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1 Elsevier Editorial System(tm) for Annals of Tourism Research Manuscript Draft Manuscript Number: Title: Is Australian Tourism Suffering Dutch Disease? Article Type: Full Length Article ( words) Keywords: Dutch Disease; Australia; destination management; tourism exports and imports; exchange rates; resource movements Corresponding Author: Professor Peter Forsyth, Corresponding Author's Institution: First Author: Peter Forsyth Order of Authors: Peter Forsyth; Peter J Forsyth, B Ec, M Ec (Syd), D Phil (Oxon); Larry M Dwyer, B Com (UNSW), Ph D (Western Ontario) Abstract: As a result of Australia's boom in exports of minerals to China and other emerging Asian economies, its currency has risen substantially against other leading currencies. The higher exchange rate has posed significant problems for traditional export and import competing industries, one of which is tourism. This is a typical Dutch Disease effect. The discussion highlights how recent changes in Australian inbound, outbound and domestic tourism can be explained in terms of the theory of the Dutch Disease.. Four different policy responses are then discussed. These involve the attempt to: enhance Australia's destination price competitiveness; promote inbound tourism; promote domestic tourism; improve product offerings to make destination Australia more attractive.

2 Cover Letter (with Author details and affiliations) Is Australian Tourism Suffering Dutch Disease? Peter Forsyth (corresponding author) Department of Economics Monash University, Clayton, 00 Victoria, Australia Tel: + 0 Larry Dwyer School of Marketing, Australian School of Business University of New South Wales, NSW, Australia <l.dwyer@unsw.edu.au> Tel: + ; Fax: + Ray Spurr School of Marketing, Australian School of Business University of New South Wales, NSW, Australia <r,spurr@unsw.edu.au> Tel: + ; Fax: +

3 Author Bio Peter Forsyth has been Professor of Economics at Monash University since. His research has been on applied microeconomics, with particular reference to the economics of air transport, and tourism economic. He has recently published a jointly edited book on Airport Competition the European Experience, Ashgate. Recent work has involved using computable general equilibrium models to assess the economic impacts of tourism, including events, and in analysing tourism and aviation policy issues. Much of his work is with Larry Dwyer and Ray Spurr.

4 *Title Page Is Australian Tourism Suffering Dutch Disease? Peter Forsyth, Monash University, Australia Larry Dwyer, University of New South Wales, Australia Ray Spurr, University of New South Wales, Australia

5 *Highlights (for review) Research Highlights Dutch Disease is analysed in a novel context with tourism as the declining sector Changes in Australian inbound, outbound and domestic tourism explained in terms of Dutch Disease The discussion highlights the challenges presented to destination managers. The findings are relevant to any destination which has a booming (non tourism) export sector.

6 *Manuscript (without author details, affiliations, or acknowledgements) Click here to view linked References 0 Is Australian Tourism Suffering Dutch Disease? INTRODUCTION Australia is currently experiencing a boom in its mining industry with huge demand for its minerals to fuel growth of industry in China and other emerging Asian economies. China s real GDP has increased six-fold since 0, and its economic development effort has required ever-larger amounts of raw materials for investment in infrastructure and export production. This boom has come about quite quickly, and it has been substantial (Gregory ; Gregory and Sheehan, ). Demand for coal and iron ore has grown, and a third commodity, gas, is likely to grow sharply over the next decade. Shipments from Australia of coal and iron ore have risen, but the notable feature of this boom has been that prices have risen very rapidly. A major economic outcome has been a strengthening of the Australian dollar. While high commodity prices, high interest rates, and increased financial inflows have played a role in strengthening the Australian dollar, the major influence has been the resources boom. Australia's strong Asian ties and Asia's demand for resources all have helped sustain the rise of the Australian dollar against other leading currencies, which in mid reached historic highs (TRA b). While minerals exports have increased, the mining boom has lead to a contraction in other tradable goods and services- the Dutch Disease effect. Dutch Disease is a term coined in the late 0s after economists identified a link between the discovery of large deposits of natural gas in the Netherlands and the decline of its manufacturing sector. The theory postulates that, due to a resources boom, the domestic currency appreciates due to increased

7 0 export sales but this adversely affects other, non-resource exporters, making them less competitive. Additionally, a resources boom attracts scarce inputs to production such as labour and capital away from other sectors creating an additional impact. There are several dimensions to this concept (Gregory ; Corden and Neary, ). An export boom (eg. natural gas, oil) leads to a rise in real incomes in a country, which give rise to spending effects- thus residents of the country, are able to spend more. The boom leads to increases in exports of the booming commodity, but reduced demand for other exports, and additional imports of goods and services that compete with domestically produced items. Resources are shifted away from the production of the non-booming ( lagging ) exports, and into the production of the booming sector s exports, and non-tradable goods and services. Thus, while the mining exports of Australia continue to grow, other sections of the economy have declined. These include agriculture, international education and manufacturing (Corden, ). One export and import competing sector particularly affected by Australia s mining boom is its tourism industry. Tourism, as a tradable service, is affected by the rise in the exchange rate, and the various spending effects resulting from the boom. The question arises as to the extent to which the tourism industry is affected by the mining boom. There has been some discussion of Dutch Disease in the tourism literature, but with one exception that we know of (Tourism Research Australia a, b), it has been in the context of tourism as the booming sector not as a sector affected by the boom. Since tourism turns non-tradable goods and services into exportable goods and services, the symptoms of Dutch disease can also result from a demand shock of inbound tourism booms as opposed to the traditional Dutch disease supply shocks, such as discoveries in natural resources. Copeland () in an earlier theoretical paper, argued that a tourist boom tends to raise the demand for and hence the

