Samuel Meng and Mahinda Siriwardana Assessing the Economic Impact of Tourism A Computable General Equilibrium Modelling Approach Samuel Meng University of New England, Armidale, New South Wales, Australia Mahinda Siriwardana University of New England, Armidale, New South Wales, Australia ISBN 978-3-319-40327-4 e-ISBN 978-3-319-40328-1 DOI 10.1007/978-3-319-40328-1 Library of Congress Control Number: 2016956078 © The Editor(s) (if applicable) and The Author(s) 2017 This work is subject to copyright All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed The use of general descriptive names, registered names, trademarks, service marks, etc in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made Cover illustration: Cover image © Infografx / Alamy Stock Photo Printed on acid-free paper This Palgrave Macmillan imprint is published by Springer Nature The registered company is Springer International Publishing AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Abbreviations AOR Average Occupancy Rate ARR Average Room Rate ASEAN Association of Southeast Asian Nations BOT Balance of Trade CD Cobb–Douglas CES Constant Elasticity of Substitution CET Constant Elasticity of Transformation CGE Computable General Equilibrium CNTA China National Tourism Administration COE Certificate of Entitlement CPF Central Provident Fund CPI Consumer Price Index CRS Constant Returns to Scale DOS Department of Statistics DTD Double Tax Deduction EV Equivalent Variation F&B Food and Beverage FMD Foot-and-Mouth Disease FTA Free Trade Agreement FTE Full-Time Equivalent GDP Gross Domestic Product GFC Global Financial Crisis GST Goods and Service Tax GTAP Global Trade Analysis Project ICT Information Communication Technology I–O Input–Output IT Information Technology LES Linear Expenditure System MICE Meetings, Incentive travel, Exhibitions and Conventions MMRF Monash Multi-Regional Forecast MOM Ministry of Manpower MRT Mass Rapid Transit MTI Ministry of Trade and Industry NCB National Computer Board PMB Preservation of Monuments Board RoW Rest of World RWC Rugby World Cup SARS Severe Acute Respiratory Syndrome SPG South Pacific Games STB Singapore Tourism Board STPB Singapore Tourism Promotion Board TDAS Tourism Development Assistance Scheme TEV Total Expenditure of Visitors TPF Tourism Policy and Forecasting TR Tourism Receipts TSA Tourism Satellite Account UK United Kingdom UNCTAD United Nations Conference on Trade and Development UNWTO United Nations World Tourism Organization USA United States of America WTTC World Travel and Tourism Council Contents An Introduction to CGE Modelling 1.​1 What Is a CGE Model?​ 1.​2 A Brief Historical Review of CGE Modelling 1.​2.​1 Walras’ Law:​ The Theoretical Foundation for CGE Modelling 1.​2.​2 Input–Output Analysis:​ The Predecessor of CGE Modelling 1.​2.​3 Advent of CGE Modelling 1.​3 Elements of a Standard CGE Model 1.​3.​1 Elements in CGE Model Structure 1.​3.​2 Elements in CGE Database 1.​4 Types of CGE Models 1.​4.​1 Static Versus Dynamic CGE Models 1.​4.​2 Single-Country Versus Global CGE Models 1.​4.​3 Single-Region Versus Multi-Regional CGE Models 1.​4.​4 Top-Down Versus Bottom-Up CGE Models 1.​4.​5 Multi-Household and/​or Multi-Occupation CGE Models 1.​4.​6 CGE Models by Research Area 1.​5 Acceptance of CGE Modelling 1.​6 An Evaluation of CGE Modelling 1.​6.​1 Advantages of a CGE Model Over Other Simulation Models 1.​6.​2 Drawbacks of CGE Modelling References Useful CGE Modelling Packages 2.​1 GEMPACK Versus GAMS 2.​1.​1 Advantages of a Linear Model 2.​1.​2 Percentage Change Linearization Approach 2.​1.​3 Multi-Step Process to Minimizing the Linearization Errors 2.​2 How to Use GEMPACK to Do a Simulation 2.​2.​1 Using RunGEM 2.​2.​2 Using WinGEM 2.​2.​3 Viewing Simulation Results 2.​3 How to Use GEMPACK to Construct/​Change a Model 2.​3.​1 Creating a TAB File 2.​3.​2 Creating a HAR File 2.​3.​3 Creating a CMF File 2.​3.​4 Creating an STI File References Application of CGE Modelling to Tourism 3.​1 Suitability of a CGE Model in Tourism Analysis 3.​2 Assessing the Impact of Tourism Demand and Tourism Policy 3.​3 Assessing the Impact of Mega Events on Tourism and on the Economy 3.