Pergamon

Annals of Tounsm Research, Vol. 25, No. 2, pp. 393-415, 1998 0 1998 Published by Else&r Science Ltd. All rights reserved Printed in Great Britain 0160-7383/9X $19.00+0.00

PII: SOlSO-7383(97)00098-4

ECONOMIC SIGNIFICANCE OF CRUISE TOURISM

Larry Dwyer University of Western Sydney, Australia Peter Forsyth Monash University, Australia
Abstract: Cruise business is a growing segment of the international tourism market. While there have been studies of its economic impacts on a national level, the issues of the costs and benefits and their distribution have received scant attention. This paper develops a framework for assessing the economic impacts of cruise tourism for a nation and its subregions. It further explores how the framework can be used to estimate the relevant benefits and costs. A case study of cruise tourism in Australia shows how the framework can be implemented and discusses some policy implications. This analysis can facilitate future research, empirical studies, and strategy development relevant to cruise tourism. Keywords: cruise, economic evaluation, bcnefi-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 du march6 du tourisme international. Bien quil existe quelques etudes des impacts Cconomiques des croisieres au niveau national, on a fait tres peu attention 2 la distribution des cofits et bCntfices. Cet article construit un cadre thtorique pour Cvaluer les impacts Cconomiques des croisieres 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 en
Australie demontre Iapplication du cadre et discute quelques implications pour la politique. Cette analyse pourra faciliter la recherche, les etudes empiriques et le diveloppement strattgique 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.

INTRODUCTION
Cruise 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 region which accounts for 50% of total world capacity placement. Other major regions include the Mediterranean (lo%), Alaska (8%), trans Panama 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 increasingly dominated by cruiselines owned by parent companies in three coun-

Larry Dwyer is Coordinator of the Tourism Management Program, University of Western Sydney (Campbelltown NSW 2560, Australia. Email: l.dwyer@uws.edu.au). He has published widely in the area of economics of tourism and is presently undertaking research on sustainable tourism development. Peter Forsyth is Professor and Head of the Department of Economics, Monash University. He has extensive publications in the area of industry economics and airline policy and is currently undertaking research on tourism taxes and price competitiveness indexes for tourism. 393

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tries: the United States, the United Kingdom, and Norway (Peisley 1995). The question naturally arises as to distribution of impacts among foreign owned cruiselines and those countries providing stopover facilities for this type of visitation. Several countries have been developing strategies to enable each as a whole, and particular regions, to enjoy the economic and social benefits of a strong, efficient, and viable cruise shipping industry (Commonwealth Department of Tourism 1995). Policymaking to achieve the economic aims depends upon a clear understanding of the impacts-including benefits and costsof cruise tourism by international visitors. In the attempt to comprehend the potential economic significance of cruise tourism several interesting questions arise. What are the economic impacts of cruise tourism? To what extent does foreign ownership of cruiseships limit the economic impacts of this form of tourism? Will these impacts be concentrated in stopover port areas or distributed nationally? What are the potential net benefits (as compared with economic impacts) of cruise tourism regionally and nationally? The existing literature typically contains either superficial answers or none to such questions, despite their general importance to any country wishing to understand the economic significance of this sector of tourism. The paper has three major objectives. First, it develops a framework for assessing the economic impacts of cruise tourism for a country as a whole and for its states or counties. Second, it discusses how this framework can be used as a basis for estimating the relevant benefits and costs (as distinct from impacts), nationally and regionally. While some earlier analyses of the economic impacts of cruise tourism assume that economic impacts equate to benefits, here the two concepts are clearly distinguished. It is even possible for additional expenditure to generate increased economic activity, but for there to be a net cost to the economy, not a net benefit. This could be so if the increased expenditure led to an even greater increase in costs (for example, in infrastructure). Benefits are to be interpreted as the net gain in revenues, along with benefits to host country consumers, less the cost of making the goods and services purchased with the expenditure available, including non-cash costs, such as environmental costs. Typically, it is the case that the net benefits from an increase in expenditure from abroad are significantly less (only a small proportion) of the increase in overall activity that the expenditure generates. As its third objective, the paper identifies and discusses some policy implications of the analysis. The theoretical framework of 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 national economy similar to that of other foreign visitors. They may fly to the country, stay in some accommodation, and purchase goods and services. The difference is that a major component of their expenditure will be on a cruise, and in many cases this payment will be to a foreign-owned operator who, in turn, will purchase some goods and

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services in the home country. Therefore the foreign exchange earnings and the economic impact on the host economy will depend on the visitors direct and indirect expenditure, and on the extent to which the associated expenditure relates to goods and services sourced from within the region or sourced from elsewhere. The economic impacts and their distribution will differ also as between the regional and the national 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 assumes greater significance for larger countries such as the United States, Australia, or Mexico. An expenditure breakdown (Table 1) can conveniently be divided into passenger expenses and operator expenses. The assumption is made that the operator is a foreign company. Even if a payment for a cruise is made in the base country, using its currency, this does not feature as expenditure in the base country, since it is income payable abroad, and does not stimulate economic activity within this country. Passenger expenditures include the cost of the cruise, but this 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 Expenditures Passenger Expenditures