8 0 prices of nontraded goods (i.e. improvements of the so-called secondary terms of trade), expanding their production at the expense of the traded sectors and, in particular, the manufacturing sector. This argument suggests that a tourist boom can lead to deindustrialization, consistent with Dutch Disease. The welfare implications for tourism have since been examined by Chao, Hazari, Laffargue, Sgro and Yu (0), Nowak and Sahli (0), Capó, Font and Nadal, (0), and Holzner (). These studies support Copeland s view that the main channel through which an increase in domestic or international tourism may alter national welfare is a change in the real exchange rate (or terms of trade) of the host economy. Consistent with this research, computable general equilibrium (CGE) modelling has also shown that an increase in the demand for Australian tourism impacts adversely on other sectors of the Australian economy, traditional exports and import competing industries in particular, but can generate an increase in welfare depending on the size of the terms of trade effect (Adams and Parmenter ; Dwyer, Forsyth, Spurr, and Ho 0). While the above studies have focused on the effects of an expanding tourism industry on other economic sectors, the question arises as to the reverse situation, that is, where another export sector is booming and having effects on tourism. This issue, where tourism is a lagging rather than booming sector has important analytical and policy implications for destination management. This paper has several aims. First, the Australia s Dutch Disease situation is outlined briefly. The way in which tourism is affected by the Dutch Disease is then discussed- the theoretical discussion is matched up with the empirical experience. The paper then shows how recent changes in Australian inbound, outbound and domestic tourism can be explained in terms of the theory of the Dutch Disease. This sets the scene for a discussion of how destination managers should respond to the impacts on tourism of a boom in another export sector. Four different policy responses are then discussed. These involve the

9 0 attempt to: enhance Australia s destination price competitiveness; promote inbound tourism; promote domestic tourism; improve product offerings to make destination Australia more attractive. The policy discussion highlights the advantages of the different approaches and the challenges that each poses to destination managers. The issues addressed are relevant to any tourism destination where tourism is a lagging (non-booming) export sector. AUSTRALIA S DUTCH DISEASE Australia s current mining boom took hold from mid 0. Figure shows that mineral resource exports returns in original terms have increased strongly (up % to $ billion in, compared to 0 0) relative to other exports in goods and services (including tourism). During this period, the values of mineral exports from Australia have grown rapidly. INSERT FIGURE HERE From mid 0, Australia has been experiencing rapid growth in its terms of trade, and a strong increase in its exchange rate. Both these changes seem to have paused over the last year or so, but they have settled at high levels (Gregory and Sheehan, ). In recent years the higher exchange rate has posed significant problems for traditional exports and import competing industries, one of which is tourism. Thus, Australia is experiencing a typical Dutch Disease situation (Corden, ). As with other cases of the Dutch Disease, such as Australia s boom in the 0s (Gregory, ; Gregory and Sheehan, ) and the British and Norwegian North Sea Oil booms (Forsyth and Kay, 0), this creates an issue of adjustment in the foreign account. While many industry sectors gain, traditional export

10 0 industries lose markets, and are forced to contract. The mining boom leads to an increase in imports of traded goods and services such as outbound tourism, and a decrease in nonmineral exports, such as primary commodities and inbound tourism. Most areas of manufacturing find it difficult to survive, and tradable service industries, such as tourism, are negatively affected overall. The mining boom has seen returns for mining and related industries increase more strongly than for other industries. As an indicator, Gross Value Added (GVA) in the mining industry has increased from $. billion in 0 0 to $. billion in ; an average annual increase of.%. As shown in Figure, while GVA for all industries increased by.% per annum over this period, GVA for tourism increased by only.% per annum over the same period. Between 0-0 and -, the contribution of tourism (direct) to GVA has declined at the national level and in each state and territory (Tourism Research Australia b). INSERT FIGURE HERE There was also a strong growth in the demand for labour in mining and related industries during this period (%), which was much higher than the % growth in employment across all industry sectors over the same period, with tourism employment growing at a slower.% (Tourism Research Australia b). Underlying these statistics is the fact that Australia is experiencing both a spending effect, and a resource movement effect, typically associated with Dutch disease, each of which is affecting its tourism industry.

