The regional economic impact of Tourism

1. The regional economic impact of Tourism Ásgeir Jónsson The Department of economics University of Iceland ajonsson@hi.is http://www.hi.is/~ajonsson/ Njáll Trausti Friðbertsson Þórhallur Ásbjörnsson The Tourism foundation University of Akureyri

2. The number of foreign visit to Iceland has grown exponentially – about 6% a year- since 1960. The number of forreign visits to Iceland

3. The service sector has been leading the way in economic growth in Iceland since 1994

4. Many visits - small nation • The population of Iceland is almost too small to support the infrastructure, scale economics, specialization needed for a developed economy. • Foreign visits have similar effect as a population increase, without the welfare costs. • This is especially true since the main thrust of the taxation is indirect, such as the levies on gasoline which one has to pay to use the road system. • Iceland would also be unable to maintain an international airport with the current flight frequency or number of destinations without the foreign visits. • However, the tourist industry holds another promise for Iceland … • …to resurrect the service economy of the depressed rural areas.

5. Asphalt roads in Iceland

6. If we arrange all provinces of Iceland on a circle…..the change in population distribution in the 20th century becomes quite stark Population distribution in 2000 Population distribution in 1900 Reykjavík & suburbs Akureyri & Ejafjörður

7. The collapse of the service economy • The population of many rural areas in Iceland has been shrinking very rapidly for the past few years. • This is particularly true for townships in the East, West (Vest fjords) and North, which lie at sea and are surrounded by mountains. • For townships in these parts of country a 10-20% total population decline since 1980 is not uncommon. • However, the loss of young people is far greater in these towns, where about 60% of the individuals born in 1968-72 have left their home since 1988. • In these areas the local service economy has collapsed, partly due to better transportation and partly because the population has gone below the threshold needed to sustain many specialized service business.

8. However, the tourists spent their time in the rural areas… but their money in Reykjavik Days spent in Reykjavik % of total days spent in Iceland Earned income from tourism in Reykjavik % of total earned income from toursm in Iceland

9. Only 11% of earned income from tourism is not spent in close approximity to either Reykjavik or Akureyri – the main population centers of Iceland

10. Tourism is essentially a service industry • Large population centers simply have an advantage in services, with regard to quality, diversity and even price. • Therefore, money from tourism is mostly earned in Reykjavik. • Indeed, in many parts of Iceland it is almost impossible for tourist to spend money on anything else than gasoline, hamburgers and perhaps accommodation. • Moreover, foreign visits to the rural areas are confined to the summer months and can thus not create a stable year long employment. • Tourism in the rural areas is therefore mostly operated by workers from Reykjavik, spending the summer months out in the country.

11. Tourism in the rural areas are confined to just three months a year Nights spent in the rural areas by month Nights spent in Reykjavik by month

12. Foreign currency exchanges ISK by each day spent by a foreign visitor The sleeping bag effect

13. The regional impact of tourism • The regional impact of tourism can be clearly seen if the earned income from tourism divided according to regions. • Tourists spend more in the population clusters – which also tend to be air hubs - but also in close proximity from them. • These are the only regional economic impact measures available given the current available data. • These may somewhat exaggerate the impact in Reykjavik since a higher proportion of e.g. restaurants & catering may serve local than is the case in the rural areas. • Many people, living in Reykjavik, are also working in the tourist industry out in the rural areas. • However, these are the best measures available.

14. Earned income ISK from each night spent on paid accommodation of a foreign visitor

15. The data used • Earned income statistics – data obtained directly from firms by tax authorities, classified according occupation and legal residence. Available by region. • Accommodation or number of nights spent – compulsory reports by all suppliers to the National data registry, but may be unreliable. Available by month and by region. • Number of days spent – surveys taken from random sample of foreign visitors by tourist board, available by month but not by region. • Currency exchanges – information gathered by the Central bank from the commercial banks. available by month but not by region.

16. So is tourism just for city dwellers? • It is only natural for the population centers to have an advantage in services. • However, there is a accumulation effect of spending as more tourist business operate in the area and the number of foreign visitors reaches a critical mass. • Best example of this is the build-up of services in Húsavík arround the whale sightseeing. • The key is the developement of recreational activities that provide the custumer base for new business. • In the language of economics, it means that every new business in the area brings a positive external effects on the others.

17. Conclusion • It is important,with regard to regional development, to focus on broad areas rather than individual townships etc. • There are certain realities that have be accepted, concerning the economic interactions within the the regions. • The chief issue is to build up the infrastructure, especially transport, which can faciliate the intergration needed for the even distribution of economic benefits across the region.