MultiCraft International Journal of Business, Management and Social Sciences Vol. 2, No. 3, 2011, pp. 29-34 INTERNATIONAL JOURNAL OF BUSINESS, MANAGEMENT AND SOCIAL SCIENCES www.ijbmss-ng.com 2011 MultiCraft Limited. All rights reserved Estimating total contribution of tourism to Malaysian economy Mohammad Nurul Huda Mazumder 1 *, Elsadig Musa Ahmed 2, Md. Abdur Raquib 3 1* Faculty of Management, Multimedia University, Cyberjaya 63100, Selangor, MALAYSIA 2,3 Faculties of Business and Law, Multimedia University, Melaka 75450, MALAYSIA * Corresponding Author: e-mail: hudametro@yahoo.co.uk, Tel +6-03-8312-5691, Fax. +6-03-8312-5590 Abstract The main objective of this study was to estimate the total contribution of tourism to Malaysian economy in the generation of output and income. The above objective was taken to fill the research gap of available literatures which estimated only the direct and indirect impact of tourism using partial input-output analysis. Input-output, the predominant model, was employed to estimate the total economic impact of tourism. The findings of this study revealed that tourism receipts were not only contributing to the generation of output and income of direct tourism related sectors but also to the generation of significant output and income impact of other productive sectors of the economy through indirect and induced impact. The study findings suggest that when preparing economic policies using multipliers, they should be made with caution as coefficient of multipliers varies among sectors. The variation in multipliers could be minimized by reducing import dependency of tourism sectors which, in fact, would increase the value of multipliers of tourism related sectors as well as other closely related productive sectors of Malaysian economy. Keywords: tourism; economic impact; input-output model; output; and income. 1. Introduction The ability to generate ripple effects by tourism makes it a performer of vital medium of foreign currency injection which has been drawing a significant attention for the economic development of developing countries. Developing economies are progressively relying on income streams from tourism while the traditional economic sectors have become less potential in contributing to GDP. The economic repercussions of tourism are occurring in extensive latitude, within the evolution of the globalization process (Sugiyarto et al., 2003) that is, in turn, helping the acceleration of this industry s expansion around the globe. In fact, direct, indirect, and induced multiplier effects are the causes that assist in expanding the contribution of tourism to an economy. Therefore, along with direct impacts, the measurement of indirect and induced impacts of tourist expenditure has to be taken into consideration as they represent a better measure (Archer, 1982; Fletcher, 1989a; Vaughan et al., 2000) that completes the total economic impact of tourism. As repercussion effects of tourism are being realized by nations, it is now believed to stimulate the economic progress of developing economies and its importance in gaining widespread recognition, as such, Malaysia is no exception. With the immense growth of tourism, Malaysia has become one of the leading tourist destinations competing with other popular destinations of the global economy. Similar to many developing nations, tourism industry has become one of the most vital sectors, drivers and/or engines of growth and development for Malaysian economy because of its competitive advantages and potentiality. The tourism industry not only creates considerable high multiplier effects but also enhances the inter-sectoral linkages in the economy. Through intersectoral linkages, impact of international tourist expenditure affects almost all sectors of an economy beside direct tourism related sectors.(mazumder et al., 2011). A full extent of realizing the potential economic contribution of tourism can only be achieved by appropriately estimating the total contribution of tourism. This could be obtained by deriving multipliers of the Malaysian economy that would, in turn, assist policy makers in formulating appropriate future planning and policies.