Air Fares to/from Base Internal Travel Add-on Expenditure: Country Accommodation Meals Shopping Excursions Meals Excursions and Shopping

Port

Expenditure

travel

Operator Expenditures
Port Expenditures: Government Charges Port Charges (incl. Terminal) Towage Stores and Provedoring Bunkering Purchase of Services (Waste Water) Local Crew Port expenditure by Foreign Country Income Tax Customs Duties Departure taxes

Provedoring:

Disposal,

Crew

Expenditure:

Crew

Ship Maintenance Marketing in Base Taxes:

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CRUISE TOURISM

expenditure in a stopover port (for instance, in a small island state or some coastal resort city). Passenger expenditure includes that incurred as part of the cruise (port visit expenditure) and also the payment for it. Thus it includes air fares to/from the base country-some of which, though not all, will be paid to airlines owned by the country. There is also travel within the country. Some add-on expenditure, such as hotel accommodation in port before the cruise begins is essential for the cruise. However, passengers may choose to combine their cruise with other tourism activities in the country. In a sense, this expenditure can be regarded as being generated by the cruise, and it is unlikely to have been made, at least to the same extent, if the cruise had not taken place. Visitors also make direct expenditures, on excursions, attractions, and shopping, while on the cruise. Operators make a range of payments. They pay charges associated with the use of a port, including those, which are levied by government to cover the cost of navigational services, those levied by the port authority, as for the terminal used, as those for towage and stevedoring, paid to private operators for services provided. The operator will purchase goods and services to provision the vessel, including stores and provedoring, fuel, and services to enable ship operation, such as waste disposal and electricity. Two forms of payments to crews will result in expenditure in the base country. The first of these is hiring local resident crew; all of the cost of this will be expenditure in 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 base country or stopover ports. Apart from these, the operator will make expenditures on ship maintenance. It will also have business expenses in the base country, including costs of operating an office and marketing expenditure, but excluding any marketing costs elsewhere in the world. Further, taxes may be levied on cruise operators. These include income or corporate taxes (but some operators will be exempt, due to the operations of tax agreements and the nature of their cruises). There may be customs duties payable, and departure taxes may be levied. It should be noted that apart from direct taxes on cruises, there may be indirect taxes, on such items as fuel, and it is possible that government charges for services would include a tax element. Much of the literature on the economics of cruise tourism focuses on the direct and overall impacts on economic activity (Mescon and Vozikis 1985; Price Waterhouse 1993). Increased spending associated with cruises has a direct effect on the economy and this is concentrated in the region where the spending occurs. This spending creates additional economic activity. The effects on the rest of the economy come about as the industries supplying the cruises directly increase their demand for inputs, including produced goods and services, from the rest of the economy. There will be a positive effect on demand for these from the rest of the economy. These effects are often analyzed using multiplier analysis, and, more rigorously, input-output analysis. This increase in demand has two effects: it may encourage greater

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economic activity elsewhere, and it may direct resources, employed in other areas, to be used in supplying the expanding cruise industry. The fact that a boom in one section has negative implications for other sectors is recognized in booming sector models (Neary and Wijnbergen 1986). It is not possible to make any general statements about how these effects are divided. When the economy is operating close to capacity, it is likely that additional demand will be met by diverting production from elsewhere (it can also add to inflationary pressures). When the economy is slack, a high proportion of the increase in demand could be met by additional production. A problem with multiplier and input-output analysis is that estimates are made of the overall impact on activity in the economy which make no allowance for the situation the economy is in; they assume that all direct and indirect effects represent additional output. For this reason, estimates of the economic significance of tourism growth are making greater use of computable general equilibrium (CGE) models which allow for feedback effects which negatively impact on other industries and which, in turn, may rebound upon the tourism industry (Adams and Parmenter 1992; Dwyer and Forsyth 1993, 1994). Figure 1 outlines how a change in spending by passengers and operators can impact on the region and country. This complicated diagram highlights the range of different types of effects on activity that are likely to occur. Even though the overall impacts may be positive, several interactions lead to a reducted activity in particular parts of the economy. This is in sharp contrast to the simple expenditure/regional multiplier/national multiplier type of approach which would suggest that commerce will be increased in all sections of the economy. To determine impacts on activity, it is necessary to subtract direct leakages from the gross expenditure. For example, passengers may purchase directly imported liquor which, apart from the productive services in importing and selling, gives rise to a leakage into imports. Such expenditure does not have any impact on the regional or national economy. The goods and services purchased come partly from within, and partly from outside, the region. Where they come from within, local production is stimulated. This in turn results in more purchases of goods and services, again from within and outside the region. When local output is, directly and indirectly stimulated, there is increased demand for factors of production. These may come from increased local supply (e.g., people working longer hours or from people previously unemployed), from factors previously employed elsewhere in the local economy, or from factors located elsewhere in the national economy. Where factors are drawn from elsewhere, there will be a reduction in activity. A boom in spending is not good news for everyone. For example, a cruising boom may lead to increases in the prices of waterfront land, or be to the detriment of the local fishing industry finding its competitiveness eroded. Turning to the national economy, the impacts on activity are mixed. The indirect increase in expenditure leads to increases in activity. These give rise to additional demands for workers and machines-to the extent that they were previously unemployed, there is no reduction

