The Economic Impact of Cruise

 
 
The Economic
                                          Impact of Cruise
Abstract
Tourism is the largest industry
                                            Tourism on
in the world and cruise tourism
has been the fastest growing
sector of this industry for the
past twenty years (World
                                             Jamaica
Tourism Organization, 1998;
Wood, 2000). This growth in
cruise tourism is expected to
continue into the future as only
a small proportion of the
population who have the
resources to take a cruise have                            Gregory L. Chase
done so (Dickinson & Vladimir,
1997).
                                                                 and
Although cruise tourism can
increase economic activity in a
                                                            David L. McKee
nation, there still may be a net
cost to an economy rather than
a net benefit. Cruise
expenditures can increase
overall output in an economy,
but the increased costs of factor        Cruise tourism
inputs may cause these
expenditures to be less than the                As part of an export-based development cruise tourism can
increased cost of the factor             benefit a country by increasing or improving foreign exchange
inputs (Dwyer & Forsyth, 1998;           earnings, profit and taxes, employment, externalities, terms of trade,
Grassel, 1999). Smaller island           and economies of scale (Dwyer & Forsyth, 1998). In addition, cruise
destinations may incur costs,            tourism requires less infrastructure compared to stopover tourism at
which are relatively more                a tourist destination (McKee, 1998). Cruise tourism does not need
substantial (McKee, 1998). In            large tourist facilities with high costs, such as hotels that sit idle in
this investigation Jamaica will          the off-season (McKee, 1988).
be examined with an eye to
assessing the economic impact                  Leakages of tourist expenditures present a problem to cruise
that cruise tourism has had              destinations. Leakages consist of tourist revenue flowing out of the
upon that particular small               country in which it was spent. The main sources of leakages are
island destination.                      consumer goods (especially food and drink), repatriation of profits,
                                         overseas promotional expenses and amortisation of external debt (UN
                                         Commission on Sustainable Development, 1996). If the income from
                                         tourism goes to people who reside outside of the country, instead of
Gregory L. Chase is Assistant            residents, the benefits of tourism are small (Baaijens, Injkamp & Van
Professor of Economics and               Montfort, 1997). Cruise tourism has been criticised for imposing local
Business, Department of Graduate         costs without compensating benefits. Cruise passenger spending is
Studies, Loeb-Sullivan School of         directed towards shopping where local content is low (KMPG Peat
International Business & Logistics,      Marwick, 1996).
Maine Maritime Academy, Castine,
Maine, U.S.A.                                  To maximise benefits the ports of calls need to be concerned
David L. McKee is Professor of           with the local content of goods and services provided to cruise tourists
Economics, Department of                 (Mammozadeh & McKee, 1994) just as with any other type of tourist.
Economics, College of Business           Nations that wish to increase the economic impact of cruise tourists
Administration, Kent State University,   need to increase their per capita expenditures or increase the number
Ohio, U.S.A.                             of arrivals. In addition, cruise tourism can increase land based


