Ever since the Covid-19 pandemic waned and economies started to slowly get back to business, tourists were the first to take off! Travel and tourism which were the worst-hit sectors of the economy during the pandemic-induced recession, surged back to life and how! But, tourism, often touted as an important part of an economy, can also be a bane. And it wasn’t just the pandemic that brought this message home. In fact, I doubt how many have still realized just how troublesome it can be to depend so much on the tourism industry.
In normal times too, too much dependence on the tourism industry for economic growth can be problematic. This is even more exacerbated in the case of countries whose economies aren’t diversified enough. They tend to depend largely on inbound tourist traffic to earn their much-needed foreign exchange earnings, as well as to create jobs and grow their businesses. Think southern Europe which is where the pandemic epicentre in Europe was – in Italy – and what it did to all their economies, from Portugal and Spain to Italy and Greece. I had written on my blog at the time that this should be a wake-up call for southern Europe economies to try and diversify economic activity and output and not depend solely on the travel industry.
I will be making an argument in this piece about how too much tourism can be bad for an economy and why and how governments need to bear this in mind and try and regulate the industry somewhat. First and foremost, tourism has an inflationary impact on an economy, when it forms a significant part of it. This is primarily because sellers of goods and services tend to overcharge tourists, knowing that these are short-stay visitors and will probably not be back again. Also, because tourism increases the demand for certain goods and services beyond what can be supplied, it increases prices as well. And finally, because so much of tourism revolves around the finite resource of real estate, it raises the prices of property as well as rentals in the country.
Large cities that are big tourism hubs experience this most of all. If they also happen to be big business travel destinations, the inflationary effect is slightly less, since business and business investment has an upward bias to supply at least in the medium to long term. The inflationary impact of tourism is further exacerbated when these cities and countries import most of their essential goods and staples, because it exerts pressure on supply. Sometimes, one doesn’t even need to be in a large city to experience the high cost of living that is caused by tourism. My aged parents settled in Goa three decades ago, and have seen the direct effect of tourism on prices and the general cost of living in Goa over time. What makes it worse is that Goa already imports most of its daily needs in terms of food produce, groceries, and other consumer goods from nearby states. What is still relatively inexpensive in Goa is liquor, and this is because the state government taxes on it are lower than in other states of India, in an attempt to attract tourists! Now that India has the single GST system, perhaps these inter-state differences are reduced, but on fresh food produce and groceries, the variations would still be quite wide. This is despite the fact that Goa doesn’t attract the high-spending international traveller, not even with so many deluxe hotels.
Which brings me to another phenomenon in recent years that has an inflationary impact of its own on the economy. Homestays a la Airbnb. It is not merely excessive tourism that can raise the cost of living for citizens. Homestays, especially on the massive scale of an Airbnb, have been seen to have an inflationary impact on economies as well. And this is most felt in the prices of residential real estate and home rentals. There are various reports in the US on the impact that Airbnb is having on housing shortage, prices and rentals in American cities. From a study by Wharton Business School to an article in Harvard Business Review, and another in Forbes Magazine, that all cite the same study by Wharton, it appears that this inflationary impact might have only increased in the post-pandemic surge in travel driven by pent-up demand.
It is hardly surprising that this should be so, since real estate is already at a premium in most big cities. In the US we have the additional problem of strict zoning laws that prevent building in certain areas and drive up the prices of residential property as well as rents. There is also the impact that short-term rentals of homestays such as Airbnb can have on property prices and rents.
Homestays as an idea is not new. It has existed in UK for decades as B&Bs (Bed & Breakfast) accommodation and is extremely popular with new and budget travellers. B&Bs dot the British countryside as well, along motorways and in small towns out in the country. Europe too has had its version of homestays, called pensiones there. They too offer rooms with breakfast and are extremely popular. Having stayed in these on my travels overseas decades ago, I can say that they are a good and affordable option to hotels. Usually family-run, they are friendly and helpful to guests as well.
I think what makes the difference is the sheer scale of an Airbnb. Consider this: When I did a cursory check online on the biggest Airbnb cities worldwide, it appears that London has the most Airbnb homestays, at 71, 938. Number of B&Bs in the city? 2, 288. These numbers might not be accurate or exhaustive, but they tell us how much Airbnb dominates the tourist accommodation market in the city of London. Similarly, 2982 pensiones in Paris, vs 55,000 Airbnbs in the city. Any wonder why it wouldn’t dominate and determine the housing and rentals market and prices as well? I am not sure New York City which has the world’s third highest number of Airbnb properties has an equivalent of a B&B or a pensione, and the comparison would have to be with hotel accommodation, I think. Besides, the inflationary impact of Airbnb on property prices and rentals is also more direct, as it is entire homes or apartments that go on short-term rentals.
There is another argument to make against the effect of Airbnb on an economy and that is that it contributes little or nothing to job creation in the hospitality industry when you compare it with the traditional hotel industry, or even the B&Bs and pensiones. Even the smaller, latter tourist accommodations have to hire people to work on their premises, rooms, meals, etc. Airbnb lets you have a furnished home to yourself, and you manage the stay on your own.
It is strange indeed that the launch advertising for Airbnb promised staying and discovering a city, like a local. Actually, there are no locals; they merely rent you their home to stay in. You find your way around, I guess.