11 0 The spending effect comes from the higher profitability of the booming sector and related industries. This sector pays higher wages to its workers, higher capital payments to capital owners, and higher tax revenue to the government. The rise in real incomes effectively raises the demand from households and government for all goods and services in the economy, including non-tradeables. Over the last five to ten years, Australia s GDP has not grown remarkably, but its real gross income (GNI) has, reflecting the additional rents earned from the mining sector (Australian Bureau of Statistics (). While some of these rents are payable overseas to owners of capital, Australia still gains a large increase in its income. The increased profitability of the booming sector increases demand for the services sector (nontradeable sector), and its prices increase as a result. However, the tradeable sectors are subject to world prices, which are not influenced by changes in domestic supply, so their tradeable goods remain at world prices. Effectively, the relativity of prices of non-tradeable to tradeable goods has increased, and this increase in relative prices reflects a real appreciation in the exchange rate. Australians are spending their increased income on tradable products such as TVs, computers and overseas tourism as well as non-tradable products such as home renovations, restaurant meals and haircuts (Australian Bureau of Statistics b). At the same time, there is a large resource movement effect taking place. This effect comes through in various stages. Due to its higher profitability, the booming sector is able to pay higher wages to attract labour from the other sectors, including the non-tradeable sectors. The movement of labour out of any non-tradeable sector reduces the output level of that sector. As a result, this creates excess demand for non-tradeable goods. Consequently, the price of non-tradeable goods will rise to restore the equilibrium in the non-tradeable sector, which again leads to a real appreciation. Real appreciation reflects a stronger domestic currency relative to foreign currency. As a result, this adversely affects exports of all other sectors. In

12 0 Australia, in the current boom, the resource movement effect is not so much a matter of a shift to the booming sector. In the present boom, it is not so much that the resource movement effect takes the form, for example, of plumbers and carpenters in Cairns, a tourism and agricultural centre, moving to the Pilbara, a mining area, so much as baristas and hairdressers in Cairns moving to Sydney, a major urban and financial city. To this extent, the resource shifts set in motion by the boom may be easier to be accommodated than if there were there a large shift to the mining regions. The reduced production of export and import competing goods frees the resources to be used in the mining and non-tradable industries. This shift of resources is important to understanding what is happening to Australia s tourism industry at the present time. Since traditional export sectors, including tourism have had capital, investment dollars, and labour drawn away by the record profitability of mining and related industries. Reflecting this unevenness in growth, terms such as patchwork or two-speed are being used to describe the condition of Australia s economy. According to many economists, we are no longer dealing with a cyclical shift but a structural change in the Australian economy (Corden ) TOURISM AND DUTCH DISEASE Tourism is a relatively large industry for Australia. In - tourism s contribution (direct plus indirect) to Australian gross value added (GVA) was $. billion, or.% share of the Australian economy. In -, 0,0 people were directly and indirectly employed by spending on tourism, representing.% cent of total Australian employment. Tourism exports were $. billion in -, accounting for.0% of the national total (Australian Bureau of Statistics ). However, despite these impressive statistics, over the past decade,

13 0 the tourism industry has underperformed against the broader Australian economy, the latter growing at an average annual rate of.% in nominal terms while the tourism industry has grown by only.% a year. If the Australian economy grows at its thirty year average of.% a year, forecasts suggest that tourism s share in the economy will continue to decline in the period to (Tourism Research Australia a). Prior to the year 00, inbound and outbound tourism were both growing strongly. Domestic tourism was growing, but at a much slower pace. Table provides data on Australian inbound, outbound and domestic tourism over the past decade. INSERT TABLE HERE Table reveals that, since the middle of the decade, inbound tourism has grown but quite slowly. Between 0-0 and -, international visitor arrivals to Australia have grown by.% per annum from. million to.0 million well below the long term average of.% (- to -). Inbound leisure arrivals have struggled most since 0-0, growing by just 0.% per annum despite rapid expansion in the China market. By contrast, columns and reveal that outbound tourism has been growing very rapidly with numbers more than doubling between 00 and. In contrast to the lower than average growth in international visitor arrivals, short-term departures by Australians have increased from. million to.0 million (growth of.% per annum) between 0-0 and -. Furthermore, over the same period, departures specifically for leisure have nearly

14 0 doubled from. million to. million (growth of.% per annum). Australia now has a deficit both in arrivals and the tourism balance of trade. An increasing outbound market contributes to a widening tourism trade deficit, from a peak surplus of $. billion in 00 to a deficit of $.0 billion in 0 (Australian Government, ). Domestic visitor nights, shown in columns and, were lower in - than was the case at the beginning of the decade. Between 0-0 and -, domestic visitor nights have fallen by 0.% per annum from. million to million. Leisure travel, in particular, has come under pressure not only from the higher value of the Australian dollar (linked in part to the mining boom) and strong competition from overseas destinations but higher prices for tourism services. Reflecting this, leisure nights have fallen by 0.% per annum from million in 0-0 to million in -. Domestic interstate visitor nights for leisure have fallen from million to. million (down.% per annum). Columns and of Table show the Trade Weighted Index (TWI) and annual changes in this measure. The TWI measures the value of the Australian dollar against a basket of foreign currencies of major trading partners. Between mid 0 and mid, the TWI increased by.%. The standard TWI is not, however, an accurate measure of competitiveness for the tourism industry because tourism trade patterns are different from overall trade patterns. Dwyer and Forsyth () have developed an industry specific trade weighted index, which they call the Tourism Trade Weighted Index (TTWI). The TTWI weights the exchange rates of different countries by their share in inbound and outbound tourism expenditure (not just their share in overall exports and imports). Recent changes in the index highlights the competitive pressure Australian tourism is facing. The inbound TTWI has increased by % between June 00 and December 0, indicating that in real terms, the cost of visiting Australia, excluding air fares, fell by % over this period. During the same period the