30 2. Literature Review Existing information available in the literature is found to be limited in explaining its contribution or total economic impact to Malaysian economy. Facing similar problem or issue, Vaughan et al. (2000) asserted that this industry s contribution is not satisfactorily acknowledged since existing data is insufficient to explain its actual contribution. This sector cannot be regarded as an isolated economic activity (Yan and Wall, 2002), although, at the time of this study, Malaysian national accounts did not specifically define tourism as a single industry. An economy s existing statistics in the balance of payments current account only provides partial picture of the true impact of tourism to an economy because it does not provide any reference of indirect and induced effect of tourism (Heng and Low, 1990). Therefore, there is a need to better understand tourism industry s relative contribution to Malaysian economy by conducting an economic impact analysis using input-output modelling framework. The studies of Rashid et al. (1993) and Rashid and Bashir (2004) attempted to estimate the contribution of tourism to Malaysian economy using partial input-output analysis. The partial analysis only captures the direct and indirect multiplier impact of tourism. Therefore, this actually created a gap in existing literature which did not take into account the induced impact of tourism. The importance of induced impact is quite considerable (Archer, 1976a, 1976b) as the expenditure generated as a result of wage income may also generate a significant economic impact through household consumption (Wagner, 1997) generally captured by induced multipliers. Without estimating induced multipliers, previous studies have underestimated the total impact of tourism to Malaysian economy. Therefore, the objective of this study was to fill the above literature gap by estimating the total contribution of tourism through deriving total multipliers and analyzing the contribution of tourism to the economy in terms of output and income generation. 3. Methodology To estimate the direct, indirect and induced impact of tourist expenditure, one needs to perform multiplier analysis 1 which can be considered as the fundamental tool to estimate the total impact of tourism on an economy. And, input-output is the predominant model utilized by researchers to capture the total impact of tourism to estimate the multipliers (Fletcher, 1989; Yan and Wall, 2002, Kweka et al., 2003; Contini et al., 2009). The model describes an economy through a system of linear equation, reflecting a general equilibrium approach, where the total output produced by one productive sector is either utilized by other productive sectors as intermediate input (sometimes internally by the productive sector itself) and the final demand sector. The final demand sectors in input-output table for the year 2000 consisted of five sub-sectors including private consumption, government consumption, changes in inventory, gross fixed capital formation, and exports. Assuming an economy with a producing sector and final demand sector, the output of sector i can be written in equation form as: n X i = x ij +(F i - M i ). (1) j=1 Where, X i is the vector of gross output of sector i; Xij is the vector of output of sector i sold to sector j; F denotes the final demand vector; and M denotes imports 2, If x ij = a ij X j or AX Where, a ij X j. is the total value of purchases of goods and services by sector j from sector i which has been known as technical coefficients. Therefore, the equation (1) can be written as: X = AX+ (F-M) (2) Solving the Equation (2) it can be found as: X = (I A) -1 (F-M) (3) In Equation (3), X is the vector of output; I denotes identity matrix and [I - A] -1 is the total requirement matrix or mostly known as open Leontief inverse multiplier matrix that measures the direct and indirect impact of any change in final demand. The final demand considered for this study is the amount of international tourist expenditure or inbound tourism receipts for the year 2006. When household sector is considered as endogenous to the model [I - A] -1 that captures multipliers on three distinct directions such as the direct, indirect, and induced effect of a unit change in final demand due to an injection of international tourist expenditure. International tourist expenditure or receipts are the amount of money that foreign tourists spent in tourism related activities during their visit. When international tourists spent their money into tourism related sectors, the injection of money creates direct impact in the economy. Though direct impact of international tourist expenditure occurs within tourism related establishments, the measurement of direct impact provides incomplete picture of the precise contribution made by tourism (Mazumder et al., 2011). Through intersectoral linkages, indirect and induced impact of international tourist expenditure affects almost all sectors of an economy. The indirect impact occurs due to intersectoral linkages of tourism with other sectors of the economy. In addition, induced or consumption induced impact is the result of when the employees or entrepreneurs direct and indirect tourism related establishments earnings, such as salaries, wages, rents, profits, and dividends are being spent to make purchases in local economy. 1 The multiplier analysis represents the change in economic activity that has an effect on the whole economy resulted from some originated change in the economy and their underneath relationships (Miller and Blair, 1985). 2 Imports are considered as leakages. Therefore, without deducting imports, impacts of tourism will be significantly overstated (Henry and Deane 1997)