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ZXPtNDITUtt &ACTIVITY

LCONOMICIMPACTB

. OUTPUT

.VALUEADDED

mr-om
8OwNcu 01 mNBnn Almco8n

Figure 1. How a Change in Spending by Passengers and Operators Impacts on the Region and Country

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

Table 2. Impacts of Cruise Source Passenger Expenditure

Expenditures

on Regional

and National Impact

Activity

International Air Fares Internal Travel Add-on Port expenditure

expenditure Expenditure Government charges Port charges Towage Stevedoring Bunkering Stores Services Local Resident Crew Crew port expenditure

Operator

Port

Provedoring

Crewing

Ship Maintenance Marketing Taxes

National National: significant regional share National: significant Regional share Mainly Port Region Regional Regional Regional Regional National: small Regional share Regional and National Regional National: significant Regional share Regional Regional National and Regional National National, Regional

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CRUISE TOURISM

will be an unavoidable minimum that must be incurred in association with the cruise (local transport, accommodation before/after the cruise). This proportion will depend on how much add-on expenditure the cruise generates. If it is significant, the proportion is likely to be low, as tourists take the opportunity to visit other regions. Port expenditure will mainly impact in the region. With payments from operators, some government charges will be paid directly to the provincial/state/national governments. However, they could have a significant regional component. To the extent that the charges are for navigational facilities, and these are in the region, expenditure will come back to the region. Port charges, towage, and stevedoring will be mainly for services that are supplied regionally and thus the expenditure will be incurred internally. With bunkering, most of the expense will be for fuel and taxes. While some fuel may be produced within a region, most of it will not; and even if local firms were paid for fuel, they will pass on most of their receipts to others outside. However, there will be a small local component due to the services in actually supplying the fuel. Where the vessel is provided with stores, etc., there will be both local and national expenditure. Services purchased (e.g., waste disposal, electricity) are likely to come mainly from the region. Expenditure associated with the employment of local resident crew is likely to be national, though there may be a bias towards the region. People who obtain employment on cruise vessels are likely to live in home ports and spend their incomes there. Expenditure by foreign crew is likely to be mainly on goods and services produced in the region of the port. Ship maintenance is likely to be regional, and marketing/business expenses are likely to have regional and national components. Further, taxes are likely to mainly go outside the region. Most of the taxes will be collected by the national, and to a lesser extent, provincial/state governments. There may be a flow back of some taxes, such as departure taxes which are charged for services performed.

The Benejts

and Costs of Increased Foreign Expenditure

The benefits an economy gains from an increase in spending are related to, though not the same as, this expenditure. For a country to gain a benefit, it is necessary that there be a difference between the gains from that expenditure (primarily in the form of revenues) and the cost of providing for it. In an economy which was perfectly competitive, in the textbook sense, and if there are no externalities or taxes, the costs of providing for the expenditure on cruise tourism would equal the expenditure. The only source of net benefits would be when the increased expenditure raised the price of resources in inelastic 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 and costs of a venture (Figure 1). A venture such as a cruise may generate profits 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 industry is fairly competitive, and there is free entry into the market for a particular country/region, the industry will not be especially profitable-profits would cover the cost of capital, but no more. In such circumstances, there would be no economic profits (i.e., those above the level needed to cover capital costs) and profits would not be a direct source of net benefits. If the market were restricted, and profits were high, they would be a source of net benefit. It is important to determine to whom the cruise operation profits accrue. If the operation is domestically owned, profits are enjoyed by nationals, and any net benefits accrue to the host country. Often, however, the cruise operators are foreign, in such cases, any profits earned are not net benefits from the perspective of the host country. While cruises naturally generate consumer benefits, much of these benefits are transferred to operators through the price of the cruise. It is possible that some benefits will remain with consumers, who will value the cruise they take at more than they pay for it. This may be especially true for cruises which essentially offer new products (for example, cruises to new areas). These are cruises for which there are few close substitutes. If it is foreign tourists who are taking the cruises, any consumers surplus benefits will accrue to them, not the host country. If the latter does not operate the cruise, and passengers are foreign, it will not obtain much, if any, of the direct benefits at costs. There may be considerable expenditure on the cruise and the economic impacts could be significant. Whether or not this translates into the host enjoying net benefits or costs depends on the indirect effects. There are a variety of market failures that may be present, to a greater or lesser degree, in real economies (Perkins 1994; Pindyck and Rubinfeld 1995). In the exercise of determining what benefits additional spending brings, it is a matter of determining how significant these various market failures might be, and also of determining under what conditions additional inputs and products are supplied (for example, whether additional spending leads to higher prices). Since net benefits are related to the importance of these markets failures, in a relatively well functioning economy such as those of Western Europe, North America, and Australasia, benefits will be small as compared to the overall expenditure impacts. However, this need not be so for developing nations (Little and Mirrlees 1974). There are several distortions that could be present in an economy which would result in the resource costs of providing for tourists being unequal to their expenditure (Dwyer and Forsyth 1993). Thus, additional expenditure associated with tourism could bring net benefits or costs to the economy. It is a matter ofjudgment which of many possible distortions are relevant to a particular context. Table 3 summarizes the main types of benefits and costs considered relevant to the case of cruises. Any study of net benefits could be done from the perspective of a nation or a region. Clearly, the results could be different for the different jurisdictions. For example, a region with unemployment might gain employment benefits, along with local taxes, and the net

