Economic Significance of Cruise Tourism

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PergamonAnnals of Tounsm Research Vol. 25, No. 2, pp. 393-415, 19980 1998 Published by Else&r Science Ltd. All rights reservedPrinted in Great Britain0160-7383/9X 19.00+0.00

PII: SOlSO-7383(97)00098-4

ECONOMIC SIGNIFICANCE OFCRUISE TOURISM

Larry DwyerUniversity of Western Sydney, AustraliaPeter ForsythMonash University, AustraliaAbstract: Cruise business is a growing segment of the international tourism market. Whilethere have been studies of its economic impacts on a national level, the issues of the costs andbenefits and their distribution have received scant attention. This paper develops a frameworkfor assessing the economic impacts of cruise tourism for a nation and its subregions. It furtherexplores how the framework can be used to estimate the relevant benefits and costs. A casestudy of cruise tourism in Australia shows how the framework can be implemented and discussessome policy implications. This analysis can facilitate future research, empirical studies, andstrategy development relevant to cruise tourism. Keywords: cruise, economic evaluation, bcn-efi-cost analysis, Australia. 0 1998 Published by Elsevier Science Ltd. All rights reserved.R&umC:Limportance Cconomique des croisieres. Les croisieres sent un segment croissant dumarch6 du tourisme international. Bien quil existe quelques etudes des impacts Cconomiquesdes croisieres au niveau national, on a fait tres peu attention 2 la distribution des cofits etbCntfices. Cet article construit un cadre thtorique pour Cvaluer les impacts Cconomiques descroisieres pour une nation et pour ses sous-regions. On montre en plus comment ce cadre peut&tre utilise pour &valuer les cotits et les bCnCfices pertinents. Une ttudc de cas des croisieres enAustralie demontre Iapplication du cadre et discute quelques implications pour la politique.Cette analyse pourra faciliter la recherche, les etudes empiriques et le diveloppement stra-ttgique futurs pour le tourisme de croisieres. Mats-cl : croisitres, evaluation Cconomique,analyse coat-benefice, Australie. 0 1998 Published by Elsevier Science Ltd. All rights reserved.

INTRODUCTIONCruise business is one of the major growth areas of international

tourism. (Cruise Lines International Association 1995; Hobson 1993;Peisley 1992). The dominant world destination is the Caribbean regionwhich accounts for 50% of total world capacity placement. Othermajor regions include the Mediterranean (lo%), Alaska (8%), transPanama Canal (6%), West Mexico (5%), and Northern Europe (4%)(Cruise Lines International Association 1995). On the supply side,however, the world cruise shipping industry is becoming increasinglydominated by cruiselines owned by parent companies in three coun-

Larry Dwyer is Coordinator of the Tourism Management Program, University ofWestern Sydney Campbelltown NSW 2560, Australia. Email: [email protected]).He has published widely in the area of economics of tourism and is presently under-taking research on sustainable tourism development. Peter Forsyth is Professorand Head of the Department of Economics, Monash University. He has extensivepublications in the area of industry economics and airline policy and is currentlyundertaking research on tourism taxes and price competitiveness indexes for tourism.

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394 CRUISE TOURISM

tries: the United States, the United Kingdom, and Norway (Peisley1995). The question naturally arises as to distribution of impactsamong foreign owned cruiselines and those countries providing stop-over facilities for this type of visitation. Several countries have beendeveloping strategies to enable each as a whole, and particular regions,to enjoy the economic and social benefits of a strong, efficient, andviable cruise shipping industry (Commonwealth Department of Tour-ism 1995). Policymaking to achieve the economic aims depends upona clear understanding of the impacts-including benefits and costs-of cruise tourism by international visitors.

In the attempt to comprehend the potential economic significanceof cruise tourism several interesting questions arise. What are theeconomic impacts of cruise tourism? To what extent does foreignownership of cruiseships limit the economic impacts of this form oftourism? Will these impacts be concentrated in stopover port areasor distributed nationally? What are the potential net benefits (ascompared with economic impacts) of cruise tourism regionally andnationally? The existing literature typically contains either superficialanswers or none to such questions, despite their general importanceto any country wishing to understand the economic significance of thissector of tourism.

The paper has three major objectives. First, it develops a frameworkfor assessing the economic impacts of cruise tourism for a country asa whole and for its states or counties. Second, it discusses how thisframework can be used as a basis for estimating the relevant benefitsand costs (as distinct from impacts), nationally and regionally. Whilesome earlier analyses of the economic impacts of cruise tourismassume that economic impacts equate to benefits, here the two con-cepts are clearly distinguished. It is even possible for additional expen-diture to generate increased economic activity, but for there to be anet cost to the economy, not a net benefit. This could be so if theincreased expenditure led to an even greater increase in costs (forexample, in infrastructure). Benefits are to be interpreted as the netgain in revenues, along with benefits to host country consumers,less the cost of making the goods and services purchased with theexpenditure available, including non-cash costs, such as environ-mental costs. Typically, it is the case that the net benefits from anincrease in expenditure from abroad are significantly less (only a smallproportion) of the increase in overall activity that the expendituregenerates. As its third objective, the paper identifies and discussessome policy implications of the analysis. The theoretical frameworkof analysis is applicable to any economy or its regions within.ECONOMICS OF CRUISE TOURISM

In many respects, cruise tourists will have an impact on a nationaleconomy similar to that of other foreign visitors. They may fly tothe country, stay in some accommodation, and purchase goods andservices. The difference is that a major component of their expen-diture will be on a cruise, and in many cases this payment will be to aforeign-owned operator who, in turn, will purchase some goods and


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DWYER AND FORSYTH 395

services in the home country. Therefore the foreign exchange earningsand the economic impact on the host economy will depend on thevisitors direct and indirect expenditure, and on the extent to whichthe associated expenditure relates to goods and services sourced fromwithin the region or sourced from elsewhere. The economic impactsand their distribution will differ also as between the regional and thenational economy.

While this issue is of less relevance to ports in small island states(e.g., such as those in the Caribbean, or in South Pacific), it assumesgreater significance for larger countries such as the United States,Australia, or Mexico.

