The income and employment multiplier effects of tourism: the case of Rwanda period: 2015

Abstract

The growing popularity of developing countries as tourist destinations in recent years has stimulated a considerable body of research on the developmental benefits inherent in tourism. Developing countries have been attracting tourists mainly due to their natural resource endowments, considered a vital determinant in this newly-found source of their comparative advantage. After accounting for all the explicit and hidden costs linked to this natural resource-based tourism, the sustainable expansion of the tourism sector is claimed to be contributing substantially to economic growth. Studies to date have investigated the rising share of tourism in macroeconomic output, but have paid limited attention to the economic mechanisms through which tourism supposedly leads to broader development. This study seeks to contribute to filling this gap in our knowledge of the economic dynamics associated with tourism. More specifically, the goal is to shed light on the channels through which tourism contributes to economic growth and to derive tourism income and employment multipliers to estimate its developmental benefits for Rwanda. Our refined multipliers to capture the total effects of tourism to the economy confirm that through its powerful inter-sectoral linkages, tourism improves the economic wealth of many developing countries including Rwanda. Deeper analysis of the macroeconomic consequences of the expansion of the service sector however suggests that, under some conditions, this could exhibit “Dutch Disease” effects. Tourism generates substantial foreign earnings and its development is strongly correlated with the shrinkage of the traditional primary exports (agriculture in many developing economies), as it triggers exchange rate appreciation in line with the predictions of the conventional „Dutch Disease‟ model. As a case study, the analytical model developed in this thesis is tested using Rwandan data. The findings show that tourism contributes significantly to Rwandan economy through income and employment generation. With an elementary input-output framework to guide the empirical analysis, tourism multipliers in the order of 2.713 for income and 3.122 for employment are estimated for the year 2015. Furthermore, these income and employment multipliers obtained are used to simulate tourism growth under different scenarios and enable us to derive plausible and pertinent policy recommendations.