Friday, April 24, 2015

Let tourists arrive and Georgia thrive!

24.04.2015. The contribution of tourism to world gross domestic product (GDP) is just 3%, and the economies of countries where tourism accounts for a big share of the GDP often perform poorly. The most notorious case is Greece, where in 2011 tourism generated 18% of GDP ($15 billion dollars in absolute terms), and whose economy is, as everyone knows, totally on the skids. Another example is Spain – while being struck disastrously by the European economic crisis, the country can boast the second highest tourism revenues in the world, amounting to $60.4 billion dollars in 2013 (or about 6% of Spanish GDP).

Even if one disregards that tourism-centered economies are often weak, the absolute size of the tourism contributions are not that impressive. Economists typically talk about billions of dollars, sometimes about trillions, like astronomers talk about light years – so what the heck is so exciting about $60.4 billion? In 2012, the Spanish telecommunications provider Telefonica, one single company, generated revenues of about $85 billion, almost $25 billion more than Spain’s entire tourism sector. And this turnover was generated with just 275,000 employees, whereas 2 million Spaniards are working in tourism. Interpreting these numbers is hazy, because we do not know what value is added by the Telefonica personnel (portions of the revenues, both in tourism and in telecommunications, account for preliminary products), but there can be no doubt that production (and hence average incomes) in telecommunications are much higher than in tourism.

On the surface, one might conclude that Greece and Spain should not deliver the blueprints for developing the Georgian economy, and, instead, Georgia should strive for more sophisticated sectors. A “national champion,” i.e. a company like Telefonica in Spain, might create more value than all the tourism businesses taken together (Florian Biermann discussed the merits of this argument in the article “The Economics of Great Personalities,” to be found on the ISET Economist Blog).

The argument of the apparent economic insignificance of tourism, however, misses many advantages and positive externalities associated with this sector.


First of all, tourism is an important source of income for low-skilled laborers and those living in rural areas. Transportation, hospitality, gastronomy, and tourist guide services provide employment without the need for higher education.

Equally important are the educational incentives created through tourism. To understand this, one has to review an important psychological finding of the 20th century. The ability to wait, or to defer gratification, as it is called by psychologists, has been identified as one of only two character traits which (1) can be measured among children and (2) statistically significantly predict the overall well-being and success of a person in their later lives (the other one being the IQ). In the famous Stanford Marshmallow Experiment of the late 1960s, eminent psychologist Walter Mischel gave children marshmallows and told them that they would get more marshmallows if they would not eat the first marshmallow within 15 minutes. It turned out that those children who succeeded to wait did much better in their later lives. When they had reached adulthood, they earned higher salaries, had better educational achievements, and followed healthier lifestyles, among other accomplishments.

The ability to defer one’s gratification is also the foremost character trait needed for upgrading one’s human capital. One needs great stamina to attend boring lectures, read lengthy books, memorize material in which one is not interested, and to do all of this under the pressure of exams. And, worst of all, the reward for all of this trouble comes several years later. It is, therefore, not surprising that it has been shown that people who do not acquire much human capital are very often those who cannot defer gratification.

Relevant skills for tourism, however, can be acquired in a piecemeal fashion with gratification following almost immediately. One learns a little bit of English, Russian, or any other language spoken by tourists, and immediately one is qualified for certain jobs (selling in tourist stores, guiding people around, luring them into restaurants, etc.). One does not even have to learn genuine English a la Shakespeare – one can already profit from knowing simplest phrases like “Where are you from?”, “XX good” (where XX is the home country of the tourist), “Shop here!”, “Low prices!”, “Good offer!”, “Come my friend, visit my shop!” and – the classic among tourism workers – “No problem!” (as a universal answer to any question the tourist might have). Therefore, even people who lack the patience to invest in their human capital over the course of many years, because they lack the skill to defer gratification, have incentives to upgrade their human capital step by step, as the gratification is received quickly. Once one speaks English, however, new opportunities emerge to increase one’s human capital further in relatively interesting ways - through one of the many online courses offered on almost every subject, among them in tourism management, or through the possibility to work and learn abroad.