15 0 outbound TTWI increased by %, indicating that foreign destinations were, on average % less expensive for Australians (Dwyer and Forsyth ). Establishing any direct causality between the mining boom and various segments in the Australian tourism industry is difficult. Dutch Disease influence does not necessarily imply declining inbound visitation. If the impact of lower visitation on the industry was modest, it could be manifest as a fall in the growth rate, not an absolute decline. Nonetheless, these recent trends in tourism appear to relate, at least in part, to the mining boom which took hold in 0-0. Studies indicate that exchange rate changes do influence international arrivals, particularly leisure tourism (Crouch,, Seetaram ). Real tourism exports increased.% over the period to 0. This was a period when the Australian dollar averaged around US$0.. When compared to the period 0 to - when the Australian dollar averaged US$0.- real tourism exports increased.% (Tourism Research Australia b). A higher Australian dollar reduces Australia s international competitiveness and reduces the spending power of inbound tourists in Australia. Figure shows tourism and mining exports and imports in volume terms and movements of the Australian dollar. The graph highlights the contrast between Australian inbound and outbound tourism flows since mid 0 as the exchange rate appreciated. INSERT FIGURE HERE

16 0 The influence of the exchange rate appreciation varies across different source markets and across purpose segments. Consider first the international inbound market. International holiday travellers are more influenced than business travellers and those visiting friends and relatives. For Australia as a tourism destination, the bilateral exchange rate (the exchange rate between the source country and Australia) has been found to play a greater role in the purchasing decision than the country s overall exchange rate performance (Tourism Research Australia b). Over the period 00-, the changes in inbound tourism expenditure are revealing when considered by source market. While some source countries have experienced declines in visitor numbers, especially Japan and some in Europe, there have been some real success stories, especially China (the mining boom reflects the growth of the Chinese economy). While numbers of Chinese inbound tourists have increased, the % appreciation of the Australian dollar against the Chinese Renminbi, was associated with a decline in real per-visitor expenditure of %. Corresponding falls in real expenditure per visitor occurred in other major source markets: UK (- %), USA (-%), New Zealand (-%), Japan (-%) and Indonesia (-%). Both the spending effect and the exchange rate effect associated with Dutch Disease generate more outbound tourism, which was growing strongly prior to the boom. As a result of the boom, Australian residents incomes are higher- in this particular case, quite a lot higher (Gregory and Sheehan, ). The higher incomes generate greater demand for travel overseas. At the same time, the appreciation of the local currency means that the cost of Australian tourism services increases relative to overseas tourism services. As a result, alternative destinations become more appealing to consumers. Since outbound tourism reduces welfare for Australia (Forsyth et al ) this represents a cost of the mining boom, though not necessarily a large one.

17 0 Australian residents are spending some of their additional income on domestic tourism. Stronger demand for business travel is evident in key areas associated with the mining boom (Tourism Research Australia b). Business travel in non-capital city tourism regions has increased strongly (particularly in Queensland and Western Australia). Some of this growth is due to the increase in travel associated with the mining boom, particularly by Fly in-fly out and Drive in-drive out workers, implying some competition with mining for accommodation and aviation (and related infrastructure). There will also be an increase in leisure tourism. In contrast, the exchange rate effect induces residents to switch out of domestic tourism and other goods and services, and into outbound tourism. The net impact is often uncertain. Although it seems that since mid 0, the positive spending effect appears to have been outweighed by the exchange rate effect (suggesting that domestic and outbound tourism are quite good substitutes). Where the spending effect is relatively low, as with the Australian 0s minerals boom, (Forsyth, ) it is more likely that domestic tourism will fall. Unfortunately, we do not know precisely how substitutable domestic tourism is for outbound tourism as this issue has been neglected by researchers. There is a significant difference in the way tourism has been affected by the mining boom as compared to most tradable industries in Australia. For most traded goods and services, the mining boom has been associated with a sharp quantity adjustment- producers of export and import competing products have lost market share, and in some cases have exited the market. For tourism, in contrast, the main response to the exchange rate rise has been in terms of price not quantity. While the outputs of most industries have been affected by the large rise in the exchange rate- tourism has been less affected relative some manufacturing sectors. With tourism, prices in the destination are set in the domestic currency- not, as with most tradables,