31 This process generates additional economic impact. To get an overview of international tourist expenditure and their effects in three distinct direction direct, indirect, and induced effect, a reference can be made to Mazumder et al. (2011). The basic requirement of an input-output model is the data from input-output table prepared by department of statistics, Malaysia for the year 2000 published in 2005 was employed in this study. As a data hungry model (Briassoulis, 1991), it is usual to have time-lag in assembling and publishing the table as a result of its complex nature (Yan & Wall, 2002) which is very frequent in impact studies employed data from input-output table. Besides, the data on the amount of international tourist arrivals and receipts/expenditure were collected from Malaysia Tourism Promotion Board (MTPB). 4. Results and Discussion The results obtained from input-output analysis are presented in this section and in table 1. The multipliers were estimated for aggregated 52 sectors of Malaysian economy which were then multiplied by the amount of international tourism receipts (RM36.2 billion) obtained in 2006 to estimate the total contribution of tourism in the generation of output, and income. The output multiplier measures the overall increase in output or sales in the economy due to a unit increase in final demand. As represented in table 1, the output multipliers range from the highest value of 3.553322 attributed by education sector to the lowest value of 1.182431 for crude, petrol and natural gas sector with economy s sectoral average output multiplier of 2.112366. Service or tertiary sectors were representing among the most important output generating sectors with average output multipliers of 2.228867. In addition, majority of service sectors output multiplier was found to be greater than economy s sectoral average (2.112366). It is noticeable that the average output multiplier of primary sectors (1.924083) was lower than the economy s sectoral average (2.112366) while secondary or manufacturing sectors average output multiplier (2.094801) was also lower than the economy s average sectoral output multiplier. This picture indicates that there was an existence of strong linkages of service sectors with all other sectors of Malaysian economy as compared to primary and secondary sectors. The sectors that contributed to tourism showed greater output multipliers than economy s sectoral average except wholesale and retail trade (1.746333), and entertainment and recreation sector (2.043308). Overall, the tourism industry reflects relatively strong inter-industrial relationship with other sectors of the economy as compared to primary sectors. Tourism has been considered to be a vital source of foreign exchange earnings competing with other export oriented industries. When comparing tourism related sectors with other export oriented sectors, it is interesting from the table 1 that direct tourism related sectors generated comparatively larger output than other export oriented industries of Malaysian economy. This is very much consistent with Ninth Malaysian Plan for boosting tourism industry as a vital sector of the economy. For example, the output multiplier of hotel and restaurant sector was found to be 2.330975 which was larger than export oriented foreign exchange earning sector such as palm oil sector (1.741110), radio, TV, and computer equipment sector (1.529393), and rubber and rubber products sector (2.183997) to name a few. The income multipliers show the change in the amount of income generated per unit of output resulted from the impact of changes in final demand spending. The magnitude of income multipliers coefficient varies between a high of 0.848458 attributed to the hotels and restaurants sector and a low magnitude coefficient of 0.026107 retained by Crude, Petrol and Natural Gas sector. The sectoral average income multiplier of Malaysian economy was estimated to be 0.354770. Services sectors or tertiary sectors generated an average income multiplier of 0.469484. This is higher than average income multiplier while the average income multiplier of primary (0.277223) and secondary or manufacturing (0.305519) sectors found to be lower than industry s average. Hotels and restaurants sector appeared to be the most