​4 Assessing the Impact of Tourism on the Environment and Natural Resources 3.​5 Assessing the Distributional Effect of Tourism References Collecting Background Information for a Tourism CGE Model 4.​1 Information on Economic Structure and the Role of Tourism 4.​1.​1 General Feature of Singaporean Economy and Its Implications 4.​1.​2 Manufacturing Sector 4.​1.​3 Trade, Hotels, and Restaurants 4.​1.​4 Financial and Business Services 4.​1.​5 Transportation and ICT Services 4.​1.​6 Linkages Among Sectors 4.​2 Information on Tourism Resources 4.​2.​1 Favourable Geographic Position and Tropical Environment 4.​2.​2 Colonial Historical Legacy 4.​2.​3 Sound Infrastructure and Efficient Service 4.​3 Performance of the Tourism Sector 4.​3.​1 International Comparison 4.​3.​2 Performance over Time 4.​3.​3 Performance of the Hospitality Industry 4.​4 Characteristics of Tourism Market 4.​4.​1 A Holiday and Business/​MICE Destination 4.​4.​2 Diverse but Uneven Tourism-Generating Markets 4.​4.​3 Gateway Tourism 4.​4.​4 Tourism Shopping and Health Tourism 4.​5 Information on Tourism Policies 4.​5.​1 Modernist Aspiration (1965–1985) 4.​5.​2 Heritage Tourism (1986–1995) 4.​5.​3 Tourism Capital (1996–Present) References Constructing a Tourism CGE Model 5.​1 How to Incorporate Tourism into a CGE Model 5.​1.​1 Creating a Real Tourism Industry 5.​1.​2 Creating a Shadow Tourism Industry 5.​1.​3 Modelling the Tourism Industry Directly from the Demand Side 5.​1.​4 The Overview of a Tourism CGE Model 5.​2 Production of Goods and Services 5.​2.​1 Demand for Composite Inputs 5.​2.​2 Demand for Intermediate Inputs 5.​2.​3 Demand for Primary Factors 5.​2.​4 Output Mix 5.​3 Investors’ Demand 5.​4 Household Utility 5.​5 Tourism Demand 5.​5.​1 Demand for Composite Tourism Services 5.​5.​2 Demand for Tourism Shopping and Non-Shopping Services 5.​5.​3 Tourism Shopping Expenditure Pattern 5.​5.​4 Tourism Non-Shopping Services Demand 5.​5.​5 TABLO Codes for Tourism Demand 5.​6 Exports and Other Final Demands 5.​6.​1 Foreign Demand for Exports 5.​6.​2 Government Demand 5.​7 The Price System 5.​7.​1 The Basic Values 5.​7.​2 The Purchasers’ Prices 5.​8 Income, Consumption, and Investment 5.​8.​1 Household Income, Consumption, and Budget Constraint 5.​8.​2 Government Income 5.​8.​3 Investment and Capital Accumulation 5.​9 Imports, Exports, and Balance of Trade 5.​10 Price Indices, Wage Indexation, and GDP Price Deflator 5.​11 Market Clearing Equations 5.​12 The Complete Model References Preparing Database for a Tourism CGE Model 6.​1 Data Requirements 6.​1.​1 I–O Data 6.​1.​2 Other Data 6.​2 Data Availability and Sources 6.​2.​1 Singaporean I–O Tables 6.​2.​2 Other Sources 6.​3 Model Accounts 6.​3.​1 Production Account 6.​3.​2 Household Account 6.​3.​3 Tourism Account 6.​3.​4 Sectoral Employment 6.​3.​5 Investment Matrices 6.​3.​6 Tax Matrices 6.​4 Behavioural Parameters [CrossRef] Meng, X., Siriwardana, M., & Pham, T (2013) A CGE Assessment of Singapore’s Tourism Policies Tourism Management, 34, 25– 36 [CrossRef] Footnotes Section 8.1 has been significantly revised from Journal of Travel & Tourism Marketing, 31:1071–1089, 2014, ‘The Role of Inbound Tourism in the Singaporean Economy: A Computable General Equilibrium (CGE) Assessment’ by Samuel Meng Although 0.1 % seems a small number, the contribution of tourism is very significant due to the large base of GDP and employment For example, Singapore’s GDP was $243,169 million and employment 2733 thousand in 2007 (MIT 2008) Around % growth in tourism demand in 2007 would have induced $243 million GDP growth and created 2733 new jobs These are significant numbers for a city state economy Section 8.2 has been significantly revised from Tourism Analysis, 16(3):343–359, 2011, DOI: 10.3727/108354211X13110944387284, ‘A Computable General Equilibrium Analysis of Potential Policy Responses to A Negative Tourism Demand Shock in Singapore’ by Meng, X., Siriwardana, M and Dollery, B Thanks for the copyright permission from Cognizant Communication Corporation A simplified version of this section was published in Tourism Management, 34:25–36, 2013 ‘A CGE Assessment of Singapore’s Tourism Policies’ by