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TOURISM

Table 3. Cruise Expenditures and Benefits

Type of Benefit Dependent Upon Comment National/ Regional relevant National

1. Foreign
exchange 2. Profit and taxes

Net expenditure

Net impact

(i.e., less import International Travel Air leakages) Some profit able routes serviced by home country-owned airlines Add on Expenditure Port Expenditure (passenger/crew) State charges Port charges Towage Stevedoring Bunkering Home Taxes country crew Slight Slight local monopoly local monopoly to cost? to cost? Regional National (taxes) and

Relationship Relationship Profits Profits Indirect Income Net tax?

possible possible taxes tax

3. Employment

Local employment effects National effects employment Net impact Noise cost Environmental Environmental Possible Small Small negative Regional costs costs Regional, National (passenger/crew) Ship visits Externalities effects effects relevant Regional, National

4. Externalities

International/Internal Air Travel Add-on expenditure Port expenditure

5. Terms

of trade

Add-on expenditure Port expenditure (passenger/crew) Port charges Expenditure

6. Scale Economies

in regions

Negative positive: includes

and port, road

Mainly Regional, some National

Congestion

benefits from a cruise operation may be positive at this level. From the national perspective, there could be costs (e.g., port infrastructure might be subsidized). Thus, it is possible that the net benefit from the national perspective could be negative. In Table 3, the third column identifies whether benefits or costs are likely to be accrued at the regional 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 cruiselines leads to an increase in net foreign exchange earnings by the country generated expenditure less direct leakages into ( i.e., total cruise imports). 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 foreign exchange. However, it is possible that some distortions are present, and the nominal or market value of foreign exchange understates its full value to the country (Perkins 1994). Such distortions would include tariffs, which tend to push up the value of the home currency (and thus undervalue foreign exchange). For individual countries, which are quite open to trade, the shadow foreign exchange rate will be close 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 the market rate for Canada. For developing countries, which may have significant trade distortions and exchange controls, the difference between shadow and market rates would be more substantial, and additional foreign exchange may provide significant benefits. A second category of benefits comprises those associated with the generation of profits and taxes. The suppliers of the cruise operation, and other firms individually affected, could be making profits on their sales. As with direct benefits profits means economic or supernormal income and above the normal return on capital. Competitive industries, unless restricted by regulations, would not give rise to such profits. Many of the goods and services purchased by cruise passengers and operators would be sold under fairly competitive conditions (this may not be the case for fuel and port services), and thus supernormal profits are not likely to be present (if present, not likely to be high). International air travel is associated with cruising, and it is a regulated 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 extent that home country carriers earn above normal profits on international air transport associated with cruises, there will be a benefit. In most countries, current internal travel is moderately open to competition and does not generate supernormal-profits. Nor is it usually subjected to high taxation. Expenditure by passengers, both in ports and on add-ons, as well as crew expenditure, may generate some above normal profits in some areas of the economy. These could come about through spending on monopoly owned attractions. However, this is unlikely to be a large source of benefit. Government charges for navigation services, and port charges, may include a profit/tax element. It would be a matter of estimating the actual (marginal) cost of providing navigation/port services to the cruiseship and comparing this to the charges levied. Towage and stevedoring are concentrated industries in some countries, and some above normal profits could be earned. Likewise, bunkering will increase tax receipts and the economy gains if prices are above 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 would not be employed otherwise). Furthermore, there are several taxes that may be levied on the cruise operator. Some of these, to an extent, may reflect services rendered, but many are pure taxes. Prices to foreign tourists and cruise operators could be higher than costs because of the presence of taxes and profits. If tourists buy a taxed good, they may pay $20 for it, but it may cost the country only $15 to supply it; the rest may go as tax to the government. The important question is to what extent there is a net increase in taxation. Additional foreign spending will lead to pressure on the exchange rate to rise, and thus a reduction in foreign spending on other goods and services (commodities, manufactured goods). If these too are taxed, there will be a corresponding loss to the economy. Thus, there will be a net benefit if the taxes on the goods and services that cruise tourists buy are greater than those on other export products. This is a possibility for some countries, including industrial ones. Most do not tax exports of manufactured goods, minerals and agricultural outputs. However, many do have consumer taxes, such as value added or goods and services taxes, and international tourists tend to purchase goods and services subject to tax. In short, tourism exports could be more heavily taxed than exports of other goods and services. To this extent, if a country exports more tourism services, there will be a net increase in tax receipts. It would be possible to make estimates of the net effect on taxes through use of CGE models, such as that used by Adams and Parmenter (1992). Benefits from this source can be both regional and national. Profits from direct expenditure will accrue partly to the region, to the extent that firms supplying the services are locally owned. Taxes may be levied at the local level. However, at least some taxes, such as fuel taxes, will be levied at the national level, and benefits will not stay in the region. To the extent that increased local activity takes place at the expense of non-local, local profits and taxes may rise at the expense of profits and taxes elsewhere. As the third indirect benefit and cost, additional expenditure from cruise tourism can result in unemployed resources, primarily labor, finding employment. The benefits that occur depend on how local and national labor markets work. Where an expansion of activity is achieved (partly) through resources which have hitherto been unemployed, there may be a benefit (Harberger 1972). For example, if increased spending leads to more jobs in a region, and some of these are filled by people who have been unemployed, there is likely to be a benefit (Forsyth and Dwyer 1994; Norris, Stromback and Dockery 1994). The benefits from increased employment depend on the difference between the overall price paid for labor, and the price at which people are prepared to offer their services. Some of these benefits will be enjoyed by governments which receive greater income and payroll taxes. In addition, governments may gain through reductions in social security benefits paid. The effects on employment are both regional and national. Regional benefits will be greater if additional employment leads to reduced