18 0 in world prices (the important exception is aviation). In world price terms, tourism prices have risen- Australia as a whole, has some market power (Forsyth and Dwyer 0). While Australia has become less competitive in world tourism markets, the shift out of tourism towards the booming sector and non tradables has been smaller than in other industries, such as most manufacturing. POLICY RESPONSE In most cases, since the costs of any measures that successfully moderate real appreciation of the exchange rate and thus Dutch Disease effects may be considerable, the efficient response to a decline in the export of a tradable industry is to do nothing to slow up or prevent the decline of particular firms or industries adversely affected. The argument is that lagging export sectors need to adjust to the world economy and that the different assistance options such as exchange controls and higher tariffs will ultimately come at the expense of other, more efficient, industries (Corden, ). In contrast, if tourism industries are negatively affected by the Dutch Disease, it does not follow that the usual response- to let the market work, is necessarily welfare improving. Tourism is not a typical export/import competing industry. Given that Australia has market power in its tourism product, tourism differs from other industries in a Dutch Disease context. There are several ways in which the negative impacts of the Dutch Disease can be mitigated. Four strategies will be discussed here. These are: price changes through changes in taxes levied on tourists; promotion of inbound tourism; promotion of domestic tourism; improving product offerings to make the destination more attractive. Price changes through changes in taxes levied on tourists

19 0 With most goods and services for which the Dutch Disease is an issue, the small open economy assumption prevails (Chao et al 0, Nowak and Sahli 0). A country buys and sells a good, such as wheat or rice, at the going world price. Thus a country such as Australia has effectively no market power over these goods. With tourism it is different- along with other countries, Australia can determine the price at which it sells its tourism services, by raising or lowering taxes. This means that countries can and do exercise market power in inbound tourism. It is very likely that Australia does not make full use of this market power. To some extent, destinations can choose the prices at which they sell their tourism services by raising or lowering taxes. Australia can impose a tax on tourism and inbound tourists will have to pay it, if they choose to visit Australia. Australia already imposes specific tourism taxes, such as the Passenger Movement Charge (Forsyth, Dwyer, Pham, Spurr, Hoque ), as well as taxes such as GST (Goods and Services Tax) which it levies on all the goods and services that tourists buy, such as accommodation, meals and transport fares. Should the price of inbound tourism be reduced by reducing taxes paid by tourists? The problem with this option is that it will decrease the price that Australia receives for its tourism services. If for example Australia were to reduce its taxes on inbound tourism (say by reducing the incidence of the GST on tourists), it will gain through additional benefits from tourism, but lose from a reduction in taxes paid by foreigners. Given that Australia does not tax tourism highly, it will be a net loser from any reduction in tourism taxation. Thus one of the most obvious ways of mitigating the effects of the Dutch Disease is ruled out. There is scope for destinations to reduce different charges paid by tourists, including infrastructure charges and environmental charges. Governments have little influence over real wage rates

20 0 which reflect the destinations stage of development and the workings of the labour market. Destinations can influence price levels through monetary policy but this is not a very well targeted way of influencing destination competitiveness especially since low home prices tend to be associated with higher exchange rates (with corresponding Dutch disease effects).while governments can influence the productivity of different industries including tourism, in the main this influence is indirect via competition policy which stimulates efficiency. Again, however, economy wide productivity improvements will tend to result in exchange rate rises and no gain in export competitiveness (Dwyer and Forsyth ). A contrary argument is that since Australia has market power in tourism, it is in the national interest to make use of this. For example it could levy a tax on outbound tourism to reduce the unwelcome effect of Dutch Disease to induce greater departures of Australian residents offshore. In fact, Australia already has a departure tax (Passenger Movement Charge) in operation which has just been increased from $ to $ for each outbound traveller (foreign or Australian resident). A recent study of the implications of an increase in the Passenger Movement Change finds that while the Australian tourism industry is a net loser, there are gains in Gross National Income, Gross Domestic Product and employment to the wider economy (Forsyth et al ). Recently, a proportion (%) of the revenues raised by the increase in PMC has been earmarked for assistance to the tourism industry in the form of additional funding to Australia s national tourism organisation, Tourism Australia ($ million over years) to assist with their push into Asia through an Asian Marketing Fund. No detailed study has been done as to what is the optimal mix of tax and promotion. An appropriate tax/marketing mix might be useful at a time in which Australia is coming to grips with the resource transfers

21 0 which the Dutch Disease brings about. It will reduce the outflow of resources from tourismwhich will be welfare enhancing. It is a second best policy, and one which does not necessarily need a Dutch Disease effect to be in place. Inbound Tourism Promotion With goods and services that are sold at the world trade price, there is no need for the producer to promote their product. When a producer or country has market power, however, the issue of promotion can become significant. Thus while for some goods and services, such as for standardised goods, promotion may not be worthwhile, in the case of differentiated goods and services, however, it may be very worthwhile for the seller to advertise or promote them. Promotion can lead to increased sales, and, possibly, to increased profits. Thus it may not be sensible for a country to advertise its wheat, but sensible to advertise its tourism attractions. Both producers and countries promote their tourism products, and Australia is a heavy promoter of its tourism product. Over the years there is empirical evidence that expenditure on tourism promotion has been effective (Kulendran and Dwyer, 0). In fact, it is quite possible that Australia s destination marketing effort has averted a bigger fall in inbound tourism associated with the mining boom One might question why governments need to become involved- after all, government promotion is not expected for cars or medical supplies. This is an involved issue- one reason might be that tourism firms are too small to promote their wares effectively, and another is that promotion can be seen as an offset against some of the taxes that tourism, but not other exports, pay. The arguments put forward by tourism stakeholders for government support for

