Multiplying By Zero: Recession and tourism

You say recession, we say growth. The Centre for Economic Research (Centre de Recerca Econòmica, CRE) is the "you", the Balearic Government is the "we". Forecasts that the Balearics will fall back into recession in the third quarter of this year have been countered by the government. No recession, it says; there will be slight growth. And as ever, the slight growth will come because of tourism, or so the government would hope.

The eternal optimism that flows from tourism coming to the rescue is not, however, one that is shared by the CRE. Serious attention should be paid to what the CRE is saying, because if a myth being debunked can be said to have a sound, then there is an awful lot of noise coming from the CRE.

It says that the multiplier effect of tourism on the Balearic economy has been shrinking. And this means? In basic terms, the multiplier effect refers to how an increase in spending results in an increase in the income of a country (or a region, in the case of the Balearics) that is greater than the increase in spending (hence the multiplier). Essentially, if there is a strong multiplier effect, then there will be decent growth. The problem arises when the spending doesn't increase.

And this - spending - is just the problem that the Balearics have. Spending by tourists, that is.

Intuitively, anyone can tell you that tourism spending has been declining. At least, this has been the experience for many businesses right in the front line - bars, restaurants and so on. Counter-intuitively, statistics related to tourism spending, stays and arrivals that the government trots out ad nauseam show increases in spending. They haven't always but generally they have. The CRE says that government figures are misleading. You bet they are.

The CRE's report is damning. The multiplier effect of tourism has been shrinking not since the economic crisis started but since the turn of the century. It is an industry that has, says the CRE, lost productivity and competitiveness. In other words, it is not maximising returns on its resources, and one reason why is because Balearic tourism simply doesn't spend enough. The CRE argues that, in order to activate genuine growth (and growth that might be sustainable), there has to be a focus on more profitable tourism.

I don't like to say that I told you so, but if you have followed what I have written over the years about local tourism, then you will know that I have told you. For example, I have referred to key research from the early 1990s which proved that a percentage (approximately 10%) of tourism equated to a net loss. This percentage has to have increased since the onset of market change of low-grade all-inclusive tourism from around the mid-1990s. Another example: tourism spend statistics are misleading, as a good chunk of the spend is not spend that finds its way into the local economy as the statistics include spend made to tour operators and airlines.

The productivity return on resources is inevitably going to be less than it might be when there are so many resources unemployed for such a lengthy period of time. These are not just the human resources of the dole queues, they are also the physical resources of hotels; vast amounts of expensive real estate that inflates the price of property in general but which is unused for anything up to six months of the year.

The obscenity of this unused resource contributes, in turn, to an inhibitor to growth because of the high costs associated with residential property which lead to a lowering of disposable consumer spend. Furthermore, low wages, as are paid to many within the tourism sector that is meant to drive economic growth, mean a lack of competitiveness.

At the same time as there is renewed talk of recession (or not), the government has been forced to backtrack on one element of its new tourism law, that of stipulating that hotels which convert to condos would have to be open eight months a year. The eight months are now back to six. The best intentions of government to try and address the lack of hotel productivity have been undermined.

The CRE's report might just be thought of as another piece of economic blah-blah, but it should not be dismissed as such. In a nutshell, it has exposed the fundamental problem of the Balearics economy, one that is so reliant on tourism, and one which - and this is the only conclusion that can be drawn - will not achieve sustainable growth unless there is a rethinking of tourism strategy.


Any comments to andrew@thealcudiaguide.com please.