Tourism can help us along the road to recovery

ECONOMICS:Tourism came to the aid of our economy in past downturns and it may do so again if we adopt the right policies, writes JIM DEEGAN

IN AN economy where GDP declined by 3 per cent in 2008 and 7.1 per cent in 2009 it is clear that the road to recovery will be slow, arduous and challenging. The attempt to meet our commitment to reducing the budget deficit to less than 3 per cent by 2014 will continue to impose significant constraints on domestic consumption and employment growth. Moreover, there is a need to recognise that some of the losses in employment are permanent due to the unsustainable levels of spending associated with a spending/borrowing splurge that is well and truly over.

Nonetheless, the recent retail spending figures and the forecast of the Economic and Social Research Institute for the years ahead suggest that the worst may be over or coming to an end. It is therefore timely to consider what economic activity is likely to propel the renaissance of the Irish economy. Given the poor budgetary position, public expenditure growth is unthinkable so the most immediate possibility is export-led economic growth.

Ireland is one of the most open economies in the world. In 2008 exports plus imports were equivalent to 150 per cent of GDP. In fact, net exports were the only component of growth in the Irish economy in 2009 as consumption, government spending and investment collapsed.

On the export front it is vital to recognise that some fundamental restructuring has taken place in the Irish economy in recent years. For example, in 2001 merchandise exports comprised 75 per cent of export earnings and services comprised the 25 per cent balance, yet by 2010 the respective figures were 53 and 47 per cent. Ireland like most developed economies is now heavily reliant on services for our economic development, a point often overlooked in policy discussions.

The structural change in the Irish economy reflects a worldwide movement whereby advanced economies move from the production of commodities to the servicing of commodities (known as Prodcom to Servcom). While there has been legitimate focus on the performance of business, financial and computer services in recent years, it is clear that the financial services element looks uncertain in the current context. Therefore, we must look to other services to bolster our exports and tourism provides fertile ground. A detailed analysis of the tourism sector reveals some important lessons for Ireland’s overall economic performance. Very briefly, the evidence informs us that tourism has often been very important to the Irish economy when we hit the ropes and it may come to our aid again if we adopt the correct policies.

The evidence alluded to above comes from our past experience. In the early post second World War years when the economy was extremely weak, the earnings from tourism surpassed that of agriculture, yet policy failures led to the industry entering a fairly fallow period until the 1980s. The evidence from the mid-1980s, when the economy was on the verge of collapse is that tourism virtually exploded until 2001. Table 1 provides the detail and warrants some explanation.

The evidence from tourism literature is that the sector prospers in circumstances where there is a good macroeconomic environment (competitiveness), there is good external access and there is good tourism product.

A review of Ireland in the early 1980s would have shown that Ireland was expensive to get to because of very poor competition policy on aviation, we were very expensive when someone arrived because of poor macroeconomic management (not competitive) and there was little to do (poor investment in product). Once Ireland tackled these respective problems through liberalisation of air transport, good competitiveness measures and investment in product our fortunes changed dramatically.

It is also clear that tourism hit somewhat of a crossroads in 2001 and while growth did resume to 2007, it was far more muted and the wheels really came off the wagon in 2008 and 2009. From 1985 to 2007 in euro terms (excluding carrier receipts) the earnings from tourism in nominal terms increased from €583 million to €3.94 billion before falling back to €3.1 billion in 2009. Interestingly, the decline in this export performance was masked by a major surge in domestic tourism which is not sustainable in my view. So what is to be done?.

We must first of all learn from the past. Competitiveness matters and everything must be done to improve the conditions under which tourism firms operate. Secondly, our aviation policy is in need of serious evaluation, what we learned in the 1980s seems to have been forgotten. Why do we subsidise so many airports and why do we have so many, especially now that our road infrastructure is so much improved. We seem focused on dissipating critical mass when the airline sector craves large population bases. Finally, the tourism sector is increasingly influenced by the ability of firms to develop innovative products and to promote them with new forms of information technology. Ireland is way behind on this and we need to situate tourism in the centre of policies of innovation and the “smart economy”.

International tourism has proven incredibly resilient to major turbulence in the world economy since the 1950s and all forecasts suggest it will increase dramatically in the years ahead. An improved tourism performance is well within our grasp and as an indigenous industry it can help alleviate our dependence on foreign investment.

Prof Jim Deegan is the director of the National Centre for Tourism Policy Studies and Department of Economics, Kemmy Business School, University of Limerick. He has organised the first annual tourism policy workshop at Dromoland Castle, Co Clare this weekend.