82021 OCTOBER 2013 • Number 127 Can Tourism Encourage Better Export Performance and Diversification in Nepal? José Guilherme Reis and Gonzalo Varela Entering and successfully surviving in export markets is a costly process for firms. Key steps for success include learning about the existence of foreign demand, determining the production costs of exportable goods, building a high-quality reputation, succeeding in product branding to reduce competitive pressures, constant upgrading of quality standards to better serve demanding international clients, and remaining competitive with other players in the global marketplace. Drawing on the findings of recent research (Reis and Varela 2013), this note argues that tourism can help alleviate some of these costs by providing a relatively inexpensive platform for cost discovery and acting as a low-cost in-house trade fair, accessible to all domestic producers. Combining product-level data on the world’s and Nepal’s exports (for goods that are both related and unrelated to tourism) with Nepalese data on tourist inflows and expenditures and macro indicators on relative prices results in a positive association between tourist inflows from given destinations and their expenditures with future merchandise exports of tourist-related products to those destinations. For goods previously unrelated to tourism, data reveal no connection between tourism flows and their future exports. The spillovers from tourism into merchandise export performance and diversification imply that there are gains to be had from cooperation between tourism and export promotion activities. How Does Tourism Help Merchandise ric in the tourists’ home countries and the rapid increase in Exports Expand? Nepal’s pashmina-related exports to the West, where it soon Two decades ago, European tourists in Nepal discovered the became fashionable. finest cashmere wool, pashmina, a piece of fabric that To what extent is the pashmina case representative of the “makes cashmere feel like cardboard.”1 Pashmina is the soft potential effect that tourist inflows may have on foreign de- fur found close to the skin around the neck and chest of the mand of traditional or “niche” goods produced in an econo- Chyangra goat, which lives at altitudes of 12,000 to 14,000 my? Conceptually, the mechanism would work as follows: feet in the Himalayas. Shawls made out of this wool have first, high-income tourists exhibit a preference for traditional, been worn for centuries by the royalty and the elites in the cultural or niche goods, which are not typically demanded by region; it is a status symbol in the East. In India and Nepal, local consumers; second, producers in the host economy di- pashmina blankets were essential components of a wealthy versify their production structure and may be induced to woman’s dowry. The “discovery” of pashmina by European adapt their quality and technical standards to those demand- tourists was a key contribution to the promotion of the fab- ed by the international tourists; third, back in their home 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise countries, tourists act as promoters of these niche products US$11,500. For example, for producers of organic essential from abroad, which may generate an increase in foreign de- oils, the German Cooperation Agency (GIZ) encouraged par- mand for these goods. ticipation in an organic trade fair in Germany by providing a There are two mechanisms operating within the channel cost-sharing scheme. Six Nepalese firms were invited, of linking tourism with merchandise export performance and which three agreed to participate. Even if, according to firms’ diversification, both of which are of key importance for a low- sources, export revenues more than doubled after participa- income country such as Nepal: (i) tourism facilitates learning, tion and they managed to diversify destinations, firms and (ii) it acts as a springboard for product promotion abroad. stopped participating when GIZ withdrew financial support. First, tourism facilitates learning. As argued by Haus- This case suggests that even if standard product promotion mann and Rodrik (2003), learning what one is good at pro- strategies are considered promising and profitable, liquidity ducing is an important challenge faced by countries on their or other constraints impede domestic firms from taking ad- path to development. Because self-discovery is costly, and the vantage of them. Tourists inflows help alleviate these con- appropriability of the discovery is low once it occurs (other straints by bringing the “fair” to the local marketplace. entrepreneurs can imitate the discoveries), there is typically These two mechanisms will likely affect exports both on an undersupply of learning on what can be produced and suc- the intensive and extensive margins. They will improve ex- cessfully marketed.2 While the inflow of tourists does not port performance of firms already exporting touristic prod- eliminate this market failure, it substantially reduces the costs ucts through the promotion effect, and they will facilitate of self-discovery associated to exportable products, because it entry of new firms into export markets of existing and new brings a sample of the international market to the local econ- touristic products by reducing both the fixed and variable omy. Tourism provides virtually free information about inter- costs of exporting, and thus making export activities more ac- national demand, which is one of the greatest uncertainties cessible to relatively less productive firms. concerning international trade (Rauch and Watson 2001), The literature on the economics of tourism has typically particularly regarding tastes; quality and technical standards focused on the direct and indirect effects that tourists’ expen- required; clients’ willingness to pay; and niches, both in terms ditures have on economic growth via increased expenditures of goods unavailable in foreign countries and in terms of tar- in hotels, restaurants, entertainment and so forth, and their get export markets for particular products. Tourism also fa- associated multiplier effects, which involve a subset of the cilitates learning about production costs without having to links between tourist spending and domestic performance, incur expensive experimentation. As argued by Lejarraga and described at the top of figure 1, including the leakages (see, Walkenhorst (2013), new goods channeled through tourism for example, Kweka, Morrissey, and Blake [2003] for Tanza- are ones in which the minimum efficient scale is lower than in nia, or Durbarry [2004] and Cattaneo [2009] for Mauritius). most other sectors; tourism-led entrepreneurs can test a for- eign market without incurring the transaction costs of ex- Figure 1. How Can Tourism Affect Domestic Economic Performance? porting abroad (no border or administrative barriers, trans- port costs, and the like), and the risks associated with the Tourist discovery are to some extent offset by the presence of a tour- spending ism market, because trial products can be sold to interna- in the Domestic economy domestic Inputs Exportable outputs tional tourists. economy • agriculture • agriculture Second, tourism acts as a springboard for promotion • hotel link • manufacture • manufacture of domestic niche goods in foreign