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The 5 th Business Enterprises for Sustainable Travel Education Network Think Tank and Conference Session 2B: Economics of Tourism Crises and Disasters 11:45~ June 17 th 2005.

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The 5th Business Enterprises for Sustainable Travel Education Network Think Tank and Conference

Session 2B: Economics of Tourism Crises and Disasters 11:45~ June 17th 2005

Discussion on Extended Validity of an Alternative Framework to Estimate Short-Term Negative Impacts of an Unexpected (Unprecedented) Event

Tad Hara: (Presenter) Regional Science Program &

School of Hotel Administration, Cornell University

prologue economic impact of terrorism
Prologue: Economic Impact of Terrorism
  • Negative Impact of Terrorism over Economy
    • Widely assumed, but hardly quantified
  • Vulnerability of Certain Sectors
    • E.g. Tourism industry
      • One of the largest & fastest growing export sectors for many nations, its potential looks bright, but its vulnerability (risk of revenue volatility) seldom quantified
  • Benefit of quantification for policy makers
    • Proper response, better plan for prevention
      • E.g. Which industry will suffer most, jobs, income, tax revenue, etc.
      • How much budget can be justified for preventive measures

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tourism industry

“Denpasar, Bali, Indonesia, Sunday, Oct. 13, 2002. (AP Photo/Jack Hamilton)

Tourism Industry

“Tourism can be one of the few development opportunities for the poor.”World Tourism Organization 2002

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prologue economic impact of terrorism4

“Facts About Bali: ECONOMY: Known as the Island of the Gods, Bali has been one of the world's most popular tourist destination for decades. The likelihood of the blast scaring away hundreds of thousands of tourists could be a devastating blow to not only the island's economy but that of the whole of Indonesia, which is struggling to recover from the Asian financial crisis of the late 1990s.

Sat Oct 12,10:33 PM ETBy The Associated Press

Prologue: Economic Impact of Terrorism

Need to study this topic?

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economic impact of terrorism introduction
Economic Impact of Terrorism: Introduction
  • Economic Impact of Terrorism is hard to quantify – Best estimates of “experts” often used
  • How do we estimate?
    • 1 Quote whatever the other sources said
    • 2 Econometrics / Time Series Model
    • 3 Input Output/Social Accounts framework

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literature review 1 5
Literature Review (1/5)
  • Literature on the Negative Economic Impact of Natural Disasters
    • Horwich (2000): “it is capital stock, not output, that is directly reduced by the disaster” (Kobe Earthquake)
    • Murdoch, Singh & Thayer: S.F Earthquake caused 2% reduction in housing values.

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literature review 2 5
Literature Review (2/5)
  • Negative Economic Impact of a Man-Made Disaster
    • Cohen (1995) Impact of Exxon Valdez Oil Spill
      • Concede difficulty of Ex-post analysis
    • Globar (1993) Econometric model (ex-post analysis)
      • Identified Inverse relation between defense expenditure and investment in Sri Lanka.
    • Coshall (2003) Intervention analysis (impacts of events on UK Air travel using ARIMA)
    • Negative Surprise tend to increase volatility than positive one (asymmetry of volatility: Engle et al 1990)

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literature review 3 5
Literature Review (3/5)
  • Input Output Models
    • Isard & Kuenne (1953)
      • Estimating Impact of Steel industry in NY-Philadelphia region
      • Demonstrated employer effect is much higher than prior assumption of 1:1.
    • Ahlert (2001)
      • Impact of Soccer World Cup 2006 to German Economy
    • English (2002)
      • Impact of Converting Corn to Ethanol Production
    • Nakajima (1994)
      • International I-O model (Japan & Asia)
    • Lee (1994)
      • I-O with fuzzy final demands

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literature review 4 5
Literature Review (4/5)
  • I-O Model Application to Tourism Industry
    • Fletcher (1981)
      • Economic Impacts on Gibraltar
      • While final demand is dominated by UK defense expenditure, tourism generated the highest marginal increase in income and employment
    • Archer (1982)
      • Usage of I-O for tourism policy
    • Heng & Low (1990)
      • Tourism industry’s impact on Singapore Economy

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literature review 5 5
Literature Review (5/5)
  • Negative Impacts with the I-O model
    • Caskie, Davis & Moss (1999)
      • Simulation of Negative Impacts of BSE on N. Irish Economy
    • Zhou, Yanagida, Chakravorty & Leung (1997)
      • Simulation of 10% decrease in tourism revenue in HI (partially using CGE by GAMS)
    • Okuyama, Hewings & Sonis (1997)
      • Kobe Earthquake’s shockImpacts from unscheduled events are not only the negative effects but also positive effects of reconstruction.

