WP/21/224 Diversion of Tourism Flows in the Asia & Pacific Region: Lessons for COVID-19 Recovery by Vybhavi Balasundharam and Robin Koepke IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 2021 International Monetary Fund IMF Working Paper WP/21/224 Asia and Pacific Department Diversion of Tourism Flows in the Asia & Pacific Region: Lessons for COVID-19 Recovery Prepared by Vybhavi Balasundharam and Robin Koepke1 Authorized for distribution by Todd Schneider August 2021 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. Abstract The COVID-19 pandemic prompted a collapse in international tourism, severely impacting the tourism-dependent economies in the Asia & Pacific region. Once countries start reopening, tourism diversion effects could accelerate the recovery in countries that establish themselves as more attractive travel destinations than competitors. We investigate the impact of previous shocks in tourism competitor countries on visitor inflows, with a particular focus on tourism-dependent Pacific Island Countries (PICs). We find that PICs were generally resilient to external shocks and benefitted from diversion effects for certain types of shocks. For example, the share of departures from Australia to PICs increased by 1 2 percent during the SARS outbreak. We then derive policy implications for the post-COVID-19 revival of inbound tourism to PICs and lessons for the future. JEL Classification Numbers: L83, N75, O53 Keywords: Tourism determinants, spillovers, COVID-19, Pacific Island Countries Author’s E-Mail Addresses: vbalasundharam@imf.org; rkoepke@imf.org 1 The authors are grateful for helpful comments by TakumaHisanaga, Seohyun Lee, Racha Moussa, Scott Roger, Todd Schneider, participants at an IMF Asia & Pacific Department research seminar, and thestaff of the Australian Treasury and Department of Foreign Affairs and Trade, as well as the Cen tral Bank of the Philippines. Yadian Cheng provided excellent research assistance; Francis Landicho and Kristine Laluces provided outstanding administrative and editorial support. 2 Contents I. Introduction.................................................................................................................. 3 II. Recent Developments and Conceptual Framework.................................................... 5 A. Recent Tourism Development in PICs........................................................................ 5 B. Conceptual Framework for Tourism Diversion ........................................................... 6 III. Data and Methodology .............................................................................................. 7 A. Model ....................................................................................................................... 7 B. Data.......................................................................................................................... 8 IV. Results...................................................................................................................... 10 V. Discussion and Policy Implications .......................................................................... 13 VI. Conclusion ............................................................................................................... 17 Figures 1. Tourism Revenue of Asian and Pacific Countries with Largest Tourism Sectors........... 5 2. International Visitor Arrivals in Pacific Island Countries Number of People................. 5 3. Visitor to PICs by Source Country .............................................................................. 6 4. Australian Visitors to PICs ......................................................................................... 6 5. Schematic: Two Types of Tourism Diversion.............................................................. 7 6. Share of Departures from Australia............................................................................. 9 7. Impact of Shocks on Number of Departures from Australia ....................................... 10 8. Impact of Shocks on Departures to Affected Countries.............................................. 11 9. Impact of External Shocks on Departures to PICs...................................................... 12 10. Change in Shares of Departures during SARS Epidemic.......................................... 12 11. Change in Share of Departures to PICs during SARS............................................... 13 12. Number of Confirmed COVID-19 Cases................................................................. 14 13. COVID-19 Vaccinations......................................................................................... 14 14. Illustrative Path of Tourism Recovery in PICs ......................................................... 15 Annex I. Detailed Estimation Results....................................................................................... 20 References...................................................................................................................... 18 3 I. INTRODUCTION The Asia and Pacific region is home to many economies that have a substantial tourism base. Of these, Pacific Island Countries (PICs) are among the most tourism-reliant countries in the world. Tourism is highly vulnerable to local shocks, such as natural disasters and political instability. In addition, global events like pandemics can have a severe impact on tourism even for countries that are not directly impacted by the shock. The COVID-19 pandemic has halted tourism across much of the world for over a year, even for PICs that have generally been little affected on the health front. Many countries in the Asia and Pacific region shut their borders in the early stages of the COVID-19 pandemic. In fact, total closure to tourists was most prevalent in this region compared to the rest of the world as of mid-2021.1 Prolonged and stringent border closures have been effective in preventing health crises in PICs, notwithstanding Fiji’s COVID-19 outbreak in 2021:Q2. However, border closures have come at a severe economic cost. The COVID-19 pandemic has brought international tourism in PICs to a standstill pending widespread vaccination, measures to ensure traveler and public safety, and the reopening