Meng, X., Siriwardana, M and Pham, T Thanks for the copyright permission from Elsevier © The Author(s) 2017 Samuel Meng and Mahinda Siriwardana, Assessing the Economic Impact of Tourism, DOI 10.1007/978-3-319-40328-1_9 Frontiers of Tourism CGE Modelling Samuel Meng1 and Mahinda Siriwardana1 (1) University of New England, Armidale, New South Wales, Australia 9.1 Modelling Tourism in a Richer Environment Due to the significant linkage between tourism and the rest of the economy, tourism demand can be affected by and can have influence on many events and policies Current tourism CGE modelling is centred on tourism demand Although some events and policies are also modelled by some researchers, most policies or events are directly related to tourism demand, for example, FMD, the Olympic games, tourism policies, and transportation policies The topics of tourism CGE modelling can be extended widely to include policies and events not directly related to tourism, for example, the introduction of a carbon price, a change in the income tax rate, the start or subsidence of a mining boom, the Fukushima nuclear meltdown, and the change in Japanese energy policy A few researchers have extended the use of tourism CGE models on these fronts 9.2 Modelling Tourism with a Multi-Regional CGE Model Most tourism CGE models are single-country single-region models, which are useful for an economy of a particular nation However, this type of model is unable to reveal the impact of tourism on local economies In reality, the local economies of popular tourism destinations rely heavily on tourism, so research in this area is much needed Multi-regional CGE models are very common in other areas such as environmental studies and research into energy markets There is no problem in applying multi-regional models to tourism studies, but the problem becomes the availability of detailed tourism data at the region level Given the data issue, a top-down approach may be employed for a multiregional model, but caution must be taken because the regional results from a top-down model may be only indicative Eventually, tourism surveys have to be conducted at regional levels to support a bottom-up multiregional tourism CGE model 9.3 Modelling Tourism with a Global Context The drawback of a single-country model is that it is unable to take into account the feedback effect from the rest of the world Given the essential inter-country linkage of international tourism, the explanatory power of a single-country CGE model is limited So far there is no global tourism CGE model This is largely due to the unavailability of detailed tourism demand data for all countries in the world One way to gauge the multi-country effects is to link a single-country model with a multi- country model This link approach can overcome the shortcoming that the world outside is assumed unchanged in a single-country model and is especially suitable for analysing the effects of mega events However, the link approach involves multiple simulations, that is, through repeatedly feeding the simulation results of two models into each other until the simulation results converge This approach is not only inefficient but also potentially problematic: the results from both models may not converge because of the different mechanisms in the two models The other way to gauge the multi-country effects is to embed a single-country model into a multi-country model This approach can provide consistent and more efficient simulation results, but it requires more computer power and needs skilfully designed model structure to integrate the two models 9.4 Modelling Tourism Using a Dynamic CGE Model The other direction tourism CGE modelling can take is to upgrade the static model to a dynamic model A dynamic model will not only overcome the problem of overstating the effects of a perturbation, but also incorporate more information in the model and result in many important results related to investment decisions, which can in turn provide more valuable information Moreover, recursive dynamic CGE models can provide year-on-year forecasting and are therefore very popular in CGE modelling, but it seems that this