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local unemployment than if it simply encourages migration into the area. The impact on employment overall may be small, in a boom economy, or large, in a depressed economy. It is the net impact which is relevant. While some impacts lead to increased employment, others, such as the crowding out of other industries, lead to reduced employment. It is not easy to obtain measures of the net employment impact, however. Expenditure is the fourth source (Perkins 1994). The external benefits or costs generated depend on the activity that is generated by the expenditure. International and internal aviation associated with cruises have noise costs and air pollution externalities. When passengers (mainly) and crew undertake excursions and purchase accommodation, there can be environmental externalities present by way of traffic congestion or overcrowding of port entertainment facilities generate externalities, (Peisley 1992: 102). Th e ships themselves especially on the marine environment. The most obvious effect on externalities is that directly associated with local activity (Waters 1996). For example, cruise passengers and ships may have an environmental impact on a natural attraction if they visit it. As with other forms of tourism, cruise tourism will create some environmental costs, though it may also lead to environmental benefits such as improved environmental standards in shipping and waste management). There will be indirect environmental costs and benefits as a result of cruise expenditure. Increased spending will lead to greater demand for food; and agricultural development in the economy will have environmental effects. However, there will also be negative impacts on activity elsewhere, to the extent that cruise tourism as an export industry crowds out other industries. Reduced agriculture and mining exports will mean less externalities associated with production of these goods (Dwyer and Forsyth 1993). If the economy is close to indirect effective full employment (i.e., as in a boom), the negative effects on activity will tend to dominate. Thus, even though additional cruise tourism may lead to direct environmental costs, which are quite obvious, it will also lead to reduced environmental costs elsewhere. Terms of trade effects is the fifth indirect benefit and cost. When there is an increase in demand for goods and services which are in (at least partly) limited supply, the prices of these will be bid up. If some of these are being exported, then export prices, on average, will rise. In short, the countrys terms of trade may improve, and greater profits are earned on sales. This effect can apply to tourism (Clarke and Ng 1993; Dwyer and Forsyth 1993). Suppose accommodation at premium locations, frequented by foreign tourists, is in limited supply. Additional tourist expenditures will push up prices mainly paid by other foreign tourists, and the country as a whole will gain. The effect could happen, in a limited way, as a result of increased spending by cruise passengers and operators. It is unlikely to be a major source of benefit, but it would be undoubtedly positive. Terms of trade effects are likely to be proportionally greatest, if they are present, at the level of the local economy. For example, additional spending in a particular port/resort city may lead to accommodation prices rising if available good 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 of expenditure can give rise to this type of benefit. This is expenditure on goods and services for which supply is in (partly) inelastic. Most tourism services are supplied fairly elastically-even large increases in expenditure are unlikely to have a significant impact on price. This effect, overall, is likely to be distinctly small, though positive. The final source of benefits is through the reaping of greater economies of scale. When there is additional cruise tourism, the nature of the supplying industry could change. It becomes worthwhile supplying goods and services with more variety, and greater convenience. More shops and excursions become available, and transport schedules become more frequent and are more convenient. Local shoppers may gain additional variety as a result of tourism. The benefits will be enjoyed both by producers and consumers, and it is likely that they will be widely spread. Both domestic and foreign tourists will gain from having a greater range of domestic cruise ports. Having a greater variety of ports will make a country a more attractive cruise destination, and this will result in more visitors, and thus greater benefits. The benefits from this source are likely to be spread widely, and will only affect the regions directly to a limited extent.