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estimation assumptions
  • Initial Shock – fairly simple one
    • Assume that the reductions in number of employed between Sept. and Oct. 2001 are all attributed to the huge exogenous shock
    • Allocate the initial shocks to SIC 1-digit industry categories

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simulations results services adjusted nyc results adjusted version
Simulations--Results (Services Adjusted: NYC results: Adjusted version)

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review of other studies
NY City Economic Impact

“Total Loss $83 billion” (NYC partnership & Chamber of Commerce: Nov 2001)

“Total Cost $54 billion” (NY Governor: Oct 2001)

“WTC Replacement Cost & Cleanup $25~29 billion” (FEB NY: April 2002)

“Total Cost $83 billion (quoting NYCP-COC) but $67 billion covered by Insurance (US GAO: May 2002)

NY City JOBS Lost

108,500, 115,300, 105,200, 125,000, 84,000, 78,200, 129,000….

NY State Jobs Lost

“99,000 in 2001, 78,000 in 2002, 77,000 in 2003” (NYS Senate Finance Committee: DRI-WEFA: January 2002)

“Resulted at peak loss of 78,200” (DRI-WEFA: March 2002)

“50,000 immediately, 70,000 in 4th Quarter” “Much of this loss is likely linked to WTC attack” (FEB NY: April 2002)

Review of Other Studies

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concluding remarks future research
Concluding Remarks & Future Research
  • Concerns
    • Important assumptions
    • Varieties of interesting problems in “ex post” analysis
    • Time Frame Issues (in what time span)
    • Rooms for Refinement
      • Multivariate Econometric Model
      • Time Series Analysis

Let’s have a quick look

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review of other types of models
Review of Other Types of Models
  • 1. Multivariate Econometrics Model
    • Future depends on past associations of dependent variable with independent data
    • Convenient model, widely used, convincing
      • Works well after all the data are on the table (when dust settles down)
  • 2. Time Series Model
    • Future depends on past behaviors of the own data
    • Powerful, good at finding patterns
    • But…“Because many models make predictions based on market’s past behavior, they can be easily wrong-footed by unusual market moves”
    • “We look at the worst probable risk, not the worst possible risk.”
    • WSJ9/27/02 “Rocky Markets Foil Firms’ Bets Based on ‘Risk Models’

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review of econometrics model example
Review of Econometrics model : Example

Can you find these data at t=0? Or How long you wait?

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review i o sam model
Review: I-O/SAM model

Where, X=Total Output (an nx1 vector), I=Identity Matrix an nxn matrix), A=“A” matrix (standardized inter-industry coefficient matrix: nxn), Y=Final demand (an nx1 vector)

You may rewrite the equation….

Increase [loss] in final demand in some sector will result in

Increase [loss] in Total Output (overall economic activities)

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data availability

How many months? How many years


Data Availability?

Source: Time managize: Suzanne Plunkett/AP

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review of time series model example time series analysis
Review of Time Series model: Example Time Series Analysis

Source: the authors by SAS based on data from Labor Department of New York State.

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concluding remarks future research26
Concluding Remarks & Future Research
  • Advantages of I-O/SAM framework for Estimating Negative Impacts of Terrorism
    • General Criticism of I-O/SAM: “No Capacity Constraints” does not hold
    • Structurally good at capturing “a huge shock”
    • Superior to other models which may estimate direct impacts only in that I-O/SAM will capture total negative impacts to a national/ regional economy by describing indirect and induced effects of terrorism.
    • External Validity
      • We can quantify impacts of large negative shock for a nation/region GIVEN I-O/SAM table and solid labor data.

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concluding remarks future research27
Concluding Remarks & Future Research
  • Rooms for Improvements
    • General EquilibriumCGE model(you can make variables endogenous; interest rate, price, exchange rate etc:

WARNING: CGE’s accuracy highly depends on the very accuracy of I-O/SAM data)

    • Hybrid with econometrics for final demand (∆FD), some stochastic model
    • (Once data become available), ARCH, GARCH, E-GARCH, or Structural Equation with Regime Shifts?
      • Can We Predict whether structural shift occurred given current surge/plunge of data (t=0)?Frontier topic of Time Series
      • Based on constraints of yt = αyt-1 + εt.

it is challenging to endogenize the shock. (Bayesian, Kalman filter?)

    • I-O/SAM seem to have good validity to deal with huge exogenous shocks amid the chaos immediately after the huge unprecedented shock.

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concluding remarks future research28
Concluding Remarks & Future Research
  • Research on Negative Shocks: Economic Impacts and Beyond
      • Quantification of potential threatsEasier to justify expenditures for proactive measures
      • Final demandinfluenced by psychological factors?
      • Roles of mass media--intermediary of information
  • The whole system of Terrorism
      • Confrontational eradication by “War on Terrorism”, or
      • Research on why some resort to terrorism?—multidisciplinary subjectits understanding may provide cost-effective prevention
  • Systematic Prevention is important to Realize Potential of Stable Growth of Tourism Industry

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geographical distribution of terrorism events
Geographical Distribution of Terrorism Events

Will you believe…that history repeats itself?

Figure 1-1 "Patterns of Global Terrorism: 2000."

Source: U.S.State Department

BEST-EN by Tad Hara