type of models have seldom been used for tourism studies A dynamic CGE model will be a very promising tool for tourism research Index A Acemoglu, D Adamowicz, W Adams, P Adams, P D Adelman, I Ahammad et al Alavalapati, J Andersen, A Arbache, J Archer, B Armington, P.S Arrow, K Arrow, K Arrow–Debreu framework Asao, A Auerbach et al Aziz, I B Babikerm et al Background information, tourism CGE model advantages of tourism characteristic of tourism disadvantages of tourism performance of tourism policies in tourism 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L Kweka, J L Leong, K Leontief, W linear programme (LP) model limitations of M Mabugu, R macroeconometric forecasts Madden, J Madden, M Madsen, A Mangan, J market equilibrium Maskus, K mass rapid transit (MRT) Massey, D Mathematical Programming System for General Equilibrium analysis (MPSGE) McDonald, S McDonald et al McGregor, P McGregor et al Mega event impact on tourism assessment types of events Merette et al Michael, S Miller, R., & Blair, P Minford et al Ministry of Trade and Industry (MTI) Model implementation and testing integrity of accuracy and consistency model validity tests rigorous simulation procedure in GEMPACK sensitivity tests substitution elasticities systematic sensitivity analysis tourism and export demand elasticities wage indexation and product transformation elasticities simulation design economic environment economic plans De Mello et al de Mooij, R Mules, G Mongsawad, P 240 N Narayan, P National Computer Board (NCB) Nelson, D O O’Connor, R Olympic modelling ORANI-G Organisation for Economic Co-operation and Development (OECD) P Packages in CGE modelling, Construct a model, GEMPACK usage GEMPACK versus GAMS usage of GEMPACK Palstev, S Pambudi,D Parikh, A Parmenter, B Parmenter, B R Performance of tourism, Singapore hospitality industry international comparison over time Perroni, C Policies in tourism, Singapore heritage tourism modernist aspiration tourism capital R real business cycle (RBC) model limitations of review of CGE modelling advent of equation types in Input–output (I–O) analysis predecessor of theoretical foundation for Walras law Riau Archipelago Rimmer, M Rioja, F Roberts, D S Sadler et al De Santis, R Scollay, R Schulze, D Scrimgeoura et al Seung et al Shrestha, N Sinclair, T Singapore characteristic of tourism economic structure performance of tourism policies in tourism tourism information Singapore’s economic structure business services financial services general features of hotels ITC services linkages among sectors 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tourism industry shadow tourism industry interpretation of results investor’s demand market clearing equations modelling in richer environment multi-regional CGE model price indices price system basic values purchases’ prices production of goods and services composite inputs intermediate inputs output fix primary factors wage indexation Tourism analysis, CGE model application distributional effect economy assessment on tourism Environmental tourism impact impact of tourism demand, assessment indirect tax replacement I–O model mega event impact on tourism natural resources, tourism impact small island economy suitability of tax on tourism tourism policy assessment U United Nations World Tourism Organization (UNTWO) V Van Leeuwen, M Verdier, T W Walras, L Walras law Walrasian equilibrium theory Wang, Z Wanhill, S Wattanakuljarus,A West, G Westin, L Winters et al Witt, S Witt, C World Trade Organization (WTO) Y Yap, M Yelddan, E Z Zhang, Z Zhou, D ...Samuel Meng and Mahinda Siriwardana Assessing the Economic Impact of Tourism A Computable General Equilibrium Modelling Approach Samuel Meng University of New England, Armidale, New South Wales,... Assessing the Impact of Tourism Demand and Tourism Policy 3.​3 Assessing the Impact of Mega Events on Tourism and on the Economy 3.​4 Assessing the Impact of Tourism on the Environment and Natural Resources... analysis is based on Walrasian general equilibrium theory and relies on the I–O table The advantage of this analysis is that it can take into account inter-industry linkages Although the idea