tourism contribution to both the sectors GVA. Tourism expenditure in the electricity sector contributed 6.7% second to agriculture with 6.8% in Manufacturing and the trade sector on the other hand were estimated to be the lowest contributors to gross fixed capital formation in Figure 14: Sector tourism expenditure contribution to capital, employment and gross value added (GVA) Pan-African Investment & Research Services August

27 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% Agric Manuf Elec Constr Trade Trans Fin Govt Pers GVA 10.0% 7.5% 12.4% 9.6% 11.3% 11.6% 9.3% 11.6% 5.3% Employment 3.3% 3.2% 5.7% 5.0% 7.0% 6.5% 4.7% 5.5% 0.7% Capital 6.8% 4.3% 6.7% 4.5% 4.3% 5.1% 4.7% 6.1% 4.6% Tourism expenditure has both direct and indirect effect on the sectors. In figure 15, indirect employment surpasses direct contribution in most sectors. This is mainly because of the backward linkages tourism has on other sectors. Direct contribution refers to the immediate effect of tourists expenditure i.e. when the tourist directly buys a good or accesses a service. On the other hand an indirect contribution occurs when the seller or provider of a good or service sources inputs from other economic agents. For instance when a seller of burgers buys beef from the butchery and uses a freight company to transport the beef to the outlet. The only sector where direct employment is more than the indirect effect is the trade sector. In fact the trade sector not only employs more people in the overall economy but also benefits the most in terms of employment resulting from tourism. This is attributable mainly to the fact that the trade sector is relatively more labour intensive than the other sectors. Figure 15: Direct and indirect contribution to employment by sector Pan-African Investment & Research Services August

28 1,200,000 1,000, , , , ,000 - Agric Manuf Elec Constr Trade Trans Fin Govt Pers Indirect 148, ,669 28, , , , , , ,208 Direct 63,660 70,119 8,420 48, ,506 59,525 81, ,216 59,680 The measurement of direct tourism GVA (also known as tourism s direct contribution to GDP) measures the contribution made by all sellers of products to tourists, as well as by the suppliers of retail products that firms on-sell to tourists. This enables a comparison between tourism s direct contribution to GVA and similar direct contributions of sectors. Tourism expenditure also results in indirect tourism also known as spill-over effect. Indirect tourism GVA results from indirect tourism expenditure, i.e. those purchases of intermediate inputs used in the production of goods and services sold directly to tourists. For instance, when a tourist purchases a meal in a restaurant, the restaurant makes a contribution to GVA equal to the value of the meal sold (less VAT), less the cost of any inputs used, e.g. meat, vegetables, electricity etc. This forms part of direct tourism gross value added. However, the providers of those vegetables, meat etc also make a contribution to GVA equal to the value of those products sold to the restaurant, less their own intermediate inputs. In turn, the suppliers of those intermediate generate a further contribution to GVA. Figure 16 depicts the growth (in GVA) in the sectors that can be attributed to spill-over effects of tourism expenditure. Electricity and transport represent sectors with the highest indirect contribution with 9.2% and 9.0% respectively. The trade sector is the largest contributor of direct nature from tourism expenditure with a massive 7% in Figure 16: Direct and indirect contribution to gross value added by sector Pan-African Investment & Research Services August

29 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Agric Manuf Elec Constr Trade Trans Fin Govt Pers Indirect 7.2% 5.6% 9.2% 7.3% 4.3% 9.0% 6.9% 8.7% 3.9% Direct 2.8% 1.9% 3.2% 2.2% 7.0% 2.8% 2.4% 2.9% 1.4% Figure 17 illustrates the different impact of the tourism to gross fixed capital formation (investment). Tourism spending by domestic and foreign air markets estimates reveals a significant contribution to investment in the country compared to tourists from land markets. This is evident in the contribution by all the sectors under consideration in the figure above. Domestic tourism spending however, in most of the sectors especially agriculture, electricity and trade accounted for largest contributors to investment. Figure 17: Contribution by sector to gross fixed capital formation as per tourist category 8.00% 6.00% 4.00% 2.00% 0.00% Agric Manuf Elec Constr Trade Trans Fin Govt Pers Domestic 3.30% 1.71% 3.49% 1.59% 2.13% 2.46% 2.04% 3.00% 1.99% Land Markets 0.80% 1.15% 0.73% 1.54% 0.64% 0.73% 0.84% 0.61% 0.86% Air Markets 2.00% 0.90% 1.40% 0.90% 1.00% 1.20% 1.00% 2.00% 1.20% Despite the deterioration in the overall economic climate, which puts pressure on household spending and travel budget, contribution to employment stock by the foreign Pan-African Investment & Research Services August

30 air market in the transport sector has been leading with the highest contribution of 5.10% as figure 18 shows. Tourism spending from the land market accounts for a minimal contribution to employment creation in all the sectors under review. Figure 18: Contribution to total employment per tourist category 8.00% 6.00% 4.00% 2.00% 0.00% Agric Manuf Elec Constr Trade Trans Fin Govt Pers Domestic 2.50% 0.90% 1.20% 0.10% 1.70% 0.50% 1.40% 1.20% 0.40% Land Markets 0.20% 0.80% 0.00% 0.20% 1.50% 0.60% 0.90% 0.40% 0.10% Air Markets 0.60% 1.30% 4.10% 4.20% 3.60% 5.10% 2.20% 3.60% 0.20% The gross value added in the sectors has mainly been driven by the foreign air market and domestic tourism spending. Figure 19 shows the contribution to GVA per tourist category. Tourists from the land market contribute very little to GVA. The high Pan-African Investment & Research Services August