An Australian Case Study

The framework outlined here is conceptual in nature, but it is capable of being applied empirically. The ease of application depends on the data available, and to implement fully, the framework is quite demanding of data. However, it is feasible to obtain some useful estimates even if data are limited. In general, it is easier to obtain estimates of the overall expenditure impact than regionally disaggregated expenditures, and it is easier to obtain estimates of expenditures than of net benefits. In Australias small cruise industry, nearly all vessels are foreign owned. Some cruises are coastal, visiting only Australian ports, while others are based in Australian ports but visit other countries (specifically, South Pacific States). Most cruise passengers are foreign tourists. Thus most direct producer benefits (profit), and consumer benefits, are accrued outside the host country. Foreign tourists fly to the home port, take a cruise, and sometimes add on a shore based stay to their trip, and fly home. The Australian government has developed a strategy towards the cruise industry, and as part of that strategy, undertook surveys of expenditure by cruise operators and by passengers and crew (Ramis 1995). It is possible to make estimates of 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 passenger vessel was considered. Domestic/coastal and international cruises were analyzed. The expenditure by passengers and crew, at the home and 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 spend $239,000 (coastal cruise) and $195,000 (international cruise) in the Australian economy, for port charges, stevedoring, fuel, taxes, etc. The overall expenditure for the coastal cruise was $756,000, around four fifths of which was accounted for by passenger and crew expenditure. The overall expenditure for the international cruise was $367,000. The average expenditure per passenger was $825 for the domestic cruise and $40 1 for the international cruise. The overall average expenditure per day by foreign tourists in Australia is $95 (Bureau of Tourism Research 1995). The average expenditure by visitors taking coastal cruises was rather more than this. However, it must be borne in mind that passengers who take cruises are likely to be higher spending visitors than average, and if they had taken share based trips, would have probably spent more than $95 per day. Thus, the expenditure impacts from coastal cruise passengers and shore based tourists are probably of a comparable order of magnitude. Both have a greater impact than tourists who take international cruises. Little information is available on the extent to which international visitors who take Australian based cruises stay longer in the country, taking other shore based trips. Undoubtedly some would do so, adding to the overall expenditure resulting from the visit. to make estimates of the regional Regional Impacts. It is possible impacts of this expenditure. Most of the expenditure from cruises is incurred in the home and stopover port cities. Some expenditure is national in nature. For example, a coastal cruise in Australia is estimated to pay about $41,000 in taxation, mainly to the national government. Other forms of expenditure may, or may not, have much of an impact on the regional economy. For example, expenditure on fuel ($51,000) would have little impact on local economies where fuel is shipped to small ports, but would have a significant impact in larger cities where fuel is provided from local refineries. It is possible to identify separate expenditure impacts on home and stopover ports. Most of the operator expenditure is incurred in the home or base port. The main expenditure impact in stopover ports is from passenger and crew spending. The net benefits (expenditures less costs of Estimating Net Benejts. providing goods and services) to a country are usually much less than the expenditures; this is especially true of industrial countries such as Australia. Dwyer and Forsyth (1993) make tentative estimates of the net benefits from an additional dollar of tourist expenditure in Australia (around 5% of total gross expenditure). This estimate is for tourism expenditure in general. For cruise expenditure it is likely to be similar, though not necessarily identical. For instance, a high proportion of total expenditure, for the coastal cruise, is accounted for by tax. Foreign Exchange Benejits. Much from the cruise would be receipts of the expenditure of foreign exchange, in Australia since most

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passengers are visitors. Taking the Canadian estimate of the shadow price of foreign exchange of 1.06 as a starting point, it can be argued that the current Australian shadow price would be closer to 1.0, since there have been significant reductions in protection and other distortions recently and protection in Australia now is lower than in Canada in the early, 80s. If 90% of expenditure were in the form of foreign exchange, and the shadow exchange rate were 1.05, the net benefit from $6 17,000 ( coastal cruise) would be $27,800 and from the foreign cruise would be $7,800. are foreign owned, and Profits and Taxes. Most cruise operations profits accrue to the owners. Other businesses, owned by locals, will be affected, but these will normally be quite competitive, and profits will just cover the cost of capital. There can be significant tax results, however. If it is assumed that port charges do not include a tax element (i.e., they reflect costs), there are still fuel taxes paid. For the coastal cruise, these account for $41,000 of the $239,000 expenditure by the operator. This can be counted as a net benefit to the home country. International cruises do not pay this tax. In addition to this, expenditure by passengers will include some expenditure on goods and services subject to tax. As consumption tax levels in Australia are very low by international standards, this will give rise to small, though positive, net benefits. Employment Eflects. There are likely to be some positive net benefits from employment effects, though it is difficult to measure them. Currently, unemployment in Australia is high, and a reduction of it generates positive benefits. While the impact effects of additional cruise expenditure on jobs will be positive, other effects (such as pushing up the exchange rate) will be negative, though the overall net effect is unlikely to be negative. Overall, this could be a significant, though very uncertain, source of benefits. This item can be positive or negative; the balance of Externalities. effects depends very much on the case in point. It is not feasible to make general statements about external costs and benefits, except to say that cruises in Australia, with the exception of those to the environmentally sensitive Great Barrier Reef, have not caused much controversy on environmental grounds. Terms of Trade. This effect is unlikely to be large for cruise tourism. Most expenditure is on goods and services in elastic supply. Cruise related expenditure will not have any perceptible effect in terms of bidding up the price. Scale Economies. The size of the cruise industry in Australia is not such as to have major effects in terms of reaping scale economies. A doubling of its size, for example, could have a positive effect on some small ports currently on the margin of determining whether investment 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 most significant-i.e., employment effects-is also the most contentious. Apart from this, the main sources of net benefits would be the foreign exchange effect and the tax effects. For coastal cruises, these were estimated 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 Implications The framework of analysis has several features of positive interest to researchers and policymakers. Some of these are discussed here. This analysis helps Identijcation ofRelevant Expenditure and Leakages. to identify the type of expenditure which cruise tourism is likely to generate and the types of leakage associated with that expenditure. The breakdown of direct passenger and operator expenditure as in Table 1 is an essential first step in determining net injected expenditure (that is, net of expenditure on imported goods and services). It is not nationality of ownershipperse which is important in determining the size of leakages but the sources of inputs used to satisfy the demands of cruise passengers and operators (Dwyer and Forsyth 1994a, b). Estimation of the import content of cruise passenger and operator expenditure will, of course, depend on the size of the region under study. What is a leakage from a port area perspective may not be a leakage from a national perspective. The framework of analysis allows such distinctions to be made. Impacts and Net BeneJits. The distinction between impacts on activity and benefits is an important one for policy purposes. Both will be of interest. A local port may be interested to know what the overall impact on economic activity in its region will be. For example, additional cruise visits may generate additional activity worth $50 million in the region, and an additional 100 jobs. This will be important information for infrastructure planning and for gearing up to meet the needs of the passengers. However, these will not be a good measure of the net benefits that the region gains. Additional activity will have its costs, and the costs of producing the additional goods and services required will be significant. The net benefits might be of the order of $2.5 million, or less (or, 5% of total injected expenditure). If the local area is determining how much to spend to attract cruise visits, or how much to spend on facilities to cater for them (for instance, on building a 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 in implementing its cruise shipping strategy. It would not be worth promoting in a market that might require $10 million of promotion to generate $50 million of additional expenditure but only $2.5 million of additional benefits.