22 0 tourism promotion typically are based on the standard economic justifications of government support for private sector activity in circumstances of market failure, ie., externalities/nonappropriability of benefits, risk and uncertainty, the presence of distorting taxation, and indivisibilities (Dwyer and Forsyth b; Dwyer, Forsyth and Dwyer :-). A recent study (Dwyer, Pham, Forsyth and Spurr, ) using a CGE approach indicates that additional promotion raises GDP and welfare in Australia. But are the benefits worth the cost of the additional expenditure? To resolve this, one needs to measure the benefits from additional inbound tourism expenditure and compare them with the full costs of promotion. Evaluating this necessitates also distinguishing the gainers and losers from an expanding tourism industry (Dwyer, Forsyth, Madden and Spurr 00). This issue has been discussed in theoretical terms, though not in empirical work (Dwyer and Forsyth, a). Strategies to consider in high exchange rate environments could include recognising those markets that have strong economic growth and high consumer confidence. These markets will most likely provide the strongest inbound markets in the future, for example the strong economic growth in many countries in Asia. Another strategy would involve identifying markets where positive aviation changes are occurring either in terms of pricing or additional capacity. It needs to be recognised also that not all inbound markets are equally affected by Australia s high exchange rate (Dwyer and Forsyth ). Over the last decade the Australian dollar has appreciated most strongly against the US dollar (and tied currencies), the Euro and the UK Pound, but less so against the Japanese Yen, New Zealand, Singapore and Canadian dollar, and has depreciated against the Indian Rupee. At the same time some segments may be less impacted upon by exchange rates e.g. international youth travellers (Tourism Research Australia b).

23 0 Promote domestic tourism Another option is promotion of domestic tourism. To the extent that domestic and outbound tourism are substitutes, this will have the effect of reducing outbound tourism. From a national point of view, promoting domestic tourism is not necessarily welfare enhancing, though it can be if it reduces outbound tourism. Tourism Australia presently has a no leave no life campaign targeted at domestic tourists (Tourism Australia :, ). If additional promotion of domestic tourism passes the cost benefit test, then there will be a benefit to the economy from a reduction of outbound tourism. Thus there would be some reduction in the negative effect of the Dutch Disease. Improving the tourism product There has been a slowdown in investment in Australian tourism over recent years, resulting in a tired product offered to the world. Australia s national long term tourism strategy recognises that innovative investments with continuous improvements and renewal are needed to ensure that the Australian tourism product remains competitive in the global marketplace (Australian Government 0). Some argue that the lack of investment is the reason for the stagnation in inbound and domestic tourism and that an increase in investment would lead to better products and stimulate demand. If this is the reason, it is not clear why investment has fallen. While there have been several disincentives to invest (such as tax depreciation arrangements and planning controls), these factors have been present for many years. An alternative view is that the causality is the other way around. Because tourism producers and their financiers do not see a good future for their industry, they do not see the need for

24 0 investment- thus they do not invest. It is only when suppliers are convinced that growth is resuming that they will be prepared to invest again. It should be noted that tourism is a footloose industry, and this applies to investment as well. Other countries, as well as Australia, are competing for investment projects. The lack of investment in the industry is almost certainly largely a symptom of, rather than a cause of, the lack of demand growth. Investment is needed to ensure Australian tourism product remains competitive in a global marketplace. The Jackson Report (0) suggests that greater investment in tourism plant and infrastructure will build productive capacity, drive long-term profitability, innovation and growth in the sector. The ability of a tourism destination to attract investment in tourism infrastructure is influenced by a complex number of characteristics. Ensuring that Australia achieves and maintains competitive advantage requires the development of quality tourism business products and services from tourism operators committed to innovation, continuous improvement and renewal (Dwyer and Kim 0). Several reasons underpin under-investment in Australian tourism including a history of low rates of return; a lack of basic market data limiting awareness of investment opportunities; cautious investors; the inherent cyclical and/or seasonal nature of tourism; complexities dealing with multi-level government project approval processes; a lack of a coherent vision and direction by governments. Tourism businesses depend on surrounding public and private infrastructure and amenities to provide a quality tourism experience to visitors. This need for supporting infrastructure, which is outside the scope or control of tourism operators, often adds an extra complication and increases the uncertainty associated with tourism investment proposals.

25 0 Australia s tourism competitiveness depends on its exchange rate. When the exchange rate was low, as it was prior to 00, Australia was competitive in tourism (Dwyer, Forsyth and Rao, 00), but since then it has become much less competitive. What is more, tourism productivity growth tends to be slow. Between - to 0-0, tourism productivity growth, at.0%, was slower than the whole of the market sector, at.%, and from 0-0 to 0-0, tourism productivity fell by 0.%, while it fell by 0.% for the market sector (Australian Government 0). Tourism is a service orientated sector, with labour productivity an important factor in driving overall tourism productivity growth. Increasing productivity within the tourism industry can enhance the rate of return on tourism investment and lift the profitability and competitiveness of the industry. Putting investment in a productivity context helps to clarify what investment needs to do in order to be efficient and effective in helping to foster destination competitiveness. The firms that prosper will be those that are committed to continuous improvement through innovation and those that are enterprising and skilled enough to offer a differentiated product or service to maintain their competitive advantages. If Australian tourism can increase its productivity, it will make its product more competitive in international inbound markets, along with making it more competitive as a substitute in outbound markets. CONCLUSIONS This paper examined how Australian tourism is affected by the country s mining boom. The experience of the tourism industry in Australia fits very well with the Dutch Disease theory. However, different parts of the industry have fared differently. Tourism can be broken down into the inbound (export) industry, the domestic industry, and the outbound (import) industry. Domestic tourism and outbound tourism are imperfect substitutes for one another. The patterns of impacts are interesting. The inbound tourism growth rate has declined compared