An expenditure breakdown (Table 1) can conveniently be dividedinto passenger expenses and operator expenses. The assumption ismade that the operator is a foreign company. Even if a payment for acruise is made in the base country, using its currency, this does notfeature as expenditure in the base country, since it is income pay-able abroad, and does not stimulate economic activity within thiscountry. Passenger expenditures include the cost of the cruise, butthis is an amount paid to a foreign company, and it is not included.The distinction can also be made between expenditure in a base port(such as a cruise departing from London, Miami, or Sydney) and

Table 1 Cruise Related ExpendituresPassenger ExpendituresAir Fares to/from Base CountryInternal TravelAdd-on Expenditure:

Port Expenditure

AccommodationMealsShoppingExcursionsMealsExcursions and travelShopping

Operator ExpendituresPort Expenditures:

Provedoring:

Crew Expenditure:Ship MaintenanceMarketing in Base CountryTaxes:

Government ChargesPort Charges (incl. Terminal)TowageStores and ProvedoringBunkeringPurchase of Services (Waste Disposal,Water)Local CrewPort expenditure by Foreign Crew

Income TaxCustoms DutiesDeparture taxes


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396 CRUISE TOURISM

expenditure in a stopover port (for instance, in a small island state orsome coastal resort city).Passenger expenditure includes that incurred as part of the cruise(port visit expenditure) and also the payment for it. Thus it includesair fares to/from the base country-some of which, though not all,will be paid to airlines owned by the country. There is also travelwithin the country. Some add-on expenditure, such as hotel accom-modation in port before the cruise begins is essential for the cruise.However, passengers may choose to combine their cruise with othertourism activities in the country. In a sense, this expenditure can beregarded as being generated by the cruise, and it is unlikely to havebeen made, at least to the same extent, if the cruise had not takenplace. Visitors also make direct expenditures, on excursions, attrac-tions, and shopping, while on the cruise.Operators make a range of payments. They pay charges associatedwith the use of a port, including those, which are levied by governmentto cover the cost of navigational services, those levied by the portauthority, as for the terminal used, as those for towage and stev-edoring, paid to private operators for services provided. The operatorwill purchase goods and services to provision the vessel, includingstores and provedoring, fuel, and services to enable ship operation,such as waste disposal and electricity. Two forms of payments to crewswill result in expenditure in the base country. The first of these ishiring local resident crew; all of the cost of this will be expenditurein the base country. In addition, the operator will hire foreign crew(only what they spend in port will be expenditure in the base country).Typically, a small proportion of the total crew will be from the basecountry or stopover ports. Apart from these, the operator will makeexpenditures on ship maintenance. It will also have business expensesin the base country, including costs of operating an office and mar-keting expenditure, but excluding any marketing costs elsewhere inthe world. Further, taxes may be levied on cruise operators. Theseinclude income or corporate taxes (but some operators will be exempt,due to the operations of tax agreements and the nature of theircruises). There may be customs duties payable, and departure taxesmay be levied. It should be noted that apart from direct taxes oncruises, there may be indirect taxes, on such items as fuel, and it ispossible that government charges for services would include a taxelement.Much of the literature on the economics of cruise tourism focuseson the direct and overall impacts on economic activity (Mescon andVozikis 1985; Price Waterhouse 1993). Increased spending associatedwith cruises has a direct effect on the economy and this is concentratedin the region where the spending occurs. This spending createsadditional economic activity. The effects on the rest of the economycome about as the industries supplying the cruises directly increasetheir demand for inputs, including produced goods and services, fromthe rest of the economy. There will be a positive effect on demand forthese from the rest of the economy. These effects are often analyzedusing multiplier analysis, and, more rigorously, input-output analysis.This increase in demand has two effects: it may encourage greater


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in activity elsewhere. However, there will be a reduction in activity inother industries which lose these to the expanding industries, andthere will be industries which contract because they lose these directlyto the expanding region. Final, there will be effects on activity due tomacroeconomic effects. An increase in spending by foreign visitorswill lead to an increase in foreign exchange receipts. This leads to anincrease in demand for the home currency, and consequently, anincrease in its price. This effect will be present though it will often bedifficult to detect; only when booms in industries are large relative tothe economys size can impact on exchange rates can be seen. The risein the exchange rate will lead to other export and import competingindustries being less competitive, and thus contracting.With the classification of types of expenditure in Table 1, it ispossible to break this down into whether the expenditure, and conse-quent direct impact and activity, will be at the national or regionallevel (Table 2). Locally-owned airlines will obtain a share of inter-national air fares paid by people joining cruises. Most of this expen-diture will be effectively dispersed throughout the economy (only asmall proportion of it, associated with servicing international flights,will be spent at the regional level), a base port will have flights in andout, and some expenditure will be incurred on supporting these. Theregional share of add-on expenditure will be significant, since there

Table 2 Impacts of Cruise Expenditures on Regional and National ActivitySource Expenditure ImpactPassenger International Air Fares

Internal TravelAdd-on expenditurePort expenditure

Operator Port Expenditure

Provedoring

Crewing

Ship MaintenanceMarketingTaxes

GovernmentchargesPortchargesTowageStevedoringBunkeringStoresServicesLocalResidentCrewCrew portexpenditure

NationalNational: significantregional shareNational: significantRegional shareMainly PortRegionRegionalRegionalRegionalRegionalNational: smallRegional shareRegional andNationalRegionalNational: significantRegional shareRegionalRegionalNational andRegionalNationalNational, Regional


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400 CRUISE TOURISM

will be an unavoidable minimum that must be incurred in associationwith the cruise (local transport, accommodation before/after thecruise). This proportion will depend on how much add-on expenditurethe cruise generates. If it is significant, the proportion is likely tobe low, as tourists take the opportunity to visit other regions. Portexpenditure will mainly impact in the region.With payments from operators, some government charges will bepaid directly to the provincial/state/national governments. However,they could have a significant regional component. To the extent thatthe charges are for navigational facilities, and these are in the region,expenditure will come back to the region. Port charges, towage, andstevedoring will be mainly for services that are supplied regionallyand thus the expenditure will be incurred internally. With bunkering,most of the expense will be for fuel and taxes. While some fuel maybe produced within a region, most of it will not; and even if local firmswere paid for fuel, they will pass on most of their receipts to othersoutside. However, there will be a small local component due to theservices in actually supplying the fuel. Where the vessel is providedwith stores, etc., there will be both local and national expenditure.Services purchased (e.g., waste disposal, electricity) are likely to comemainly from the region.