important in terms of income multiplier, generating RM0.848458 of household income to Malaysian residents per one additional Ringgit increase in final demand for that sector. The second most important income generating sector was emerged as entertainment and recreation (0.847962) sector. Meat and dairy products sector, and other private service sector ranked third, and fourth important income generating sectors in concern where all these industries together exceeding the industry s average of 0.354770. Education was viewed as the most important sector in terms of output but ironically this sector represents relatively lower income multiplier (0.579417) than the tourism related sectors. This hypothesizes the fact that, although this sector used to contribute significantly in generating output, has, in fact, made relatively insignificant contribution in generating income. Public administration and others (a sector) which was the second most important sector in terms of output generation appeared to be relatively non-significant sector in terms of income generation resulting in an income multiplier of 0.385655 as compared to output multiplier of 3.121665. According to the results found in table 1, most of the industries of services sector generally had higher propensity to generate output and household income. The results also reveal that sub-sectors that constituted tourism industry had higher income multiplier reflecting their ability to generate households income. The high income multipliers of tourism related sectors indicate that the large proportion of households income generated due to one Ringgit increase in tourist spending. When compared between the income multiplier of direct tourism related sectors and the income multiplier of other sources of foreign exchange earnings sector, it was found to be lower than direct tourism related sectors (0.848458 for hotel and restaurant sector versus 0.106986 for palm oil sector). The income multiplier of one of the direct tourism related sectors namely, the hotels and restaurants sector ranked top among the 52 industries considered. When examining the income multipliers between direct tourism related sector and its competing export substitute product sector, it is evident from table 1 that tourism related sectors hold the ability to generate more income than major export substitute industries.
32 Direct tourism related sectors ability to generate income was appeared to be higher than manufacturing sectors sectoral average. On the other hand, most of the export oriented industries income multiplier was found to be lower than economy s sectoral average. For an instance, with income multiplier of 0.848458 for hotels and restaurants sector generates the highest multiplier impact whereas radio, TV, and computer equipment sector, as one of the major alternative export oriented industries, generates the income multiplier of 0.060423 which was ranked as the second lowest income multiplier within the 52 sectors of Malaysian economy. The income multiplier of entertainment and recreation sector is about fourteen times higher than radio, TV, and computer equipment sector. Even, the income multipliers of other major alternative export oriented industries were also found to have been lower than the direct tourism related industries. Table 1: The multipliers impact of tourist expenditure on output, and income for fifty-two productive sectors of Malaysian economy Name of Sector Output multiplier Output Impact (RM million) Income multiplier Income Impact (RM million) Agriculture & Other 1.673723 60,746 0.285467 37,621 Palm Oil 1.741110 63,192 0.106986 5,389 Livestock 2.766065 100,392 0.699965 57,809 Forestry & Logging products 1.663118 60,361 0.105043 4,647 Fish etc. 2.056253 74,630 0.648942 61,284 Crude, Petrol & Natural Gas 1.182431 42,915 0.026107 7,377 Metal Ore 2.384677 86,549 0.200077 7,284 Stone, Clay & Sand Quarrying 1.925286 69,876 0.145201 5,612 Meat & Dairy Products 2.619348 95,067 0.727488 59,286 Preserved Fruit, Vegetable, Oil & Fats 3.048368 110,637 0.273503 25,521 Preserved Sea Food 2.627216 95,352 0.485971 23,000 Grain Mill Products 2.355709 85,498 0.502174 41,611 Bakery & Confectionary Products 2.222540 80,665 0.614884 53,158 Ice & Other Foods 2.122651 77,039 0.424057 44,147 Wine & Soft Drinks 2.154593 78,199 0.676185 62,591 Tobacco 1.726542 62,663 0.453946 40,925 Cloths & Other Textiles 2.055176 74,591 0.420848 35,793 Leather Products 2.396821 86,990 0.401442 28,241 Furniture & Others 2.375640 86,221 0.161248 7,158 Paper & Board 1.989602 72,211 0.220997 21,756 Printed Product 2.347092 85,185 0.486725 40,177 Industrial Chemical & Others 2.237231 81,198 0.143347 11,115 Drug & Soap Preparations 2.216396 80,442 0.309760 22,872 Other Chemical