31 contribution of foreign air tourism expenditure in the transport sector indicates that a good transport system plays a central role to foreign tourist. Domestic tourism spending takes about half the contribution of GVA in the transport sector. Figure 19: Contribution to gross value added per tourism category 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% Agric Manuf Elec Constr Trade Trans Fin Govt Pers Domestic 5.80% 2.60% 4.70% 1.70% 3.80% 3.00% 3.50% 4.20% 2.40% Land Markets 1.00% 1.90% 0.70% 1.80% 2.10% 1.30% 1.70% 1.00% 1.00% Air Markets 2.60% 2.30% 5.50% 5.10% 4.50% 6.30% 3.10% 5.60% 1.30% Pan-African Investment & Research Services August

32 4. Tourism Contribution to Gross Value Added (GVA) The purpose of this section is to simply consolidate the sectoral outcomes to calculate the contribution of each sector to GVA. The contribution to GVA from all the sectors was calculated together with the sector share of the last quarter of Table 4: Tourism contribution to GVA Real composition of GDP per sector in Q4 of 2007 Estimated total Sectors GVA for 2007 Agriculture 10.04% Manufacturing 7.48% Electricity 12.36% Construction 9.55% Trade 11.29% Transport 11.63% Finance 9.34% Government 11.58% Personal 5.26% Total contribution from sectors 9.12 Direct contribution 2.5 Indirect contribution 7.3 Total aggregate contribution 9.8% Total estimated tourism contribution to GVA (%) The above table indicates the total estimated tourism contribution to GVA from each sector in the economy. Each sector has its own estimated GVA contribution for 2007 and real composition of GDP per sector in the last quarter of Pan-African Investment & Research Services August

33 Total contribution from sectors for 2007 is estimated to be 9.12%. This figure is represented by the direct and the indirect contributions of 2.5% and 7.3% respectively. The sectors contribution the highest estimated GVA is the electricity sector with 12.36% followed by the transport sector with 11.63%. The sectors that contribute the lowest to GVA are personal services and manufacturing. The total contribution from sectors was then used to calculate the total aggregate contribution to GVA. This contribution was estimated to be 9.8% in By global comparison, this figure is not far off from other studies that have estimated contribution to GVA by South Africa for example the World Tourism and Travel Council (WTTC). Pan-African Investment & Research Services August

34 4.1 Benchmarking the Results Very little is known about tourism s contribution in the global economy. The World Tourism and Travel Council (WTTC) has estimated tourism s contribution for many countries across the globe. Some countries and their estimates are given below. Table 5: WTTC estimates of tourism contribution to growth and employment 2007 GDP Employment Country US$ bn % of GDP Number % of total employment Mauritius % 172, % Namibia % 74, % Malaysia % 1,226, % China % 71,865, % Kenya % 511, % Australia % 1,145, % Tanzania % 720, % Botswana % 58, % UK % 2,713, % South Africa % 941, % India % 29,187, % Source: WTTC Travel and tourism sector plays an important role in Mauritius in terms of its contribution to GDP. This sector is equally important in Namibia, Malaysia, China and Kenya. In the same way, travel and tourism sector is critical in terms of employment creation. For instance, this sector contributes 32.76% of total employment in Mauritius. Employment creation by tourism sector is equally high in Namibia, Malaysia and Australia as shown by the high percentages of total employment creation by tourism in these countries. The WTTC estimates South Africa s tourism contribution to GDP at 8.1% and the contribution to employment at 7.28% in This compares favourably with the results of our analysis where we see tourism s contribution to GVA at 9.8% and to employment at 6.7% in Pan-African Investment & Research Services August

35 5. Determining Tourism Indicators As part of estimating the contribution of tourism to GDP, it is important to have indicators that signal the possible impact tourism might have on the economy. So far the main indicators identified are: 1. Number of foreign arrivals, 2. Number of domestic trips undertaken, 3. Amount spend per foreign tourist, and 4. Amount spend per domestic tourist. However, there are other indirect variables that drive tourism expenditure for both foreign and domestic tourism. This section explores the impact of these key economic variables on tourism expenditure. Once again, two separate equations were estimated since the drivers of domestic tourism expenditure are different from those of foreign tourism expenditure. 5.1 Domestic Tourism Expenditure Factors that affect the disposable income of South Africans are likely to have an important impact on tourism expenditure such as the level of interest rates and the exchange rate. However, our analysis shows presence of high persistence in domestic tourism demand and of course the influence of disposable income. Thus, the outcome shows that; A 1% increase in disposable income will, on average, result in a 0.07% increase in domestic tourism expenditure. Repeat visits are also largely influenced by the previous period encounters, i.e. about 0.69% of current period visits are influenced by previous period visits. Pan-African Investment & Research Services August

36 5.2 Tourism Expenditure from Foreign Air Markets As far as foreign air tourism is concerned, different factors come into play. Estimation results indicate that the following are key drivers in determining foreign air expenditure on tourism: Foreign air income: Changes in the income of the foreign air market have positive impact on tourism expenditure by foreigners in SA. For instance, a 1% increase in foreign air income (proxied by GDP of major advanced economies) increases foreign air tourists spending in SA by 0.82%. Exchange rate: Rand/US$ exchange rate has a positive impact on foreign air tourism expenditure in SA. To illustrate, a 1% depreciation of the Rand against the US dollar, increases foreign air tourism expenditure by 0.90% indicating that as the Rand depreciates, foreign air tourists find it cheaper to visit SA for holidays. Pan-African Investment & Research Services August