Expenditure associated with the employment of local resident crewis likely to be national, though there may be a bias towards the region.People who obtain employment on cruise vessels are likely to live inhome ports and spend their incomes there. Expenditure by foreigncrew is likely to be mainly on goods and services produced in theregion of the port. Ship maintenance is likely to be regional, andmarketing/business expenses are likely to have regional and nationalcomponents. Further, taxes are likely to mainly go outside the region.Most of the taxes will be collected by the national, and to a lesserextent, provincial/state governments. There may be a flow back ofsome taxes, such as departure taxes which are charged for servicesperformed.

The Benejts and Costs of Increased Foreign ExpenditureThe benefits an economy gains from an increase in spending arerelated to, though not the same as, this expenditure. For a country togain a benefit, it is necessary that there be a difference between the

gains from that expenditure (primarily in the form of revenues) andthe cost of providing for it. In an economy which was perfectly com-petitive, in the textbook sense, and if there are no externalities ortaxes, the costs of providing for the expenditure on cruise tourismwould equal the expenditure. The only source of net benefits wouldbe when the increased expenditure raised the price of resources ininelastic supply-what is described as the terms of trade effect(Clarke and Ng 1993).It is useful to distinguish the direct from the indirect benefits andcosts of a venture (Figure 1). A venture such as a cruise may generateprofits for the operators, along with consumers surplus (or benefits in


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excess of the price paid for them) for consumers. If the cruise industryis fairly competitive, and there is free entry into the market for aparticular country/region, the industry will not be especially profit-able-profits would cover the cost of capital, but no more. In suchcircumstances, there would be no economic profits (i.e., those abovethe level needed to cover capital costs) and profits would not be adirect source of net benefits. If the market were restricted, and profitswere high, they would be a source of net benefit. It is important todetermine to whom the cruise operation profits accrue. If the oper-ation is domestically owned, profits are enjoyed by nationals, and anynet benefits accrue to the host country. Often, however, the cruiseoperators are foreign, in such cases, any profits earned are not netbenefits from the perspective of the host country.

While cruises naturally generate consumer benefits, much of thesebenefits are transferred to operators through the price of the cruise.It is possible that some benefits will remain with consumers, who willvalue the cruise they take at more than they pay for it. This may beespecially true for cruises which essentially offer new products (forexample, cruises to new areas). These are cruises for which there arefew close substitutes. If it is foreign tourists who are taking the cruises,any consumers surplus benefits will accrue to them, not the hostcountry. If the latter does not operate the cruise, and passengers areforeign, it will not obtain much, if any, of the direct benefits atcosts. There may be considerable expenditure on the cruise and theeconomic impacts could be significant. Whether or not this translatesinto the host enjoying net benefits or costs depends on the indirecteffects.

There are a variety of market failures that may be present, to agreater or lesser degree, in real economies (Perkins 1994; Pindyckand Rubinfeld 1995). In the exercise of determining what benefitsadditional spending brings, it is a matter of determining how sig-nificant these various market failures might be, and also of deter-mining under what conditions additional inputs and products aresupplied (for example, whether additional spending leads to higherprices). Since net benefits are related to the importance of thesemarkets failures, in a relatively well functioning economy such asthose of Western Europe, North America, and Australasia, benefitswill be small as compared to the overall expenditure impacts.However, this need not be so for developing nations (Little andMirrlees 1974). There are several distortions that could be present inan economy which would result in the resource costs of providing fortourists being unequal to their expenditure (Dwyer and Forsyth 1993).Thus, additional expenditure associated with tourism could bring netbenefits or costs to the economy. It is a matter ofjudgment which ofmany possible distortions are relevant to a particular context. Table3 summarizes the main types of benefits and costs considered relevantto the case of cruises.

Any study of net benefits could be done from the perspective of anation or a region. Clearly, the results could be different for thedifferent jurisdictions. For example, a region with unemploymentmight gain employment benefits, along with local taxes, and the net


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Table 3 Cruise Expenditures and BenefitsType of Benefit Dependent Upon Comment National/Regional1 Foreignexchange2. Profit andtaxes

3 Employment

4. Externalities

5 Terms of trade

6. ScaleEconomies

Net expenditure

International AirTravel

Add on ExpenditurePort Expenditure(passenger/crew)State chargesPort chargesTowageStevedoringBunkeringHome country crewTaxesLocal employmenteffectsNational employmenteffectsInternational/InternalAir TravelAdd-on expenditurePort expenditure(passenger/crew)Ship visitsAdd-on expenditurePort expenditure(passenger/crew)Port charges

Net impact relevant(i.e., less importleakages)

Some profit ableroutes serviced byhome country-ownedairlinesSlight local monopolySlight local monopolyRelationship to cost?Relationship to cost?Profits possibleProfits possibleIndirect taxesIncome taxNet tax?

Net impact relevantNoise costEnvironmental costsEnvironmental costsPossible negativeExternalitiesSmall effectsSmall effects

Expenditure in regions Negative andpositive:includes port, roadCongestion

National

Regional andNational(taxes)

Regional,National

Regional,National

Regional

MainlyRegional,someNational

benefits from a cruise operation may be positive at this level. Fromthe national perspective, there could be costs (e.g., port infrastructuremight be subsidized). Thus, it is possible that the net benefit from thenational perspective could be negative. In Table 3, the third columnidentifies whether benefits or costs are likely to be accrued at theregional or national level.Six possible sources of indirect benefits or costs may be identified.