16    THE JOURNAL OF TOURISM STUDIES Vol. 14, No. 2, DEC. ‘03
tourism when cruise tourists are       economic impact of cruise tourism     Ct = co + c1(1- Tt)Yt + et         (2)
impressed by a location on their       for three jurisdictions in the        It = io + i1(1- Tt - c1)Yt + st    (3)
cruise visit, so they will return as   Caribbean. He found that cruise
                                                                             Gt = go + g1TtYt + ut              (4)
stop-over tourists. The advantage      tourism did not have a significant
of stopover tourists is that they      economic impact on Bermuda and        Mt = mo + m1(1 - Tt)Yt + wt        (5)
spend 30 times what a cruise           Barbados, but did have a              Xt = Xt                            (6)
tourist spends (Wise, 1999).           significant positive impact on the
                                       Bahamas. However, the cruise          Where,
Previous studies                       industry today is totally different
                                       from when Mamoozadeh did his          Y = Gross Domestic Product
Literature on the economic             study. To begin with the size of      C = Consumption
impact of cruise ships is              the industry today is about three     I = Investment
practically non-existent (Wood,        times what it was then (Cruise        G = Government Spending
2000). What does exist tends to        Line Industry Association, 2001).     X = Exports
focus on trends, fare structures,      In addition, he did not consider      M = Imports
or passenger profiles. However,        leakages in his model. Allowing       T = Tax Rate
Barnwell and Boxill (1998)             for leakages of expenditures from     t = Time
evaluated the economic impact in       an economy makes the Keynesian        c1, i1, g1, m1 = Coefficients
port and city improvements of          multiplier more accurate (Archer,     co, io, go, mo = Intercept terms
tourist facilities for cruise ships    1976; Sinclair & Sutcliffe, 1982).
                                                                             e, s, u, w = Error terms
and their passengers in Port
Royal, Jamaica. Their study            Model
                                                                             To consider the impact of cruise
looked at supply aspects, by
                                                                             tourism      three      additional
analysing the receipts of the main     In the existing literature on the
                                                                             variables, cruise tourist ex-
tourist establishments in Jamaica      evaluation of the economic impact
                                                                             penditures, stopover tourist
having direct transactions with        of tourism, the multiplier model
                                                                             expenditures, and total tourist
tourists. The revenues reported        tends to be the dominant method
                                                                             expenditures, were added to three
were assumed to represent              of evaluation. The three most
                                                                             different variations of the model.
tourist expenditures in Port           commonly used versions of the
Royal, Jamaica.          However,      multiplier model are the
                                                                             The first modification of the
Barnwell and Boxill acknow-            computable general equilibrium,
                                                                             model considers the impact of
ledged problems in their study         input-out, and Keynesian model
                                                                             cruise expenditures. So that the
due to the lack of cooperation,        (see World Tourism Organization,
                                                                             model becomes:
subjective definition of tourist       1999; Archer, 1976; Baaijens,
businesses, and not having all         Injkamp & Van Montfort, 1997).
                                                                             It=i2+i3(1-Tt-c1)Yt+i4CRt+st (7)
receipts considered.
                                       This study employs a Keynesian        Gt=g2+g3TtYt+g4CRt+ut        (8)
Since 1994 a yearly study by           version of the multiplier model to    Mt=m2+m3(1-Tt)Yt+m4CRt+wt (9)
Pricewaterhouse, and more              consider the economic impact of
recently        Pric ewaterhouse       cruise tourism for Jamaica.           Where,
Coopers, for the Florida-              Three different regressions for
Caribbean Cruise Association has       three different multipliers           CR = Cruise tourist expenditures
evaluated the economic impact of       (government, imports, and             i3, i4, g3, g4, m3, m4 = Coefficients
cruise tourism on several ports in     investment) were used to              i2, g2, m2 = Intercept terms
the Caribbean region. This study       evaluate the impact of cruise
is different in that it is the only    tourism. The version of the
                                                                             The second modification considers
known study to directly consider       Keynesian multiplier model
                                                                             the impact of stopover tourist
spending by the crew of cruise         employed was taken from
                                                                             expenditures. So that the model
ships in the Caribbean region.         McDonald (1997). This model
                                                                             becomes:
The study uses a very limited          considers leakages from imports,
number of random surveys of            taxes, and savings, while at the
                                                                             It=i5+i6(1-Tt-c1)Yt+i7SOt+st (10)
cruise ship passengers and crew        same time considering the direct,
at each port to determine the          indirect, and induced spending        Gt=g5+g6TtYt+g7SOt+ut        (11)
total spending on different            from an additional unit of            Mt=m5+m6(1-Tt)Yt+m7SOt+wt(12)
categories of goods and services at    spending. The basic Keynesian
each of these ports. The use of        model as described by McDonald        Where,
surveys in this manner leads to        is as follows:
many possible inaccuracies                                                   SO=Stopover tourist expenditures
(Barnwell & Boxill, 1998).             Yt = Ct + It + Gt + Xt – Mt    (1)    i6, i7, g6, g7, m6, m7 = Coefficients
                                                                             i5, g5, m5 = Intercept terms
Using a Keynesian multiplier           And,
Mamoozadeh (1989) looked at the