26 0 to that experienced in the past two decades. Domestic tourism has fallen, while outbound tourism has grown remarkably. This fits in well with what we would expect, taking into account that there has been a large spending effect taking place, not just an exchange rate effect. The various processes associated with Australia s mining boom are essentially shifts of the economy to new equilibria. It could be that most of this adjustment has now taken place. Thus it may well be that the exchange rate has gone as high as it is likely to go and the terms of trade, on which the income effect of the boom depends, has stabilised (Gregory and Sheehan, ). In fact the terms of trade have fallen since (though not the exchange rate), though it is not clear whether this is an emerging trend or just volatility. If this is the case, then the adjustment period for tourism, as for other industries, could be coming to an end and the earlier growth patterns of tourism might gradually re-emerge. Inbound tourism will return to growth following a near ten year pause. Outbound tourism will continue at a higher level, but its growth is likely to resume its historical rates. Assuming that the growth in the Australian economy returns to its long term trend, domestic tourism may start to grow modestly again. If some predictions of the mining boom s duration are correct, however, it may last for two decades. In the long term, the main implication of an appreciating exchange rate is structural change within the Australian economy. Since a strong Australian dollar means that Australian exports become more expensive, traditional export industries will effectively become less competitive in the world market. This results in the release of labour and capital previously utilised by uncompetitive businesses, which will be reallocated to the expanding mining industry. The reallocation of resources to an area of production in which they are being used

27 0 more efficiently results in higher productivity growth and increased economic growth. This in turn leads to higher real incomes for Australians, and higher living standards. While the appreciation of the dollar has many implications for the economy and the tourism industry, ultimately, it will have an expansionary effect on the Australian economy in the long term, largely through the instigation of structural change. Regardless of the duration of the mining export boom, this paper has argued that particular strategies can be developed to reduce some of its adverse impacts on the tourism industry. The strategies discussed are not the only ones that can be actioned but they do present tourism stakeholders with some opportunities to be proactive in confronting the challenges posed by the (non tourism) booming sector. The strategies rely on some special characteristics possessed by the tourism industry particularly some market power internationally. There is no magic solution for tourism given its role as a lagging sector in the Australian economy, but these strategies should receive serious consideration in the tourism industry s response to the present situation. A subsequent impact of the appreciation of the real exchange rate is the shift towards a narrow export base as a result of structural change within the economy. Consequently, Australia becomes more vulnerable to external shocks, such as a downturn in the Chinese economy. Australia is also exposed to large fluctuations in commodity prices, which substantially influence export earnings, leading to increased volatility in the current account deficit. These are further good reasons for Australia to develop the identified strategies to support its tourism industry. The discussion thus has implications for destinations worldwide which are experiencing booms in commodities other than tourism.

28 0 REFERENCES Adams and Parmenter () "An Applied General Equilibrium Analysis of Tourism in a Quite Small, Quite Open Economy" Applied Economics,,, -. Australian Bureau of Statistics, Overseas Arrivals and Departures, Australia (ABS CAT. No. 0.0), various issues. Australian Bureau of Statistics () Tourism Satellite Account -, cat.0, Canberra, Australia Australian Bureau of Statistics (a).0 - Australian Economic Indicators, May. Latest ISSUE Released at : AM (CANBERRA TIME) /0/ Australian Bureau of Statistics (b) International Trade in Goods and Services, June quarter (Cat. No..0) Australian Government (0) National Long Term Tourism Strategy Department of Resources, Energy and Tourism, Tourism Research Australia Australian Government () Australian Tourism: facts and figures at a glance Department of Resources, Energy and Tourism, Tourism Research Australia, May, Canberra Capó, J., Font, A. R., & Nadal, J. R. (0) Dutch disease in tourism economies: evidence from the Balearics and the Canary Islands Journal of Sustainable Tourism, (), -. Chao C.C., B.R. Hazari, J-P Laffargue, P. M. Sgro and E.S.H. Yu (0), Tourism, Dutch Disease and Welfare in an Open Dynamic Economy, Japanese Economic Review, (), - Copeland, B. R. () Tourism, Welfare and De-Industrialization in a Small Open Economy, Economica,Vol., pp.. Corden, W M () The Dutch Disease in Australia: Policy Options for a Three-Speed Economy, Melbourne Institute Working Paper No / Corden, W M and P Neary () Booming Sector and De-industrialization in a Small Open Economy, Economic Journal, pp - Crouch G.I (), A Meta-analysis of Tourism Demand Annals of Tourism Research, Vol., No., pp. -.