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Identijication of Sources of Economic BeneJits and Costs. The framework identifies the sources of economic benefits and costs from increased foreign expenditure on cruise tourism, including foreign exchange benefits, taxes and profits, employment generation, externalities, terms of trade effect, and scale economy effects. The net benefits created by additional cruise tourism are dependent on a number of factors: overall spending and activity, the breakdown of direct and indirect impacts, tax rates, and the way labor markets work. All of this means that caution needs to be exercised in making general statements. Additional expenditure will tend to mean additional benefits, and under certain circumstances, a doubling of expenditure will lead to an approximate doubling of benefits. This would be so ifpatterns of expenditure remained the same (on the same goods and services, in the same places), but, if the pattern changed significantly, this need not be true. Benefits could be disproportionately larger (e.g., if additional expenditure was in areas of high employment) or less than proportionally larger. This reinforces the importance of distinguishing between impacts and net benefits of cruise tourism.

Regional and National Impacts of Cruise Tourism. The framework allows the regional and national impacts and benefits of cruise tourism to be separated out. This can be of particular importance to provincial or regional governments. The theoretical framework of analysis is applicable to any economy and regions within economies. Impacts on economic activity will tend to be concentrated in those regions in which the spending occurs, but will spread to the rest of the economy. Increased spending has a direct and indirect effect on activity within the region. Regional benefits can be quite substantial, especiallywhere a region is depressed. For example, where additional expenditure from 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 also depends on the nature of the market failures present. For example, additional spending may give rise to externalities, such as environmental costs and congestion (undesirable) and also impacts on greater variety (desirable). These will be relatively obvious at the regional level. Changes in economic activity elsewhere will have effects on externalities, but these would be very difficult to track or measure. They will be none the less real, and it can be misleading to focus on the direct externalities without recognizing that there will be externalities associated with industries which expand and contract as a result of an increase in cruise spending. In other cases, there may be benefits which are created at the regional level, but which are spread throughout the economy by other mechanisms. A good example of one of these arises with indirect taxation. Something that a cruise passenger buys may be produced locally, but it may be taxed (such as gambling services) by a central government. The price paid exceeds the cost of supply, and thus there is a net benefit. However, this benefit is not enjoyed in the local economy; it is rather spread throughout the

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whole economy, reduced.

to the

extent

that

it results

in other

taxes

being

policy Eflects OfAlternative Policy Measures. The effects of alternative measures on cruise tourism expenditure, its impacts and potential net benefits can also be examined using this framework. Policies can influence the benefits from tourism in several ways. While a change in policy, such as the granting of tax concessions, may encourage additional cruise tourism and have other effects. It can encourage more domestic tourists to take cruises, and induce foreign, non-cruise tourists, to switch to cruises. In short, a change in cruise tourism may be associated with other changes: if a policy is directed towards affecting cruise tourism expenditures it is necessary to take other effects into account. Where more domestic tourists take home based cruises, there will be an impact on domestic expenditures and foreign exchange. To the extent that domestic tourists substitute from foreign trips, there will be a net gain or loss in expenditures, dependent on how much such tourists would have spent. Foreign exchange effects will normally be positive; the saving in holiday costs will reduce foreign exchange expenditures, but the net foreign component of the cruise cost (cruise price less amount spent per person in the home country) will be a foreign expenditure. In spite of this latter amount, the net impact is likely to be a net gain in domestic expenditure. When the domestic tourist substitutes from domestic expenditure, whether on tourism or other goods and services, there will be a reduction in terms of domestic expenditure, and an addition to demand for foreign exchange. When there is a change in the number of foreign cruise visitors, there will be changes in other relevant variables. In particular, there will be a degree of switching from home based, non-cruise holidays. There can be further effects in the long term. A larger pool of persons who have made home based cruises will spread the word about them, and possibly lead to further visits, which in turn will have impacts on activity and benefits. Three broad ways in which policy might influence the number of foreign visitors taking cruises may be identified: promotion overseas, price reductions, and quality improvements. These may influence those other determinants of expenditure and benefits differentially. Overseas promotion may encourage foreign tourists to visit a country from which they then take a cruise. Some of these visitors would have taken non-cruise trips to this country. Thus, the impact on expenditure and benefits will be less than the net additional receipts of the cruise visitors would indicate. To the extent that visitors are switching from other visits to the country, there will be a reduction in spending which must be deducted. If the base countrys component of a 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 its consequent benefits. Promotion of the product overseas is not likely to have significant impacts on the numbers of domestic tourists switching to cruises.