                                         THE JOURNAL OF TOURISM STUDIES Vol. 14, No. 2, DEC. ‘03                      17
The third modification includes           omitted from the results, since        procedure employed previously
 total tourist expenditures in the         they were not considered tourists.     by McElroy and Tinsely (1982).
 model, so that the model                  In the case of cruise ships, only
 becomes:                                  passengers were surveyed and           The tourist expenditure variables
                                           only those that left the ship.         in    the    investment      and
 It=i8+i9(1-Tt-c1)Yt+i10ARt+st (13)        Expenditures included all monies       government multipliers had
 Gt=g8+g9TtYt+g10ARt+ut        (14)        injected into the Jamaican             additional adjustments to the
                                           economy by cruise ship passen-         method described above. For the
 Mt=m8+m9(1-Tt)Yt+m10ARt+wt
                                           gers (Tourist Expenditure Data is      government multipliers the
                               (15)        included in Table 1). The data on      resulting     percentage     was
                                           GDP, the components of GDP,            multiplied by tax revenue as a
 Where,                                    and tourist expenditures were          percent of GDP before sub-
                                           adjusted by the inflation rate,        tracting it from the tourist
 AR = Total tourist expenditures           obtained from the IMF, so that         expenditure values, once again
 i9, i10, g9, g10, m9, m10= Coefficients   all of the values are in constant      employing the method of McElroy
 i8, g8, m8 = Intercept terms              domestic currency over the period      and Tinsely (1982). For the
                                           of the study. The tax rates were       investment multipliers the
 This model considers the                  obtained from the Inter-American       resulting     percentage     was
 economic impact caused by                 Development bank (2000).               multiplied by income available
 cruise, stopover, and total tourist                                              for investment divided by GDP
 expenditures. Traditionally, the          Regressions                            before subtracting it from the
 most important reason for                                                        tourist expenditure values.
 developing a tourism industry is          On initial runs of the regressions
 the expected macroeconomic                the Variance Inflationary Factor       The adjustments corrected for
 benefit. This model is able to            detected multicollinearity in          double counting revenue from
 consider a possible improvement           many of the independent                tourism and reduced multi-
 in the balance of payments, since         variables. The adjustment made         collinearity in the data.
 it considers increased expen-             to the data to correct for             Although, some of the multi-
 ditures from cruise tourism,              multicollinearity considered the       collinearity was removed from
 while taking import leakages into         effect of leakages from the            the multipliers, the import and
 consideration. It is important to         economy in terms of imports as a       investment multipliers continued
 consider the effects on imports           percent of GDP, which was then         to indicate high levels of multi-
 with increases in tourism, since          subtracted from one.          The      collinearity. Multicollinearity is
 an    increase      in   imports          resulting p ercent was then            not a violation of any assumption
 expenditures due to tourism may           multiplied by each of the differ-      of the linear model and the
 be large enough to trigger a              ent types of tourist expenditures      estimates produced are unbiased
 decline in GDP (Grassl, 1999).            and subtracted from them, a            (Pindyck & Rubinfeld, 1991;

 Data
                                           Table 1: Tourist expenditures for Jamaica from 1981-1999:
 Data for the model were collected                  In millions of Jamaican dollars adjusted for inflation.
 from various sources. Data for                               Stop-over             Cruise                Total
 GDP and the breakdown of the                                  visitors          passengers           Expenditure
 various components of GDP came
 from the International Monetary           1981             20.33045339          0.40063595           20.731089
                                           1982             26.14921192          0.56397146           26.713183
 Fund (IMF). The different
                                           1983              36.0816352           0.9075976           36.989233
 tourist expenditures were                 1984              90.7806042          2.78439876           93.565003
 obtained from the Central Bank            1985             178.0426116           6.0644916            184.1071
 of Jamaica, which the Jamaican            1986               295.02128              8.95432           303.9756
 Tourist Board collected for the           1987             379.1083728           10.141836           389.25021
 different types of tourist                1988               378.15547             13.96703           392.1225
 expenditures. The collection              1989             478.7714888          18.0984672           496.86996
 method was by exit surveys of             1990              873.102888           33.189912            906.2928
 passengers at airports for                1991             1626.315679          80.8912168           1707.2069
                                           1992             7863.886351         317.4920168           8181.3784
 stopover tourists, and at the port
                                           1993             11956.25101         509.1424223           12465.393
 terminals for cruise ship                 1994             23441.16231         1193.128253           24634.291
 passengers. In each month a               1995              33822.8774           1663.4202           35486.298
 minimum of 10% of each type of            1996             49870.34806          2710.13571           52580.484
 tourist were surveyed to obtain           1997             50456.14686          2827.20285            53283.35
 the     expenditures        data.         1998             58784.25237         2923.486632           61707.739
 Individuals indicating they were          1999             72025.16389         3624.019163           75649.183
 visiting family or friends were