Products 1.754460 63,676 0.091195 4,769 Petrol, Coal & Plastic Products 1.751859 63,582 0.302868 41,915 Rubber & Rubber Products 2.183997 79,266 0.223860 12,248 Glass, Cement & Other Non-metal Products 2.226686 80,815 0.156955 8,464 Iron & Steel 1.883014 68,342 0.095648 5,068 Non-Ferrous Metal 1.639702 59,511 0.070668 2,904 Fabricated Metal & Other Metal Products 1.928427 69,990 0.123163 9,778 Industrial & Household Machinery 1.451498 52,681 0.064360 8,509 Radio, TV & Com. Equipment 1.529393 55,508 0.060423 3,112 Ships, Motor Vehicles & Other Transport Equipment 1.922723 69,783 0.418948 38,267 Instruments & Clocks 1.791739 65,029 0.120015 5,670 Other Manufacturing Products 2.001200 72,632 0.218326 16,881 Electricity & Gas 1.638732 59,476 0.291106 35,423 Water 2.143201 77,785 0.330104 25,263 Buildings & Constructions 2.480013 90,010 0.201181 11,373 Wholesale & Retail Trade 1.746333 63,381 0.194356 28,571 Hotels & Restaurants 2.330975 84,600 0.848458 76,462 Transport 2.243865 81,439 0.333566 25,937 Communications 1.685298 61,166 0.577906 57,644 Banking, Insurance & Other Financial Service 1.908616 69,271 0.368944 28,403 Real Estate & Others 1.323823 48,047 0.671130 72,156 Business Services 2.163819 78,534 0.244153 19,324 Education 3.553322 128,964 0.579417 29,872 Health 2.661823 96,608 0.630341 47,306 Other Private Service 2.343743 85,064 0.711979 58,264 Entertainment & Recreation 2.043308 74,160 0.847962 79,017 Motor Vehicle & Other Repair 2.460811 89,313 0.640296 53,173 Recycle Product 2.041399 74,091 0.124677 4,632 Public Administration & Others 3.121665 113,298 0.385655 14,146
33 In regard to the output impact generated by tourism receipts of RM36.2 billion, it was found that the sector that yielded comparatively higher output multiplier did generate the higher output impact as the ranking of the sectors did not show any change. For example, the highest output multiplier was found for education sector and this sector generated the highest impact of RM7345.07 million of output from inbound tourism receipts through direct, indirect, and induced impact. But, when comparing the sectoral income multipliers with income impact, it was found that the sector that yielded higher income multiplier did not necessarily produce the highest income impact. According to the figures found on the table, the direct tourism related sectors showed strong income impact compared to output impacts, reflecting inbound tourists expenditure s significance in generating income for Malaysian economy. The entertainment and recreation sector was the sector with greatest income impacts, generating RM79, 017 million from inbound tourism receipts totally (direct, indirect, and induced impacts) though this sector conceded the second highest income multiplier. A significant change was appeared in the ranking of sectors between income multipliers and income impact which was not the case in terms of output. The second higher income generating sector was found to be the hotels and restaurants sector which generated income impact of RM76, 462 million followed by real estate & others products (RM72, 156 million) and wine and soft drinks sector (RM62, 591 million). It is evident from table 1 that tourism related sectors generated relatively higher income impact than alternative foreign exchange earnings sector. The results implying that the contribution of inbound tourists expenditure in generating impacts was also relatively high for the tourism related sector. These figures indicate that there were existences of comparatively stronger relationships of tourism sectors with the other sectors of the economy concerning the generation of output and income. 5. Conclusion and Policy Recommendations The findings of this study reveal that the economic impacts generated by tourism can enormously benefit all sectors of an economy in one way or another. Although tourism yields the most direct impact on the services sectors, the economic impact of tourism holds the ability to generate substantial impacts upon all other sectors of the economy through creating secondary (indirect and induced) effects. The results also demonstrate clearly that all sectors of the economy benefit from tourism receipts, not just those that used to receive the initial receipts. Although direct impact of tourism receipts is contributing directly to the direct tourism related sectors, it does contribute significantly to the whole economy through indirect and induced effect. Therefore, it can be concluded that tourism has closer relationship with majority of the sectors of Malaysian economy. The output impact of inbound tourists expenditure of those sectors which obtained relatively lower earnings were said to have relatively lesser relationship with