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When there is a price reduction, there will be a fall in receipts from those foreign tourists who were already taking cruises. If the reduction has been achieved by subsidies, or tax/price reductions (e.g., concessions on fuel taxes or lowered port charges), there will be smaller benefits gained from those foreign cruise visitors. To these must be added the benefits and costs associated with those who now choose to take a cruise. There is more spending, and related benefits, as a result of the domestic component of foreign cruise expenditure (port, addon, and operator expenditures in the country). There will be a switch by foreign tourists from shore based to cruise holidays. If these are comparably priced, there will be a net loss of expenditure and benefits as a result of this, since the local expenditure component of the holiday will be less. There will also be a net reduction in expenditure in the country as a result of domestic tourists switching to cruises. When home tourists are induced to substitute cruises for foreign holidays, there will be positive and negative effects on expenditure. If the costs of the holiday are similar, or if the cruise is cheaper than the foreign holiday, there will be a net increase in expenditure in the country. To evaluate these effects, it would be necessary to have considerable information about relevant elasticities. Formal estimates of these are difficult to obtain. However, experts in the industry may have a good feel for the relevant orders of magnitude. The framework highlights the factors to be considered for price reduction policies: they will have a cost; and the net effects on expenditure and benefits will be less than the expenditures of the additional cruise passengers would suggest. The net effect on expenditure and benefits could even be negative if there is substantial switching from shore to cruise holidays by 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 navigation facilities such as channels. These will have a cost. Their effects will be similar to those of price reductions. It will, however, be even more difficult to obtain information on sensitivity of cruise passenger numbers to quality variables than to price. CONCLUSION The paper develops a framework in which the impacts on, and net benefits to, the host economy of expenditure on cruises, oriented mainly to foreign visitors, can be analyzed. This framework is then applied to the Australian cruising industry. The ways in which it can be used in policy discussions are highlighted. In analyzing how such cruises affect the economy, it is important to distinguish between impacts and net benefits. The impacts depend on the overall level of expenditure, whereas net benefits are normally much smaller than this amount. This is because there are resource costs associated with providing the goods and services bought by the cruise operators and passengers. Typically, these costs and expenditures 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 the economy. Certain goods and services may be taxed, leading to an excess of expenditure over cost. Some resources may be unemployed, such as labor, and additional cruise expenditure can lessen unemployment. Sometimes cruising activity creates external costs, for example, where it leads to undesirable effects on the environment. The possible sources of divergence between expenditure and cost are explored, and their likely relevance assessed. The ways, both direct and indirect, in which expenditure can impact on the regional economy (for example, around the home port) and national economy, are outlined. The net benefits and costs are also examined in terms of the level (regional, national) at which they accrue. As an example, the framework is applied to the cruise industry in Australia, for which relatively good data are available. It is a somewhat straightforward matter to estimate the impacts, regional and national, of cruise expenditure. Measuring benefits is much more complex; as would be expected in an industrial country with relatively small market distortions, net benefits as estimated are significantly smaller than expenditures. Major sources of net benefit stem from taxes collected on cruise expenditures, and from foreign exchange effects. There could also be a positive benefit from reducing unemployment, but in a complex, integrated, economy this benefit is very difficult to estimate. The framework, both as a theoretical construct and when it is applied to actual data, is of value in considering policy towards cruise tourism. Knowledge of regional impacts can be valuable in planning infrastructure, for example. It is possible to examine the advantages and disadvantages, from a regional and national viewpoint, of measures designed to encourage cruise tourism, such as reductions in fuel taxes levied on operators. When decisions are made to commit resources to promote tourism, it is necessary to compare these to the net benefits from such tourism, rather than the much larger, overall expenditure impacts. It is also necessary to take into account any effects on domestic based cruise passengers, who may be encouraged to switch to home based cruises if they become more price competitive, or who might be inclined to switch to overseas trips if the local product becomes too popular and expensive. The issues raised in this paper can now be addressed in further studies of the economic significance of cruise tourism.
Acknowledgments-The issues addressed in this paper arose from the authors contribution to the development of a National Cruise Shipping Strategy on behalf of the Australian Department of Tourism. Permission from the department to publish this material is gratefully acknowledged.

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Ramis 1995 Cruise Ship Passenger and Crew:1995 Survey Report. Prepared for Commonwealth Department of Tourism. Canberra: Commonwealth Department of Tourism. Waters, W. G. 1996 Cost-Recovery of Tourist-Oriented Transport Infrastructure: Pricing Cruise Ship Facilities. Paper presented at International Association of Maritime Economists Conference, Vancouver, Canada.

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

Pizam