18    THE JOURNAL OF TOURISM STUDIES Vol. 14, No. 2, DEC. ‘03
Griffiths, Hill & Judge 1993).        Table 2: Jamaica Government Expenditure Multipliers.
For the import and investment                                                      Standard
multipliers all of the results were                               Coefficients       Error           t Stat
statistically significant, so no
                                                            Cruise Tourist Expenditures
additional corrective action was
taken.                                Intercept                      -1.89706686     6.922506102   -0.27404336
                                      Tax Revenue                     1.276949125    0.15238473     8.379770905
The initial regressions runs          Cruise Tourist Expenditures    -0.209090262    0.125882162   -1.660999934
showed signs of heteroscedas-
ticity in some of the residuals. A                        Stopover Tourist Expenditures
transformation of the data to
logarithmic form gave the best        Intercept                     -0.978031259    11.14368346    -0.08776553
                                      Tax Revenue                    1.171461935     0.145706925    8.039850761
results in correcting for this
                                      Stopover Tourist Expenditures -0.123642144     0.106066484   -1.165704176
(Gujaranti, 1978). The con-
version to logar ithmic form                                Total Tourist Expenditures
changed the coefficients in the
regressions to elasticities.          Intercept                      -1.493561744   24.1613404     -0.09291868
                                      Tax Revenue                     1.177110252    0.145585955    8.085328355
The Durbin-Watson test revealed       Total Tourist Expenditures     -0.127217597    0.107325959   -1.185338557
serial correlation in some of the
data. The Cochrane-Orcutt
iterative method corrected for        multipliers seem to indicate that      impact on import expenditures in
problems with serial correlation      cruise expenditures did not have       Jamaica. The results indicate
where it occurred.         After      a significant impact on govern-        that a substantial part of tourist
convergence was reached using         ment spending in Jamaica over          expenditures leak out of the
the Cochrane-Orcutt iterative         the period of this study. While        economy. With cruise tourism
method the intercept term was         the results for cruise tourism are     leakages being larger than
adjusted for the individual           seemingly insignificant, this is       stopover tourist expenditures.
regressions (Kelejian & Oates,        actually a positive aspect of          This result coincides with the
1974; Pindyck & Rubinfeld 1991).      cruise tourism. The two other          impression that cruise tourists
                                      types of tourist expenditures gave     purchase more imported goods
In runs of the regressions for the    similar findings.                      than stopover tourists.
investment multipliers the
Cochrane-Orcutt method failed to      Import Multipliers (see Table          Investment Multipliers ( s e e
remove the serial correlation. An     3):                                    Table 4):
analysis of the residuals revealed
an outlier in the data, which was     Overall, the import expenditure        The investment multipliers
larger than three standard errors     multipliers suggest that cruise,       appear to indicate cruise,
from the mean. The data showed        stopover tourist and total expen-      stopover, and total tourist
a huge drop in investment in          ditures did have a significant         expenditures did have a
1999, which was a much larger
change than in any previous time
period. The outlier was dropped       Table 3: Jamaica Import Expenditure Multipliers.
from the observations and the                                                       Standard
regressions were run again                                        Coefficients         Error         t Stat
without the data p oint. The
                                                            Cruise Tourist Expenditures
results were greatly improved
and serial correlation ceased to      Intercept                     0.111006652     0.81402735     0.136367227
be a problem.                         Income                        0.640348963     0.119652402    5.351743466
                                      Cruise Tourist Expenditures   0.345796726     0.103040214    3.35593951
Results
                                                          Stopover Tourist Expenditures
The results for the regressions;
the coefficients, standard errors,    Intercept                    -0.169767765     0.316355595    -0.53663589
and t-stats, for the multipliers      Income                        0.729416265     0.114643025     6.362500169
                                      Stopover Tourist Expenditures 0.29424012      0.108029776     2.723694615
are presented in the following
tables.                                                     Total Tourist Expenditures

Government Multipliers ( s e e        Intercept                     -0.157947735    0.378896646    -0.41686232
Table 2).                             Income                         0.721391542    0.126366209     5.708737706
                                      Total Tourist Expenditures     0.300861113    0.120161044     2.503815738
The government expenditure



                                       THE JOURNAL OF TOURISM STUDIES Vol. 14, No. 2, DEC. ‘03                    19
Table 4: Jamaica Investment Expenditure Multipliers.                      (see Chase & Alon, 2002; Chase,
                                              Standard                     2002). However, it is suspected
                             Coefficients       Error        t Stat        that gains from import sub-
                                                                           stitution were eclipsed by the
                       Cruise Tourist Expenditures
                                                                           importation of goods and services
 Intercept                     2.720865553   0.427556739    6.363753168    due to investment. The larger
 Available to Invest           0.438720223   0.121858409    3.600245773    coefficient value for investment
 Cruise Tourist Expenditures   0.519865242   0.105011085    4.950574916    compared       to the       import
                                                                           coefficient value indicates that an
                     Stopover Tourist Expenditures                         increase in investment expen-
                                                                           ditures would outweigh any
 Intercept                     0.638319249   0.129999572    4.910164227    decrease in imports, which
 Available to Invest           0.427430914   0.144928617    2.949251318    explains the positive coefficients
 Stopover Tourist Expenditures 0.58565638    0.138095354    4.240956433
                                                                           of imports for total, cruise, and
                       Total Tourist Expenditures                          stopover tourist expenditures.