Another important insight about tourism is that people avoid spending their holidays in places that are not interesting, livable, and beautiful. Thus, the more tourists come to Georgia, the more this country is perceived to have these favorable properties. That is reassuring.

Yet a beautiful and interesting place is not only attractive as a tourist destination, but also as a place to live. Tourism stimulates art, culture, gastronomy, and entertainment, which can then also be enjoyed by locals.

One of the authors of this article lived in Berlin for many years, where he could choose from three opera houses and two world-class orchestras (most famously, the Berlin Philharmonic). When he attended these performances, he remembers well sitting among many Asians, usually from Japan, who paid high prices to cross-subsidize the 10-20 euro tickets reserved for students from local universities. And after the concert was over, he could indulge in one of the hundreds of nice cafes and restaurants in the bohemian quarters of Friedrichshain and Prenzlauer Berg, of which there were only so many because of the masses of tourists roaming through the streets.

One can see the very same effect in Tbilisi. Not too long ago, a museum of modern art was established, arguably mainly for attracting tourists. Now it has become also an interesting destination for locals. Likewise, the nice cafes in Vake and in the Old Town around Chardin Street, in particular, are frequented heavily by tourists, subsidizing street life for native Tbilisians. And that there is now the overdue discussion about how one could make Tbilisi more attractive for pedestrians also results from the insight that tourists do not enjoy walking around in Tbilisi if: (a) zebra crossings are notoriously disregarded by cars, (b) the police, while cruising around everywhere and shouting angrily out of their cars, does nothing to enforce pedestrian rights, and (c) the sidewalks are pitted and usually blocked by parking cars (Florian Biermann discussed these problems in more length in his article “Tbilisi – a City for Cars, Not for People”, to be found on the ISET Economist Blog).

While many Tbilisians do not grasp yet that a city that is car-friendly is generally an awful place to live, the incentive to attract tourists at least provides some extrinsic motivation to make Tbilisi a more pleasant experience for pedestrians. In the same vein, to become more attractive for tourists, Georgia is working on a variety of positive initiatives, ranging from protecting nature and cultural heritage to improving safety and upgrading tourist infrastructure.


After the collapse of the Soviet Union it was believed that tourism might become one of Georgia’s “locomotive” sectors. While the Shevardnadze government failed to develop this potential, after the Rose Revolution, tourism became a top priority. Each year since 2005, the direct effect of tourism (i.e. the money spent by tourists) alone has contributed 6-7% of Georgia’s total GDP. Georgia is a net exporter of services, and tourism accounts for about 60% of these service exports. This is important income for the country, helping to finance the country’s large goods trade deficit and to reduce the depreciation pressure on the lari.

According to the Georgian National Tourism Agency (GNTA), international arrivals totaled almost 5.5 million people in 2014, 2% higher than in 2013. Three out of every four arrivals come from three neighboring countries: Turkey, Armenia and Azerbaijan. If Russia is included, tourists from neighboring countries make up 88% of all arrivals. From 2005 to 2013, the number of international arrivals was increasing by an average of 33% every year. As a result, from 2005 to 2013, the number of arrivals increased tenfold. Last year, however, growth slowed down, mainly due to the new immigration law, which was a blow to many sectors of Georgia’s economy and, in particular, to tourism. Fewer people arrived from Turkey (-10%), Iraq (-47%), and Iran (-51%), and since September, arrivals from China also declined. The direct air connection from Tehran was terminated.

While some of these countries may currently have minor significance as sources of tourists, they have paramount strategic importance for future tourism. It is not likely that, within the next few years, huge numbers of Western Europeans and Americans will discover Georgia as a primary place to spend their holidays, yet Iranians and Chinese also have a desire to make holidays. If Georgia had not actively prevented the arrivals of travelers from those countries, it could have become an important player in those markets. Now it will be difficult to restore the good reputation that Georgia enjoyed as a holiday destination among people from those countries.

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