of borders. The focus among some authorities has recently shifted to recovery, particularly on how to re-open borders and revive the tourism industry. Many countries are eager to establish travel bubbles with key source countries to jumpstart the rebound when the pandemic recedes. Both PICs and various Asian countries have attempted to set up such bubbles that would allow for inter-country travel with limited requirements on testing and quarantining, although progress has been slow thus far. These bubbles aim to attract both tourists who had already intended to travel to the destination countries, but also divert tourists with travel plans to competing destinations. Tourism diversion effects could accelerate their recovery if PICs can establish themselves as more attractive travel destinations than such competitor countries as Indonesia, Thailand, and other Asian tourism hubs. Past experiences with shocks help illustrate the extent of tourism diversion potential and provide some guidance to better prepare for an eventual recovery from the COVID-19 crisis. Lessons from previous episodes could also help PICs become more resilient and cope with shocks more effectively in the future.2 To this end, this paper uses monthly outbound travel data from Australia, the second biggest tourism spender country in the region and the primary source country for South Pacific Countries (Fiji, Vanuatu, Samoa, New Zealand and Tonga) to quantify tourism diversion effects on PICs.3 1 According to UNWTO Travel Restrictions 9th Report, of the69 destinations where borders are completely closed to tourists, 30 are in Asia and thePacific. 2 For example, while there has been a five-fold increasein terror related deaths since 2000, the hotel industry is becoming more resilient to shocks from terrorism, as the timetaken for destinations to recover from these shocks has significantly decreased (Misrahi, 2016). 3 This approach is particularly useful for countries with limited data availability and a concentrated tourism base, as is the case for PICs. Using this single dataset also facilitates identification of diversion from relevant competitor m a rkets. 4 Exploiting data on different external shocks between 1991–2016 in competitor markets, we capture the large spillovers to PICs. First, we document the resilience of tourism to PICs to large external shocks like the September 11 attacks and the SARS epidemic. Second, we show that external shocks can result in substantial diversion of tourism into unaffected PICs. However, the size of tourism diversion depends on the type of shock, the region where the shock occurs and state of competitor markets. These results suggest that travel bubbles between large source markets like Australia and New Zealand with the PICs could boost tourism recovery in the PICs, and these gains could be amplified by diversion effects. Finally, we illustrate the temporary nature of this diversion channel, highlighting the importance of timely policies to boost diversion gains and make temporary gains permanent. Our paper contributes to several strands of literature. First, there is a large literature that studies the interaction between different macroeconomic variables and tourism, including recent work by Kumar et al. (2020) that focuses specifically on PICs. Among these studies, tourist income and relative prices are the dominant factors in driving demand.4 Specifically, some studies have used the same comprehensive Australian outbound tourism data used in this paper to identify factors that affect long-run tourism demand. For example, Seetaram (2010) shows that income is the most important determinant of departures from Australia and that international crisis events occurring in years 2002 and 2003 adversely affected departures from Australia. Our paper focuses on the impact of these crisis events on PICs through the Australian demand channel. Understanding how demand responds to shocks would be helpful for these countries, given their relatively concentrated tourist base and limited capacity to manage risks. Recently, the literature has focused on understanding the impact of crisis events on inbound tourism flows (Wang, 2009; Edmonds and Mak, 2006; Lean and Smyth, 2009; Russy and Smith, 2013 etc.). Specifically, there is a nascent but growing literature focusing on tourism diversion effects, whereby tourists shifts from more affected destinations to less affected destinations.5 A closely related paper by Bonham et al. (2006) finds evidence of diversion of mainland U.S. travel from foreign travel to Hawaii that more than compensated for the declines in international visitors following the 9/11 terrorist attacks. Edmonds and Mak (2006) similarly show significant substitution of domestic travel for overseas travel by the Japanese after 9/11. Chang et al. (2011) specifically look at how shocks to international tourism demand volatility could affect the volatility in the tourism demand of neighbouring countries in the ASEAN region which are very similar and geographically connected. To the best of our knowledge, this is one of the first papers to look at the international diversion of tourists between regions, rather that within a small region. We also contribute to the literature by exploring how the spillovers vary with the type of shock and region of shock 4 Other factors include third-country price effects, seasonality, political instability, natural disasters, epidemics, marketing effectiveness, safety, and tourism-oriented policies. Kumar et al. (2020) and Nguyen (2020) provides a comprehensive literature review of these factors. 5 There are two strands in the diversion literature, one that looks at theimpact of transient shocks and another that focuses on structural changes. Examples of thelatter include Gallego et al. (2015) who look that the tourism diversion from joining the European Union, Forsyth et al. (2014) who study the impact of Australia’s departure tax on domestic tourism diversion, and Acevedo et al. (2017) who study the impact of US-Cuba tourism link for the rest of the Ca ribbean. 