29 0 Dwyer L. and, P. Forsyth (a) Assessing the Benefits and Costs of Inbound Tourism Annals of Tourism Research, Vol No,, pp.-. Dwyer L and P Forsyth (b) "Government Support for Inbound Tourism Promotion: Some Neglected Issues" Australian Economic Papers,, pp. -. Dwyer, L, P Forsyth and D.P Rao (00) The Price Competitiveness of Travel and Tourism; A Comparison of Destinations, Tourism Management,,, February, - Dwyer L. and C.W. Kim (0) Destination Competitiveness: a Model and Indicators, Current Issues in Tourism, Vol., No., pp - Dwyer L., P. Forsyth, J. Madden and R. Spurr (00) Economic Impact of Inbound Tourism under Different Assumptions about the Macroeconomy, Current Issues in Tourism Vol. No., pp -. Dwyer, L. T. Pham, P. Forsyth, R. Spurr () Return to Australia on Investment from International Tourism Marketing Dwyer L. and P. Forsyth () Methods of Estimating Destination Price Competitiveness: a case of horses for courses? Current Issues in Tourism vol., () pp - Dwyer L., P. Forsyth and W. Dwyer () Tourism Economics and Policy, Channel View Publications, Cheltenham, UK Forsyth, P () "Booming Sectors and Structural Change in Australia and Britain: A Comparison" in J.P. Neary and S. van Wijnbergen, (eds.) National Resources and the Macroeconomy, Centre for Economic Policy Research, London. (Oxford; Blackwell, pp. -. Forsyth, P., L. Dwyer (0) Market Power and the Taxation of International and Domestic Tourism, Tourism Economics Vol, No., pp -0 Forsyth, P (0) Tourism Benefits and Aviation Policy, Journal of Air Transport Management, ) pp- Forsyth, P and J Kay (0) "The Economic Implications of North Sea Oil Revenues", Fiscal Studies, Vol. I, No., July, pp. - Forsyth, P., L. Dwyer T. Pham, R. Spurr, S. Hoque () The Impacts of the Passenger Movement Charge on Tourism Output and the Economy, The Centre for Economics and Policy, Report to Tourism Research Australia, Canberra.

30 0 Gregory, R G () Some Implications of the Growth of the Mineral Sector, Australian Journal of Agricultural Economics,, - Gregory, R G () Living Standards, terms of trade and foreign ownership: reflections on the Australian mining boom, Australian Journal of Agricultural and Resource Economics, Gregory, R G and P Sheehan () The Resources Boom and Macroeconomic Policy in Australia, Australian Economic Report No, Centre for Strategic Economic Studies Victoria University Melbourne Holzner M () Tourism and economic development: The beach disease? Tourism Management () - Jackson, M., et al. (0). The Jackson Report on behalf of the Steering Committee: Informing the National Long-Term Tourism Strategy. Canberra: Commonwealth of Australia. Nowak J.J and M. Sahli (0) Coastal tourism and Dutch disease in a small island economy Tourism Economics, (), Reserve Bank of Australia () Exchange Rates Seetaram, N. (), Immigration and Tourism Demand: Empirical Evidence from Australia Tourism Management, () pp. -. Tourism Research Australia (a) The Impact of the Mining Boom on Tourism, Snapshots pdf, Department of Resources, Energy and Tourism, Canberra. Tourism Research Australia (b) Factors affecting the inbound tourism sector - the impact and implications of the Australian dollar, Department of Resources, Energy and Tourism, Canberra, June Tourism Research Australia (a) International Visitors in Australia Quarterly Results of the International Visitor Survey, December, Canberra, March Tourism Research Australia (b) Impacts of the current mining boom on tourism, Department of Resources, Energy and Tourism, Canberra, October Tourism Snapshots () ots Impact_of_the_mining_boom_on_tourism.

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33 *Statement of Contribution What is the contribution to knowledge, theory, policy or practice offered by the paper? Australia s tourism industry is affected by the mining boom. Tourism is a tradable service, and thus will be affected by the rise in the exchange rate, and the various spending effects coming about as a result of the boom. This boom leads to a contraction in other tradable goods and services- the Dutch Disease effect. There has been some discussion of Dutch Disease in the tourism literature but it has been in the context of tourism as the booming sector. A major difference of this paper is that it considers tourism as the disadvantaged sector from the Dutch Disease effect. To our knowledge this is the first paper to address this issue. The paper is also the first that we are aware of to distinguish the spending effect and the exchange rate effect which is so essential to analysing Dutch Disease in the tourism context. The paper is novel in its discussion of the ways in which tourism differs from other industries in a Dutch Disease context. It highlights some significant differences in the way tourism has been affected by the mining boom as compared to most tradable industries. These differences have significant implications for policy. How does the paper offer a social science perspective / approach? The paper addresses issues in tourism economics, a social science. It discusses the effects of Dutch disease on different tourist market segments and makes recommendations for policy to improve visitor numbers and to enhance destination competitiveness. The effects of Dutch Disease affect the community in many ways, economically, socially and environmentally. In its discussion of policy, the paper addresses multi-disciplinary issues, intersecting political theory, economics, planning, investment and innovation, marketing and management disciplines.