It is what I would call the perfect example of a rentier economy. Airbnb helps home-owners earn fabulous sums for short tourist stays, with no obligations whatsoever. The phenomenon is being euphemistically called the shared economy. The business model is called asset-light. And yes, given that it’s a business that is neither capital not labour intensive, asset-light would be an apt description.
When I checked how many Airbnbs there were in India, I was surprised – though not shocked – to know that there are over 70,000 Airbnb listings across the country, according to this article. There seem to be some favoured destinations as far as Airbnb is concerned, and Goa, where I now live with my aged father, is one of them! The article cites a study done in India which also finds that Airbnb does have an inflationary impact on housing prices and rentals. Given that affordable housing in India is already in short supply, this is hardly surprising. The Economic Times features an interview with the CEO of Airbnb, Brian Chesky, in which he says that there was a 70% spurt in demand for Airbnb homestays in India in 2022, compared with 2019. This is obviously due to the same post-Covid surge in travel that took place across the world, as I mentioned earlier.
In the context of too much tourism dependence being harmful for an economy, there is also the environmental impact to be considered. And while Airbnb or homestays on this scale has helped more people travel on leisure to more places and more often, its impact on the economy is more mixed. Not only does it put pressure on the housing market and make accommodation more expensive, it also encourages a rentier kind of economy and life, which is a moral economic argument against it. Besides, there is not just Airbnb; it might be the biggest, but there are several others who have ventured into this business, realizing that it is lucrative both for homeowners and for travellers. In India, there is Oyo who also run small hotels, and even large hospitality companies such as Indian Hotels – owners of Taj Hotels – have now started homestays with Ama Stays & Trails. The strange thing is that while Airbnb has certainly disrupted the tourism and hospitality industry forcing even large hotel chains to offer homestays in a big way, Airbnb is itself planning to enter the luxury market in homestays as has been reported often.
How can we better manage the disruption in the tourism and travel industry, without allowing it to distort the housing market and prices and rentals? One way is to certainly have it controlled by the local city or state administration, by capping the numbers of such homestays on offer. I think some of this might already be in place in the case of B&B accommodation in UK and pensiones in continental Europe, which is why they are fewer in number, when compared to the Airbnbs.
Another sensible approach would be to also allow them in limited numbers in purely leisure travel destinations, away from the big cities and towns. These are places which are away from cities, but visited for their natural and beautiful environs as well as for certain kinds of travel experiences. For example, hiking, mountaineering, water sports, white-water rafting, camping, birding, etc. These are also likely to be places with not enough hotel accommodation available, so it makes sense to supplement them with homestays. What’s more, having homestays here might actually benefit the local economy of that particular village, town or district, without having a disproportionate effect on either the urban housing market or prices.
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For example, I have written about India’s tea industry and how tea as a beverage can be promoted through tea tourism. Similarly, the wine-making region of Maharashtra can offer wine-tourism in India. Airbnb homestays might make more sense in areas like these and more, but again in a limited fashion. We don’t want to be encouraging a mad rush to buy land and homes in these beautiful places and destroy their economies, nor do we want to cause environmental damage.
In an indirect way, such an approach would promote more of the holiday experience-based tourism, compared with tourism that promotes consumption of the conspicuous kind namely shopping. This would also help reduce the inflationary impact of tourism overall. It’s not for nothing that travellers find certain cities and countries to be very pricey; Paris, Venice, the French Riviera, and I think all of Switzerland are heavy on the pocket for a traveller. Venice – where I visited decades ago and would love to visit again since I realise I had missed seeing certain quarters of the city – is not only pricey, it is so filled with tourists in the summer months that local residents flee their homes! With the result that Venice is now planning to charge travellers an entry fee to visit the city in the hope that this will bring down the numbers of tourists.
There is also another business model in tourism to consider. Timeshare resorts. These are neither hotels, nor homestays, but hotel-like properties built with the idea that you book your vacation time every year. The idea is based on membership, and the hospitality company behind these time-share resorts allots you your time-share accordingly, with a wide choice of destinations and resorts to choose from, as well as membership benefits. RCI (Resorts Condominiums International) is perhaps the oldest and most established of these worldwide, but now almost all leading hotel chains in the world seem to be offering timeshare holidays. In India, the Mahindra Group has built the country’s leading timeshare hospitality company. Of the many advantages they offer is perhaps the fact that these are not likely to have the kind of inflationary effect on property prices and home rentals, as homestays do. Neither do they encourage a rentier economy and living.
Travelling is about widening one’s horizons. And as I said in my blog post on cultural hibernation, travel is also a form of cultural immersion. That said, there is plenty in tourism that needs to be regulated, directed and planned well, so travellers and economies can both benefit from it, not just in the short term but in the long term as well.
I can’t wait for my next real holiday trip, and it’s been ages since I travelled anywhere. You could say that the long hiatus in my advertising and brand communications career has been one long extended holiday. But it wasn’t of my making and so it doesn’t qualify as a vacation.
Wherever you are travelling next, think about the kind of vacation you wish to have and also its impact on the people and places you’re visiting.
The featured image at the start of this post by Spencer Davis on Unsplash, is of Dubrovnik, Croatia, an extremely popular tourist destination after the filming of Game of Thrones there.
This article was originally published on my blog on January 11, 2024.
