Should developing economies diversify away from tourism?

Readers Question: To what extent is it necessary for the government in a developing country over-reliant on tourism to consider the expansion or agriculture and manufacturing?

In theory, the law of comparative advantage states that you should specialise in producing the goods and services where you have a comparative advantage (can produce at the lower opportunity cost). However, this may mean that a country concentrates on producing one particular good or service, and there are numerous drawbacks to relying on just one industry to create jobs and promote growth.

Reasons to diversify away from tourism

  1. Relying on one industry is risky. Bali relied on tourism to be a major factor in its growth.  After a terrorist incident, the number of tourists dropped dramatically and the economy really suffered. If it had diversified the economy and relied less on tourism it would have been in a better position to avoid the problems it faced.
  2. Changing comparative advantage. At the moment you may not have a comparative advantage in manufacturing. But, that doesn’t mean it will always be the case. It is also important to try develop the economy to enable better technology and productivity improvements. Developing economies may have a current (static) comparative advantage in the labour-intensive tourism industry, but this will change over time, and it would be a mistake to get stuck in over-developing tourism
  3. Diversification and investment can act as a spur to growth.
  4. Tourism can place high environmental costs on areas of outstanding natural beauty. Tourism leads to over-use of resources and increases pollution and congestion.
  5. Tourism can diminish the quality of life for the local population who experience greater congestion due to the influx of tourists.
  6. Tourism can increase the cost of living and renting. For example, the growth of Airbnb means that property values have increased as landlords want to buy properties to be able to let out to tourists. But, the downside of this is that locals then struggle to afford the prices of living in popular areas.
  7. Tourism is a very seasonal industry. During winter or summer months, it can lead to seasonal unemployment.

Reasons not to diversify the economy

  1. Government intervention to promote agriculture and manufacturing may be inefficient and waste money. There is no guarantee that the economy will develop in the correct way. The government may waste precious resources in setting up an industry that is uncompetitive in the long-term.
  2. An economy may not have sufficient infrastructure to develop manufacturing. Therefore, the investment will be very costly. For example, a country like Bali is wholly unsuited to developing a manufacturing base to compete with larger economies.
  3. Tourism has various advantages and has a relatively low environmental impact compared with some manufacturing industries.
  4. Rather than try to replace the tourist industry, a better strategy is to try and make tourism work better. For example, if tourism is placing external costs on the local population, the government could place a tourist tax, which can be used to build new accommodation or better infrastructure.
  5. Also, it is possible to promote ‘sustainable’ tourism. For example, limiting the number of tourists who visits special places, such as Mt Kilimanjaro. Also, making sure that the funds from tourism go into improving the quality of life for locals.
  6. Tourism has brought many benefits to developing economies – improvements in infrastructure – power, wage, communication. Also, it creates jobs and brings foreign currency in.
  7. Market forces are better than government intervention. There are developing economies who started with tourism as a mainstay of the economy. But, as the economy develops, new industry do spring up to supplement tourism.

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