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First, additional spending by foreign tourists and by foreign cruiselinesleads to an increase in net foreign exchange earnings by the country(i.e., total cruise generated expenditure less direct leakages intoimports). This may or may not give rise to a benefit for host countries.If the current market exchange rate does not reflect any distortions,then there will be no particular benefit if a country earns more foreignexchange. However, it is possible that some distortions are present,and the nominal or market value of foreign exchange understates itsfull value to the country (Perkins 1994). Such distortions would includetariffs, which tend to push up the value of the home currency (andthus undervalue foreign exchange). For individual countries, whichare quite open to trade, the shadow foreign exchange rate will beclose to the market rate, and there will be small, though positive,benefits from additional foreign exchange earnings. Jenkins and Kuo(1985) estimated that the shadow rate was around 1.06 times themarket rate for Canada. For developing countries, which may havesignificant trade distortions and exchange controls, the differencebetween shadow and market rates would be more substantial, andadditional foreign exchange may provide significant benefits.

A second category of benefits comprises those associated with thegeneration of profits and taxes. The suppliers of the cruise operation,and other firms individually affected, could be making profits on theirsales. As with direct benefits profits means economic or super-normal income and above the normal return on capital. Competitiveindustries, unless restricted by regulations, would not give rise to suchprofits. Many of the goods and services purchased by cruise passengersand operators would be sold under fairly competitive conditions (thismay not be the case for fuel and port services), and thus supernormalprofits are not likely to be present (if present, not likely to be high).

International air travel is associated with cruising, and it is a regu-lated industry, and some routes such as those from Japan (I.C.A.O.,various years), are of higher yield. On others, losses may be incurred;presumably these are not intended to be permanent. To the extentthat home country carriers earn above normal profits on internationalair transport associated with cruises, there will be a benefit. In mostcountries, current internal travel is moderately open to competitionand does not generate supernormal-profits. Nor is it usually subjectedto high taxation.

Expenditure by passengers, both in ports and on add-ons, as well ascrew expenditure, may generate some above normal profits in someareas of the economy. These could come about through spending onmonopoly owned attractions. However, this is unlikely to be a largesource of benefit. Government charges for navigation services, andport charges, may include a profit/tax element. It would be a matterof estimating the actual (marginal) cost of providing navigation/portservices to the cruiseship and comparing this to the charges levied.Towage and stevedoring are concentrated industries in some coun-tries, and some above normal profits could be earned. Likewise, bunk-ering will increase tax receipts and the economy gains if prices areabove costs. For example, Australia taxes fuel used on domestic,though not international, cruises. Employment of local crew generates


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additional income tax payments, (to the extent that such crew wouldnot be employed otherwise).Furthermore, there are several taxes that may be levied on thecruise operator. Some of these, to an extent, may reflect servicesrendered, but many are pure taxes. Prices to foreign tourists andcruise operators could be higher than costs because of the presenceof taxes and profits. If tourists buy a taxed good, they may pay 20 forit, but it may cost the country only 15 to supply it; the rest may goas tax to the government. The important question is to what extentthere is a net increase in taxation. Additional foreign spending willlead to pressure on the exchange rate to rise, and thus a reduction inforeign spending on other goods and services (commodities, manu-factured goods). If these too are taxed, there will be a correspondingloss to the economy. Thus, there will be a net benefit if the taxes onthe goods and services that cruise tourists buy are greater than thoseon other export products. This is a possibility for some countries,including industrial ones. Most do not tax exports of manufacturedgoods, minerals and agricultural outputs. However, many do haveconsumer taxes, such as value added or goods and services taxes, andinternational tourists tend to purchase goods and services subject totax.

In short, tourism exports could be more heavily taxed than exportsof other goods and services. To this extent, if a country exports moretourism services, there will be a net increase in tax receipts. It wouldbe possible to make estimates of the net effect on taxes through useof CGE models, such as that used by Adams and Parmenter (1992).Benefits from this source can be both regional and national. Profitsfrom direct expenditure will accrue partly to the region, to the extentthat firms supplying the services are locally owned. Taxes may belevied at the local level. However, at least some taxes, such as fueltaxes, will be levied at the national level, and benefits will not stay inthe region. To the extent that increased local activity takes place atthe expense of non-local, local profits and taxes may rise at the expenseof profits and taxes elsewhere.As the third indirect benefit and cost, additional expenditure fromcruise tourism can result in unemployed resources, primarily labor,finding employment. The benefits that occur depend on how localand national labor markets work. Where an expansion of activity isachieved (partly) through resources which have hitherto been unem-ployed, there may be a benefit (Harberger 1972). For example, ifincreased spending leads to more jobs in a region, and some of theseare filled by people who have been unemployed, there is likely to be abenefit (Forsyth and Dwyer 1994; Norris, Stromback and Dockery1994). The benefits from increased employment depend on the dif-ference between the overall price paid for labor, and the price atwhich people are prepared to offer their services. Some of thesebenefits will be enjoyed by governments which receive greater incomeand payroll taxes. In addition, governments may gain throughreductions in social security benefits paid.The effects on employment are both regional and national. Regionalbenefits will be greater if additional employment leads to reduced


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DWYER AND FORSYTH 4 5

local unemployment than if it simply encourages migration into thearea. The impact on employment overall may be small, in a boomeconomy, or large, in a depressed economy. It is the net impact whichis relevant. While some impacts lead to increased employment, others,such as the crowding out of other industries, lead to reduced employ-ment. It is not easy to obtain measures of the net employment impact,however.

Expenditure is the fourth source (Perkins 1994). The external ben-efits or costs generated depend on the activity that is generated bythe expenditure. International and internal aviation associated withcruises have noise costs and air pollution externalities. When pass-engers (mainly) and crew undertake excursions and purchase accom-modation, there can be environmental externalities present by way oftraffic congestion or overcrowding of port entertainment facilities(Peisley 1992: 102). Th e ships themselves generate externalities,especially on the marine environment. The most obvious effect onexternalities is that directly associated with local activity (Waters1996). For example, cruise passengers and ships may have an environ-mental impact on a natural attraction if they visit it. As with otherforms of tourism, cruise tourism will create some environmental costs,though it may also lead to environmental benefits such as improvedenvironmental standards in shipping and waste management).There will be indirect environmental costs and benefits as a resultof cruise expenditure. Increased spending will lead to greater demandfor food; and agricultural development in the economy will haveenvironmental effects. However, there will also be negative impactson activity elsewhere, to the extent that cruise tourism as an exportindustry crowds out other industries. Reduced agriculture and miningexports will mean less externalities associated with production ofthese goods (Dwyer and Forsyth 1993). If the economy is close toeffective full employment (i.e., as in a boom), the negative indirecteffects on activity will tend to dominate. Thus, even though additionalcruise tourism may lead to direct environmental costs, which are quiteobvious, it will also lead to reduced environmental costs elsewhere.