5 This paper is structured as follows. Section II discusses recent trends in international tourism to PICs and lays out a conceptual framework for thinking about tourism diversion effects. Section III presents the data and methodology, highlighting stylized facts in the data. Section IV presents the main findings. Section V discusses the applicability and implications of these findings for the recovery from the COVID-19 pandemic. Finally, Section VI concludes and discusses potential avenues for future research. II. RECENT DEVELOPMENTS AND CONCEPTUAL FRAMEWORK A. Recent Tourism Development in PICs Tourism is a critical engine of growth and employment in most PICs and several Asian countries. The tourism contribution to GDP ranges between 10 and 40 percent in Fiji, Palau, Samoa and Vanuatu, exceeded only by the Maldives (Figure 1). Visitor arrivals in PICs grew rapidly in the two decades preceding the pandemic, nearly tripling from 686,000 in 2000 to 1,870,000 in 2019 (Figure 2). Figure 1. Tourism Revenue of Asian and Pacific Countries with Largest Tourism Sectors (in percent of GDP, 2019 data; Pacific Island Countries in blue) Figure 2. International Visitor Arrivals in Pacific Island Countries Number of People (Number of people) Maldives Vanuatu Fiji Samoa Palau Cambodia Micronesia Thailand Tonga Marshall Islands Solomon Islands Sri Lanka Singapore New Zealand Tuvalu Vietnam Mongolia Timor-Leste Philippines PNG Indonesia Korea, Rep. India 60 50 40 30 20 10 0 Sources: World Bank, South Pacific Tourism Organization, and IMF staff estimates. 2,200,000 2,000,000 1,800,000 Fiji Micronesia Samoa Tuvalu Kiribati Palau Solomon Islands Vanuatu Marshall Islands Papua New Guinea Tonga 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 2008 2011 2014 2017 2020 Sources: World Development Indicators, national sources, IMF staff estimates With the onset of the COVID-19 pandemic, foreign visitor arrivals to PICs came to a sudden stop in March 2020. For 2020 as a whole, arrivals in PICs were down 84 percent, with little variation across countries. Economic activity was severely disrupted, with (unweighted) average real GDP growth of -4.5 percent in 2020. In tourism-dependent PICs like Fiji and Palau, the sudden evaporation of tourism is estimated to have led to severe GDP contractions in 2020 (see also the discussion in Arslanalp et al, forthcoming). 6 The main source country for visitors to PICs is Australia (37 percent of arrivals in 2019), followed by New Zealand (21 percent). Other notable source countries include the U.S., China, and Japan. In contrast to Australia’s dominance as a source co untry of visitors, PICs only account for a small portion of Australia’s outbound travel. In 2016, only 6 percent of Australian departures went to PICs, down from a peak of 9 percent in 2003. This suggests that there is significant scope for PICs to attract additional visitors from the Australian market, highlighting the potential for diversion effects to benefit PICs. Figure 3. Visitor to PICs by Source Country Figure 4. Australian Visitors to PICs (in percent of total 2019 data) (in percent of total Australian departures) Source: IMF staff estimates based on national sources 12 PNG Vanuatu Fiji Samoa Tonga PIC 10 8 6 4 2 0 Sources: IMF estimates. 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 B. Conceptual Framework for Tourism Diversion To provide an intuitive sense for the tourism diversion effects under investigatin on in the empirical analysis, it is useful to consider two stylized types of shocks (Figure 5 below). In the first case, a tourism-oriented country is hit by a localized shock that reduces prospective visitors’ willingness to travel to that particular country, but leaves their overall willingness to travel mostly unchanged. In this example, some visitors that would have travelled to the affected country visit other countries instead, particularly competing tourism destinations in the same geographic region. In other words, there is tourism diversion from the country hit by the localized shock to other countries in the region. Two real-world examples of such a localized shock are the Bali bombings of 2002 and 2005, which reduced travel to Indonesia while boosting visitor flows to other countries in the Asia & Pacific region. Both episodes are considered further in the empirical analysis. 7 Figure 5. Schematic: Two Types of Tourism Diversion (The size of each pie represents the total number of visitor arrivals) Case 1: Tourism Diversion under Localized Shock (Example: Bali Bombings) Case 2: Tourism Diversion under Regional/Global Shock (Example: SARS) Rest of world Country A Localized shock to Country A Rest of world Country A Regional shock concentrated on other countries Rest of world Country A Tourism diversion from Country A to rest of world Country A Tourism diversion from rest of world to Country A Case 1: Under a localized shock in country A, the size of the pie is nearly unchanged. There is tourism diversion from A to rest of world. Source: IMF staff illustration Case 2: Under a regional/global shock the size of the pie shrinks. Country A benefits from tourism diversion because it is less affected than competitors. In the second stylized example, a regional or global shock affects prospective visitors’ willingness to travel to several or many countries. In this case, there is an overall reduction in regional/global travel (“tourism destruction”). Some countries are more affected by the shock than others, with less-affected countries increasing their share of visito r arrivals at the expense of more affected countries. The more affected countries suffer a sharp reduction in visitor arrivals. By contrast, for the less affected countries, the net effect depends on the magnitude of tourism destruction relative to tourism diversion. A real-world example of a regional shock is the 2004 SARS epidemic, which reduced travel to many Asian countries, while having varied impacts on other countries in the region, as discussed in the next section. The key takeaway from the two stylized examples is that under certain conditions, tourism recipient countries may benefit from an adverse shock affecting the tourism sector, so long as tourism flows to competitor countries are (much) more affected than those to the domestic tourism market. III. DATA AND METHODOLOGY A. Model To capture the demand for tourism from Australia, we use the following model: ln
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