tourism sector, such as crude, petrol and natural gas sector, real estate and others sector, industrial and household machinery sector, radio, television and computer equipment sector, non-ferrous metal sector, forestry and logging products sector, and agriculture and other sector. It is also evident that primary sectors of Malaysian economy were receiving comparatively smaller benefit from tourism sector rather than secondary and tertiary sectors. Therefore, it is evidently conclusive that those primary sectors have slighter relationship with tourism. The relationships among the sectors of Malaysian economy vary which can be minimized by increasing the economic activity. For instance, this can be worked out by effectively decreasing the leakages being generated from imports. If imports are reduced, this will essentially improve the output impact. As such, other impacts (income, employment) do realize a significant increase in its value. Through the observation of the study results it can be streamlined that the sector that generates the higher output impact does not essentially produce the higher income impact. Therefore, when preparing appropriate policies for the potential improvement of tourism industry, the value of multipliers should be treated with sufficient caution. The results of this study can effectively be utilized for precise and realistic policy formulation. The knowledgeable government officials are expected to be able to determine as which sector should be given priority over others in attempting to increase in output or income. References Archer, B. H., 1976a. The anatomy of a multiplier. Regional Studies, Vol.10, pp. 71-77. 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34 Miller, R. E., and Blair, P.D., 1985. Input-output analysis: Foundations and extensions. Englewood Cliffs, NJ: Prentice-Hall Inc. Rashid, Z. A., Rahman, A. A. A., Othman, M. S., and Suib, A., 1993. Tourism impact analysis an inter-sectoral analysis of the Malaysian economy. Jurnal Ekonomy Malaysia, Vol.27, pp. 99-119. Rashid, Z. A., and Bashir, M. S., 2004. Economic impacts of changing tourist profile in Malaysia: An inter-industrial analysis. ASEAN Journal on Hospitality and Tourism, Vol.3, No. 1, pp. 29-39. Sugiyarto, G., Blake, A., and Sinclair, M. T., 2003. Tourism and Globalization Economic Impact in Indonesia. Annals of Tourism Research, Vol.30, No. 3, pp, 683-701. Vaughan, D. R., Farr, H., and Slee, R. W., 2000. Estimating and interpreting the local economic benefits of visitor spending: An explanation. Leisure Studies, Vol.19, No. 2, pp. 95-118, Wagner, J. E., 1997. Estimating the economic impacts of tourism. Annals of Tourism Research, Vol.24, No. 3, pp. 592-608. Yan, M., and Wall, G., 2002. Economic perspectives on tourism in China. Tourism and Hospitality Research, Vol.3, No. 3, pp. 257-275. Biographical notes Mohammad Nurul Huda Mazumder is a Lecturer in Faculty of Management, Multimedia University, Malaysia. He has received Masters in Social Science in Economics from University of Chittagong, Bangladesh in 1996 and currently pursuing his Ph. D. from Multimedia University, Malaysia. He has published a significant no. of journal and conference papers in numerous renowned journals and conferences along with book chapters. His research interest is diverse from economic impact analysis to tourism, poverty alleviation, environmental pollution, Islamic finance, and microfinance. Elsadig Musa Ahmed (Dr.) is an Associate Professor and coordinator for post graduate programs at Faculty of Business and Law, Multimedia University, Melaka Campus, Malaysia. An associate editor and reviewer of couple of journals and conferences, his research interests include productivity analysis, productivity and environment, development economics, economic growth and environment, and knowledge-based economy. Md. Abdur Raquib is a Senior Lecturer of Accounting at the Faculty of Business and Law, Multimedia University, Malaysia. He is an MBA graduate of Indiana University of Pennsylvania, USA. He also holds a Masters of Commerce and a Bachelors of Commerce with Honours in Finance from the University of Dhaka, Bangladesh. Currently he is a candidate for Ph.D. from Multimedia University. He has presented papers in the International Conferences in nine countries and so far published 25 articles in the International Journals and Conferences. Beside his own fields, his interest also spreads among the most emerging issues, such as, empowering workforce, environmental accounting, high performance work cultures, managerial impacts of cognitive and emotional intelligence, corporate governance, and risk and disaster management. Received November 2010 Accepted January 2011 Final acceptance in revised form January 2011