Terms of trade effects is the fifth indirect benefit and cost. Whenthere is an increase in demand for goods and services which are in (atleast partly) limited supply, the prices of these will be bid up. If someof these are being exported, then export prices, on average, will rise.In short, the countrys terms of trade may improve, and greater profitsare earned on sales. This effect can apply to tourism (Clarke and Ng1993; Dwyer and Forsyth 1993). Suppose accommodation at premiumlocations, frequented by foreign tourists, is in limited supply.Additional tourist expenditures will push up prices mainly paid byother foreign tourists, and the country as a whole will gain. The effectcould happen, in a limited way, as a result of increased spending bycruise passengers and operators. It is unlikely to be a major source ofbenefit, but it would be undoubtedly positive. Terms of trade effectsare likely to be proportionally greatest, if they are present, at the levelof the local economy. For example, additional spending in a particularport/resort city may lead to accommodation prices rising if availablegood land for hotels is limited. Thus, benefits from this source are


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likely to be mainly enjoyed at the regional level. Only some forms ofexpenditure can give rise to this type of benefit. This is expenditureon goods and services for which supply is in (partly) inelastic. Mosttourism services are supplied fairly elastically-even large increasesin expenditure are unlikely to have a significant impact on price. Thiseffect, overall, is likely to be distinctly small, though positive.The final source of benefits is through the reaping of greater econ-omies of scale. When there is additional cruise tourism, the nature ofthe supplying industry could change. It becomes worthwhile supplyinggoods and services with more variety, and greater convenience. Moreshops and excursions become available, and transport schedulesbecome more frequent and are more convenient. Local shoppers maygain additional variety as a result of tourism. The benefits will beenjoyed both by producers and consumers, and it is likely that theywill be widely spread. Both domestic and foreign tourists will gainfrom having a greater range of domestic cruise ports. Having a greatervariety of ports will make a country a more attractive cruise desti-nation, and this will result in more visitors, and thus greater benefits.The benefits from this source are likely to be spread widely, and willonly affect the regions directly to a limited extent.

An Australian Case StudyThe framework outlined here is conceptual in nature, but it iscapable of being applied empirically. The ease of application dependson the data available, and to implement fully, the framework is quitedemanding of data. However, it is feasible to obtain some usefulestimates even if data are limited. In general, it is easier to obtainestimates of the overall expenditure impact than regionally dis-aggregated expenditures, and it is easier to obtain estimates of expen-

ditures than of net benefits.In Australias small cruise industry, nearly all vessels are foreignowned. Some cruises are coastal, visiting only Australian ports, whileothers are based in Australian ports but visit other countries (specifi-cally, South Pacific States). Most cruise passengers are foreign tour-ists. Thus most direct producer benefits (profit), and consumerbenefits, are accrued outside the host country. Foreign tourists fly tothe home port, take a cruise, and sometimes add on a shore basedstay to their trip, and fly home. The Australian government hasdeveloped a strategy towards the cruise industry, and as part of thatstrategy, undertook surveys of expenditure by cruise operators and bypassengers and crew (Ramis 1995). It is possible to make estimatesof the expenditure impacts of cruises as reported by Dwyer and Forsyth(1996). Some summary results are reported here.Overall Impact. A fairly typical six day cruise by a 900 passengervessel was considered. Domestic/coastal and international cruiseswere analyzed. The expenditure by passengers and crew, at the homeand stopover ports, was estimated to total 6 17,000 (all in Australian

dollars in this paper) for the coastal cruise and 172,000 for the


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international cruise. The cruise operator was estimated to spend239,000 (coastal cruise) and 195,000 (international cruise) in theAustralian economy, for port charges, stevedoring, fuel, taxes, etc.

The overall expenditure for the coastal cruise was 756,000, aroundfour fifths of which was accounted for by passenger and crew expen-diture. The overall expenditure for the international cruise was

367,000. The average expenditure per passenger was 825 for thedomestic cruise and 40 1 for the international cruise.

The overall average expenditure per day by foreign tourists inAustralia is 95 (Bureau of Tourism Research 1995). The averageexpenditure by visitors taking coastal cruises was rather more thanthis. However, it must be borne in mind that passengers who takecruises are likely to be higher spending visitors than average, and ifthey had taken share based trips, would have probably spent morethan 95 per day. Thus, the expenditure impacts from coastal cruisepassengers and shore based tourists are probably of a comparableorder of magnitude. Both have a greater impact than tourists whotake international cruises. Little information is available on the extentto which international visitors who take Australian based cruises staylonger in the country, taking other shore based trips. Undoubtedlysome would do so, adding to the overall expenditure resulting fromthe visit.

Regional Impacts. It is possible to make estimates of the regionalimpacts of this expenditure. Most of the expenditure from cruises isincurred in the home and stopover port cities. Some expenditure isnational in nature. For example, a coastal cruise in Australia is esti-mated to pay about 41,000 in taxation, mainly to the national govern-ment. Other forms of expenditure may, or may not, have much of animpact on the regional economy. For example, expenditure on fuel( 51,000) would have little impact on local economies where fuel isshipped to small ports, but would have a significant impact in largercities where fuel is provided from local refineries. It is possible toidentify separate expenditure impacts on home and stopover ports.Most of the operator expenditure is incurred in the home or baseport. The main expenditure impact in stopover ports is from passengerand crew spending.

