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    This blog highlights effective ideas in the fight against poverty and exclusion, and analyzes the impact of development projects in Latin America and the Caribbean.
  • Simulation models in tourism projects



    Simulation models in tourism projects

    According to the World Travel & Tourism Council, travel and tourism sustains more jobs than financial services, communications, mining, automotive and chemicals manufacturing industries across every region of the world. In areas such as the Caribbean, tourism represents 41% of goods and services total exports. Its potential is promising to many: some consider that tourism is Kenya´s “unpolished diamond”.

    So evaluating the impact of tourism projects seems important for some and probably critical for many developing countries. Nevertheless, there is a clear challenge in randomly assigning tourists to treatment and control groups (where would you go?).  Perhaps one way would be to conduct magical mystery tours.

    A better – although not more fun – alternative is presented in a recent paper prepared for the IDB (Technical Guidelines for Evaluating the Impacts of Tourism Using Simulation Models) by Professor J. Edward Taylor of the University of California at Davis. Simulation models.

    The Guidelines are structured around the answers to 7 questions.

    1. Why invest in tourism projects? According to Taylor, tourism is the largest industry on earth, and eco-tourism is the fastest growing sector of this industry. Asking why countries should invest in tourism projects is will point to the kinds of metrics that are needed.

    What might a country hope to get out of this type of investment? How might tourism bring about “development”, particularly with regard to poverty alleviation?  The main challenge for the first question is how to project (ex ante) and attribute (ex post) observed changes to the project.

    The challenge regarding the second question is how to model both the direct and indirect impacts of changes in tourism on the outcomes of interest. These guidelines address the first question but focus primarily on the second one.

    2. Why is a simulation approach useful for tourism impact analysis? Taylor argues that it is challenging to use experimental methods for studying the impacts of tourism projects because random selection and treatment definition are problematic.

    Econometric methods (like propensity score matching or regression discontinuity) have significant drawbacks such as lack of data, timing, and that changes in tourism are not independent random events. In addition, tourism projects will produce heterogeneous impacts too complex to capture in experiments or econometric methods.

    3. What does a simulation model for the economic analysis of tourism impacts look like? In this context simulation models can be very useful as alternatives to assess the impact of a tourism project.  Their complexity can very well be reflected using Social Accounting Matrix multiplier frameworks and Computable General Equilibrium models.

    The use of both methods is compared in the Guidelines both in theoretical terms and with concrete examples of specific projects with different specifications. Taylor presents an excellent discussion on their limitations, which are not minor in terms of both data limitations and model assumptions.

    4. What are the data requirements to estimate a tourism-impact simulation model? Simulation methods entail heavy data demands in order to parameterize all of the equations in the model. The data requirements to simulate tourism project impacts using a micro CGE or a SAM multiplier approach are similar, typically requiring tourism, business and household data.

    5. How is the model constructed? Assumptions underpin all models. The two most important set of assumptions in simulations relate to functional forms (model specification) and price determination (model closure).

    6. How is the model used to explore the impacts of tourism and projects affecting tourism? The results of simulation models can form the basis for a consistent cost benefit analysis and can be extended to focus on specific outcomes, social groups, or post-intervention uses, including lessons learned about different types of approaches to tourism promotion.

    7. What are some of the major budgetary considerations in doing tourism impact simulations? The Guidelines conclude presenting three specific examples that include a SAM/CGE Study of the Impacts of Tourism in the Galápagos Islands, a SAM for a Tourism Project in the Bahia de Tela, Honduras; and a valuation of a Reef in the Honduras Bay Islands.  The cost of these studies range from $84,000 to $105,000 (not in Present Value).

    In conclusion, simulations are a very valuable tool when experimental and econometric methods are no possible and will complement conventional Cost Benefit Analysis which typically will miss local economy wide impacts and linkages.

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