 Intercept                     0.631012875   0.12946161     4.874131221    Since the government was able to
 Available to Invest           0.4240199     0.143978929    2.94501357     reduce overall expenditures as a
 Total Tourist Expenditures    0.586769969   0.136687163    4.292794997    percent of GDP during the period
                                                                           of this study, it would seem to
                                                                           indicate that cruise tourism, and
                                                                           the other types of tourism, do not
 significant impact on investment      the rate of investment expen-       have an impact on government
 expenditures in Jamaica. In           ditures for total, cruise, and      expenditures. This can explain
 recent years Jamaica has been         stopover tourist expenditures.      the insignificance of the govern-
 making large investments in           However, the goods and services     ment multipliers. However, this
 infrastructure for tourists, such     needed for the upgrading of these   does not mean that cruise
 as the Port Royal Development         facilities were most likely         tourism did not have an influence
 project, as a way to increase         imported, since construction        on government expenditures.
 tourist arrivals (Barnwell &          materials are a major import for    The 500% increase in the number
 Boxill, 1998). These increased        Jamaica.                            of cruise arrivals over the period
 investment expenditures for                                               of this study strongly indicate
 tourism could explain why all of      The source of financing for the     that additional spending by the
 these variables are significant.      investment projects did not come    government would be required
                                       from the government. The            for certain areas. Reductions in
 Overall, it seems that cruise         government had embarked on a        spending could have been less in
 tourism did have an impact on         deficit reduction program,          some programs and more in other
 import and investment expen-          resulting in a slow down in the     programs if it were not for this
 ditu res in Jamaica, but not          growth of government expen-         increase in cruise tourism in
 government expenditures. The          ditures (Economist Intelligence     Jamaica. Citizens of the country
 large development project             Unit, 2000). However, Foreign       of Jamaica would seem to be the
 recently undertaken in Port           Direct Investment (FDI) to          losers, having a larger reduction
 Royal, Jamaica, could explain         Jamaica showed substantial          in the number of goods and
 why these results are significant,    increases going from a negative 6   services provided by the
 since this project represents a       million dollars in 1981 to a        government for them to
 major investment and many of          positive 523.7 million dollars in   accommodate the incr ease in
 the goods used for these projects     1999 (World Bank, 2000a). FDI       cruise tourist arrivals. However,
 may be imported. Construction         was the primary source of           as stated previously about
 materials are a major import for      funding for total, cruise, and      investments, these expenditures
 Jamaica (Central Intelligence         stopover investment projects in     may be directed towards cruise
 Agency, 2000).                        Jamaica. Thus, the government       tourists, but the locals may also
                                       played a minimal role; so total,    benefit from them, so deter-
 Analysis                              cruise, and stopover tourist        mining the exact loss to locals is
                                       expenditures did not have a         difficult.
 Jam aica had embarked on a            significant impact on government
 major upgrading of tourist            expenditures.                       Findings
 facilities for both cruise and
 stopover tourist facilities (see      It seems probable that Jamaica      When a country has a cruise
 Barnwe ll & Boxill, 1998;             developed      some      import     industry there are costs to
 Economist Intelligence Unit           substitution industry for tourist   consider. Major investments in
 2000). This explains the positive     related goods and services, as      infrastructure must be made and
 coefficients and the increase in      been the case in other countries    an unfavorable change in the



20   THE JOURNAL OF TOURISM STUDIES Vol. 14, No. 2, DEC. ‘03
balance of payments occurs. In        this shift in spending. The exact   As a final note, this study used
the case of investment, if the        loss of goods and services          only expenditures by c ruise
country       pays      for    the    supplied by the government          passengers. If the additional
infrastructure itself there will be   would depend on how beneficial      expenditures by the cruise ship
an increase in government             the expenditures on cruise          crew and the cruise ship line
expenditures. These increased         tourists are for the locals.        itself were included the impacts
expenditures by the government                                            would most likely be larger.
for cruise tourist infrastructure
would mean decreased expen-
ditures for other purposes. While
locals may benefit from some of
these investments, they would
not have taken place without
cruise tourism. However, if the
country is able to finance these
infrastructure       investments
through FDI, then they will not
have a significant impact on
government expenditures.

The infrastructure projects
required by cruise tourism
contribute to an increase in          References
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22   THE JOURNAL OF TOURISM STUDIES Vol. 14, No. 2, DEC. ‘03
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