Estimati ng N et Benejt s. The net benefits (expenditures less costs ofproviding goods and services) to a country are usually much less thanthe expenditures; this is especially true of industrial countries suchas Australia. Dwyer and Forsyth (1993) make tentative estimates ofthe net benefits from an additional dollar of tourist expenditure inAustralia (around 5% of total gross expenditure). This estimate is fortourism expenditure in general. For cruise expenditure it is likely tobe similar, though not necessarily identical. For instance, a highproportion of total expenditure, for the coastal cruise, is accountedfor by tax.

Foreign Exchange Benejits. Much of the expenditure in Australiafrom the cruise would be receipts of foreign exchange, since most


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4 8 CRUISE TOURISM

passengers are visitors. Taking the Canadian estimate of the shadowprice of foreign exchange of 1.06 as a starting point, it can be arguedthat the current Australian shadow price would be closer to 1.0,since there have been significant reductions in protection and otherdistortions recently and protection in Australia now is lower than inCanada in the early, 80s. If 90% of expenditure were in the form offoreign exchange, and the shadow exchange rate were 1.05, the netbenefit from 6 17,000 ( coastal cruise) would be 27,800 and from theforeign cruise would be 7,800.Pr ofi ts and Taxes. Most cruise operations are foreign owned, and

profits accrue to the owners. Other businesses, owned by locals, willbe affected, but these will normally be quite competitive, and profitswill just cover the cost of capital. There can be significant tax results,however. If it is assumed that port charges do not include a taxelement (i.e., they reflect costs), there are still fuel taxes paid. Forthe coastal cruise, these account for 41,000 of the 239,000 expen-diture by the operator. This can be counted as a net benefit to thehome country. International cruises do not pay this tax. In additionto this, expenditure by passengers will include some expenditure ongoods and services subject to tax. As consumption tax levels in Aus-tralia are very low by international standards, this will give rise tosmall, though positive, net benefits.

Em ployment Ef lects. There are likely to be some positive net benefitsfrom employment effects, though it is difficult to measure them.Currently, unemployment in Australia is high, and a reduction of itgenerates positive benefits. While the impact effects of additionalcruise expenditure on jobs will be positive, other effects (such aspushing up the exchange rate) will be negative, though the overallnet effect is unlikely to be negative. Overall, this could be a significant,though very uncertain, source of benefits.Externali t ies. This item can be positive or negative; the balance ofeffects depends very much on the case in point. It is not feasible tomake general statements about external costs and benefits, exceptto say that cruises in Australia, with the exception of those to theenvironmentally sensitive Great Barrier Reef, have not caused muchcontroversy on environmental grounds.Terms of T r ade. This effect is unlikely to be large for cruise tourism.Most expenditure is on goods and services in elastic supply. Cruiserelated expenditure will not have any perceptible effect in terms ofbidding up the price.Scale Economies. The size of the cruise industry in Australia is notsuch as to have major effects in terms of reaping scale economies. Adoubling of its size, for example, could have a positive effect onsome small ports currently on the margin of determining whetherinvestment in cruise related facilities are worthwhile. In essence,

there could be small, though positive effects.


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In summary, the source of net benefits which could prove the mostsignificant-i.e., employment effects-is also the most contentious.Apart from this, the main sources of net benefits would be the foreignexchange effect and the tax effects. For coastal cruises, these wereestimated at 68,800 out of 6 17,000 and for the international cruise,7,800 out of 182,000. If anything, the tax effects are underestimated,and the foreign exchange effects are overestimated.

Policy ImplicationsThe framework of analysis has several features of positive interestto researchers and policymakers. Some of these are discussed here.Identijcation ofRelevant Expenditure and Leakages This analysis helpsto identify the type of expenditure which cruise tourism is likely togenerate and the types of leakage associated with that expenditure.The breakdown of direct passenger and operator expenditure as inTable 1 is an essential first step in determining net injected expen-

diture (that is, net of expenditure on imported goods and services). Itis not nationality of ownershipperse which is important in determiningthe size of leakages but the sources of inputs used to satisfy thedemands of cruise passengers and operators (Dwyer and Forsyth1994a, b). Estimation of the import content of cruise passenger andoperator expenditure will, of course, depend on the size of the regionunder study. What is a leakage from a port area perspective may notbe a leakage from a national perspective. The framework of analysisallows such distinctions to be made.Impacts and Net BeneJits The distinction between impacts on activityand benefits is an important one for policy purposes. Both will be ofinterest. A local port may be interested to know what the overallimpact on economic activity in its region will be. For example,additional cruise visits may generate additional activity worth 50million in the region, and an additional 100 jobs. This will be importantinformation for infrastructure planning and for gearing up to meetthe needs of the passengers. However, these will not be a good measureof the net benefits that the region gains. Additional activity will have

its costs, and the costs of producing the additional goods and servicesrequired will be significant. The net benefits might be of the order of2.5 million, or less (or, 5% of total injected expenditure). If the localarea is determining how much to spend to attract cruise visits, or howmuch to spend on facilities to cater for them (for instance, on buildinga passenger terminal), it will need to know the net benefits. Likewise,the nation as a whole will need to know what the net benefits are inimplementing its cruise shipping strategy. It would not be worthpromoting in a market that might require 10 million of promotionto generate 50 million of additional expenditure but only 2.5 millionof additional benefits.


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410 CRUISE TOURISM

Identijication of Sources of Economic BeneJits and Costs The frameworkidentifies the sources of economic benefits and costs from increasedforeign expenditure on cruise tourism, including foreign exchangebenefits, taxes and profits, employment generation, externalities,terms of trade effect, and scale economy effects. The net benefitscreated by additional cruise tourism are dependent on a number offactors: overall spending and activity, the breakdown of direct andindirect impacts, tax rates, and the way labor markets work. All ofthis means that caution needs to be exercised in making generalstatements. Additional expenditure will tend to mean additional ben-efits, and under certain circumstances, a doubling of expenditure willlead to an approximate doubling of benefits. This would be so ifpatternsof expenditure remained the same (on the same goods and services,in the same places), but, if the pattern changed significantly, thisneed not be true. Benefits could be disproportionately larger (e.g., ifadditional expenditure was in areas of high employment) or less thanproportionally larger. This reinforces the importance of distinguishingbetween impacts and net benefits of cruise tourism.

Regional and National Impacts of Cruise Tourism The frameworkallows the regional and national impacts and benefits of cruise tourismto be separated out. This can be of particular importance to provincialor regional governments. The theoretical framework of analysis isapplicable to any economy and regions within economies. Impacts oneconomic activity will tend to be concentrated in those regions inwhich the spending occurs, but will spread to the rest of the economy.Increased spending has a direct and indirect effect on activity withinthe region. Regional benefits can be quite substantial, especiallywherea region is depressed. For example, where additional expenditurefrom cruises leads to a positive impact on employment in the region,this may not be offset by reductions elsewhere in the economy.The regional/national pattern of costs and benefits is more complex.It is partly determined by where activity is stimulated. However, it alsodepends on the nature of the market failures present. For example,additional spending may give rise to externalities, such as environ-mental costs and congestion (undesirable) and also impacts on greatervariety (desirable). These will be relatively obvious at the regionallevel. Changes in economic activity elsewhere will have effects onexternalities, but these would be very difficult to track or measure.They will be none the less real, and it can be misleading to focuson the direct externalities without recognizing that there will beexternalities associated with industries which expand and contract asa result of an increase in cruise spending. In other cases, there maybe benefits which are created at the regional level, but which arespread throughout the economy by other mechanisms. A good exampleof one of these arises with indirect taxation. Something that a cruisepassenger buys may be produced locally, but it may be taxed (such asgambling services) by a central government. The price paid exceedsthe cost of supply, and thus there is a net benefit. However, this benefitis not enjoyed in the local economy; it is rather spread throughout the


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whole economy, to the extent that it results in other taxes beingreduced.

Ef l ects OfAl ter nat i ve Pol i cy M easures. The effects of alternative policymeasures on cruise tourism expenditure, its impacts and potentialnet benefits can also be examined using this framework. Policies caninfluence the benefits from tourism in several ways. While a changein policy, such as the granting of tax concessions, may encourageadditional cruise tourism and have other effects. It can encouragemore domestic tourists to take cruises, and induce foreign, non-cruisetourists, to switch to cruises. In short, a change in cruise tourismmay be associated with other changes: if a policy is directed towardsaffecting cruise tourism expenditures it is necessary to take othereffects into account.

Where more domestic tourists take home based cruises, there willbe an impact on domestic expenditures and foreign exchange. To theextent that domestic tourists substitute from foreign trips, there willbe a net gain or loss in expenditures, dependent on how much suchtourists would have spent. Foreign exchange effects will normally bepositive; the saving in holiday costs will reduce foreign exchangeexpenditures, but the net foreign component of the cruise cost (cruiseprice less amount spent per person in the home country) will be aforeign expenditure. In spite of this latter amount, the net impact islikely to be a net gain in domestic expenditure. When the domestictourist substitutes from domestic expenditure, whether on tourism orother goods and services, there will be a reduction in terms of domesticexpenditure, and an addition to demand for foreign exchange. Whenthere is a change in the number of foreign cruise visitors, there willbe changes in other relevant variables. In particular, there will be adegree of switching from home based, non-cruise holidays. There canbe further effects in the long term. A larger pool of persons who havemade home based cruises will spread the word about them, andpossibly lead to further visits, which in turn will have impacts onactivity and benefits.

Three broad ways in which policy might influence the number offoreign visitors taking cruises may be identified: promotion overseas,price reductions, and quality improvements. These may influencethose other determinants of expenditure and benefits differentially.Overseas promotion may encourage foreign tourists to visit a countryfrom which they then take a cruise. Some of these visitors wouldhave taken non-cruise trips to this country. Thus, the impact onexpenditure and benefits will be less than the net additional receiptsof the cruise visitors would indicate. To the extent that visitors areswitching from other visits to the country, there will be a reduction inspending which must be deducted. If the base countrys component ofa cruise visits expenditure is much less than that of a non-cruise visit,there could even be a net reduction in overall expenditure and in itsconsequent benefits. Promotion of the product overseas is not likelyto have significant impacts on the numbers of domestic touristsswitching to cruises.


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When there is a price reduction, there will be a fall in receipts fromthose foreign tourists who were already taking cruises. If the reductionhas been achieved by subsidies, or tax/price reductions (e.g., con-cessions on fuel taxes or lowered port charges), there will be smallerbenefits gained from those foreign cruise visitors. To these must beadded the benefits and costs associated with those who now choose totake a cruise. There is more spending, and related benefits, as a resultof the domestic component of foreign cruise expenditure (port, add-on, and operator expenditures in the country). There will be a switchby foreign tourists from shore based to cruise holidays. If these arecomparably priced, there will be a net loss of expenditure and benefitsas a result of this, since the local expenditure component of theholiday will be less. There will also be a net reduction in expenditurein the country as a result of domestic tourists switching to cruises.When home tourists are induced to substitute cruises for foreignholidays, there will be positive and negative effects on expenditure. Ifthe costs of the holiday are similar, or if the cruise is cheaper thanthe foreign holiday, there will be a net increase in expenditure in thecountry.To evaluate these effects, it would be necessary to have considerableinformation about relevant elasticities. Formal estimates of these aredifficult to obtain. However, experts in the industry may have a goodfeel for the relevant orders of magnitude. The framework highlightsthe factors to be considered for price reduction policies: they will havea cost; and the net effects on expenditure and benefits will be lessthan the expenditures of the additional cruise passengers wouldsuggest. The net effect on expenditure and benefits could even benegative if there is substantial switching from shore to cruise holidaysby foreign and domestic tourists. If the quality of cruises is improved,there will be more cruise passengers. Governments can improve the,quality through providing better facilities (e.g., terminals for ports),more tourism infrastructure in port cities, and improved navigationfacilities such as channels. These will have a cost. Their effects willbe similar to those of price reductions. It will, however, be evenmore difficult to obtain information on sensitivity of cruise passengernumbers to quality variables than to price.CONCLUSION

The paper develops a framework in which the impacts on, and netbenefits to, the host economy of expenditure on cruises, orientedmainly to foreign visitors, can be analyzed. This framework is thenapplied to the Australian cruising industry. The ways in which it canbe used in policy discussions are highlighted.In analyzing how such cruises affect the economy, it is importantto distinguish between impacts and net benefits. The impacts dependon the overall level of expenditure, whereas net benefits are normallymuch smaller than this amount. This is because there are resourcecosts associated with providing the goods and services bought by thecruise operators and passengers. Typically, these costs and expen-ditures will be of a similar level, though they will not exactly match


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one another; hence there is scope for net benefits (and costs) to theeconomy. Certain goods and services may be taxed, leading to anexcess of expenditure over cost. Some resources may be unemployed,such as labor, and additional cruise expenditure can lessen unem-ployment. Sometimes cruising activity creates external costs, forexample, where it leads to undesirable effects on the environment.The possible sources of divergence between expenditure and cost areexplored, and their likely relevance assessed. The ways, both directand indirect, in which expenditure can impact on the regional econ-omy (for example, around the home port) and national economy, areoutlined. The net benefits and costs are also examined in terms of thelevel (regional, national) at which they accrue.As an example, the framework is applied to the cruise industry inAustralia, for which relatively good data are available. It is a somewhatstraightforward matter to estimate the impacts, regional and national,of cruise expenditure. Measuring benefits is much more complex; aswould be expected in an industrial country with relatively small mar-ket distortions, net benefits as estimated are significantly smaller thanexpenditures. Major sources of net benefit stem from taxes collectedon cruise expenditures, and from foreign exchange effects. Therecould also be a positive benefit from reducing unemployment, butin a complex, integrated, economy this benefit is very difficult toestimate.

The framework, both as a theoretical construct and when it isapplied to actual data, is of value in considering policy towards cruisetourism. Knowledge of regional impacts can be valuable in planninginfrastructure, for example. It is possible to examine the advantagesand disadvantages, from a regional and national viewpoint, of mea-sures designed to encourage cruise tourism, such as reductions infuel taxes levied on operators. When decisions are made to commitresources to promote tourism, it is necessary to compare these to thenet benefits from such tourism, rather than the much larger, overallexpenditure impacts. It is also necessary to take into account anyeffects on domestic based cruise passengers, who may be encouragedto switch to home based cruises if they become more price competitive,or who might be inclined to switch to overseas trips if the local productbecomes too popular and expensive. The issues raised in this papercan now be addressed in further studies of the economic significanceof cruise tourism.

Ackn owl edgment s The issues addressed in this paper arose from the authors con-tribution to the development of a National Cruise Shipping Strategy on behalf of theAustralian Department of Tourism. Permission from the department to publish thismaterial is gratefully acknowledged.

REFERENCESAdams, P., and B. Parmenter1992 The Medium Term Significance of International Tourism to the Australian

Economy. Canberra: Bureau of Tourism Research.


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Bureau of Tourism Research1995 International Visitor Survey 1995. Canberra: Bureau of Tourism Research.Australia.Clarke, H., and Y. K. Ng1993 Tourism, Economic Welfare and Efficient Planning. Annals of TourismResearch 20:6 13-632.Cruise Lines International Association (CLIA)1995 The Cruise Industry: An Overview. Marketing Edition, New York: CruiseLines International Association.Department of Tourism1995 National Cruise Shipping Strategy. Canberra: Commonwealth Departmentof Tourism.Dwyer, L., and P. Forsyth1993 Assessing the Benefits and Costs of Inbound Tourism. Annals of TourismResearch 20~751-768.Dwyer, L., and P. Forsyth1994a Foreign Tourism Investment: Motivation and Impact. Annals of TourismResearch 21:512-537.Dwyer, L., and P. Forsyth1994b Foreign Ownership and Leakages from Tourist Expenditure: A Frameworkfor Analysis. The Australian Journal of Hospitality Management 1: 1-9.Dwyer, L., and P. Forsyth1996 Economic Impacts of Cruise Tourism in Australia. Journal ofTourism Studies7136-43.Forsyth, P., and L. Dwyer1994 Modelling Tourism Jobs: Measuring the Employment Impacts of InboundTourism. Commonwealth Department of Tourism, Occasional Paper No. 2.Harberger, A. C.1972 On Measuring the Social Opportunity Cost of Labour. Project Evaluation,New York: Macmillan.Hobson, J. S. Perry1993 Analysis of the US Cruise Line Industry. Tourism Management 13:453-462.ICAO (International Civil Aviation Organisation) Various years, Survey of Inter-national Air Transport Fares and Rates. Montreal: ICAO.Jenkins, G. P., and C. Y. Kuo1985 On Measuring the Social Opportunity Cost of Foreign Exchange. CanadianJournal of Economics 18:400-4 15.

Little, I. M. D., and J. A. Mirrlees 1974, Project Appraisal and Planning for DevelopingCountries. London: Heinemann Educational Books.Mescon, T., and G. Vosikis1985 The Economic Impact of Tourism at the Port of Miami: Annals of TourismResearch 12:5 15-528.Neary, J. P., and S. Wijnbergen, eds1986 Natural Resources and the Macroeconomy. Oxford: Centre for EconomicPolicy Research/Blackwells.Norris, K., T. Stromback and M. Dockery1994 How Tourism Labour Markets Work. Renort bv the Western AustralianLabour Market Research Centre to the Depaitment of Tourism. Paper No. 1.Canberra: Commonwealth Department of Tourism Research.Peislev. T.1992 The World Cruise Ship Industry in the 1990s. Special Report No. 2104,London: Economist Intelligence Unit.1995 The Cruise Ship Industry to the Plst Century. Economist Intelligence UnitTravel and Tourism Analyst 2:4-25.Perkins, F.1994 Practical Cost Benefit Analvsis Basic Concents and Aoulications. Melbourne:Macmillan Education.Pindvck. R. S.. and D. L. Rubinfeld

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Submitted 15 May 1996Resubmitted 13 January 1997Resubmitted 20 May 1997Accepted 12 August 1997Refereed anonymouslyCoordinating Editor: Abraham Pizam

Economic Significance of Cruise Tourism

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