markets. It operates as a • restaurants • services • services • travel agencies low-cost, in-house trade fair, accessible to all domestic pro- • transport Wages (induced effect) ducers. Exporting firms often participate in trade fairs to • entertainment• increase awareness and interest among foreign traders of • niche goods their exportable products, traders who will later be more leakages likely to place import orders. In fact, in the United States, promotional/ World economy trade show expenditures are the second largest item in the network effect • imports business marketing communications budget after advertis- • remittance of profits ing (Gopalakrishna et al. 1995). Conversely, for firms in a • foreign remote, low-income country such as Nepal, costs associated intermediaries with participation in trade fairs, or more generally, expendi- • demand for exports of niche injection ture in product promotion, can be a binding constraint to products export growth. Anecdotal evidence suggests that costs for a Nepalese firm to participate in a trade fair are around Source: Authors’ adaptation based on Cattaneo (2009). 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise However, literature has been relatively silent on the boost that on exports, both of touristic services and of merchandise in tourist spending can provide—through promotional, network, general (figure 3). and learning effects—on export performance and diversifica- The composition of tourist inflows by origin changed, re- tion, which is where this note contributes. An exception is flecting the international changes in the distribution of in- the work of Lejarraga and Walkenhorst (2013); in line with come per capita. While inflows from high-income countries Reis and Varela (2013), Lejarraga and Walkenhorst argue that represented about 55 percent of the total in the early 2000s, tourism-related activities help diversification by reducing they accounted for 35 percent of total inflows in 2011. Dur- self-discovery costs. They provide positive cross-country cor- ing the same period, Chinese inflows increased from 2.4 per- relations between tourist receipts as a portion of gross domes- cent to 8.4 percent, Indian inflows increased from 17.8 to tic product (GDP) and export diversification. Further, Lejar- 20.3 percent, and inflows from Sri Lanka (mainly related to raga and Walkenhorst argue that the ability with which pilgrimage) increased from 2.7 to 8.1 percent (figure 4). countries can leverage tourism to discover new products and Identifying the Spillovers from Tourism into exports depends on the strength of the links of tourism with Merchandise Exports the rest of the economy, and they provide some evidence on factors that may influence the extent of these links, such as Strategy the entrepreneurial capital of the host economy and the level The spillover effect that the inflow of tourists may have on of economic and social development, as well as the absence of merchandise exports can be identified by estimating an aug- violent crime and, more generally, safety and stability. mented export supply function that exploits three sources of variation: (i) variation over time, by looking at the period Trends on Tourism and Trade in Nepal 1990–2011; (ii) variation over products, by looking at the The total inflow of tourists, as well as their expenditures, has 19 goods, including tourism-related or niche goods as well been trending upward since the early 1990s, with a tempo- as products that should, in principle, be unrelated to tour- rary decrease during the conflict years of the late 1990s and ism, but also important in Nepal’s export basket; and (iii) early 2000s. Indeed, tourists’ expenditures per day measured variation across country of origin of tourists/destination of in current U.S. dollars3 more than doubled in the last 20 merchandise exports.5 The export supply function incorpo- years. In real terms, after controlling for the loss of purchasing rates as regressors the evolution of the real exchange rate to power of the dollar over that period of about 50 percent, tour- capture relative price effects, a world demand factor proxied ists’ expenditures increased roughly by 50 percent over the by world exports of the product, and product-fixed (or last two decades (figure 2).4 The length of stay seems stable product-destination) effects to control for time-invariant over the last 20 years, just above 10 days, on average. On the factors affecting the supply of exports of specific products. other hand, the real exchange rate depreciated substantially In addition, the export supply function incorporates tourist during the 1990s, while it has displayed the opposite trend inflows and their per-day expenditures and interactions during the past decade, which implies that Nepal is becoming with a touristic product dummy to capture potential spill- more expensive in dollars, with likely negative implications over effects. Figure 2. Tourist Inflows and Expenditures (Income) per Day Figure 3. Real Exchange Rate .3 .25 RER (ratio of CPI/nominal exchange rate) .2 .15 .1 .05 0 1990–94 1995–99 2000–2004 2005–11 Source: Nepal Tourism Board. Source: World Development Indicators (WDI). 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise Figure 4. Distribution of Tourist Inflows by Origin 100 90 others United Kingdom 80 United States Sri Lanka 70 Switzerland Spain 60 Netherlands percent Japan 50 Italy 40 India Germany 30 France Denmark 20 China Canada 10 Austria Australia 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Nepal Tourism Statistics, Ministry of Culture, Tourism, and Civil Aviation. The evidence disproportionately affect exports of touristic goods and the Table 1 reports the results of different specifications of the previous year’s inflows of tourists. augmented supply function for exports. The first column Overall, results strongly suggest that the quantity of tour- reports the results when year dummies are not included. Re- ist inflows are associated with exports of tourist-related prod- sults suggest that increases in inflows of tourists from coun- ucts to the tourists’ home countries in the year after their visit try j in period t-1 are associated with increases in exports to to Nepal. This confirms spillover effects from tourism into that country j in period t, all other things equal. The second exports of niche or country-specific goods. Consistently with column reports results when the (log) expenditure per day this hypothesis, the quantity of tourists is not associated with of tourists and its interaction with the tourist product dum- exports of non-tourist-related products in the year after their my are incorporated. Results are virtually unchanged and visit. The spillovers are significant statistically and economi- tourist expenditure per capita seems to exert no effect di- cally; indeed, their magnitude is sizable. The observed average rectly or indirectly via its interaction with the tourist prod- increase in the number of tourists of about 5 percent per year uct dummy. The third column reports the results of the is systematically associated with, all else being equal, higher baseline specification now introducing year dummies, exports of tourist-related products by about 2.85 percent per which implies that those regressors with time variation only year, taking as a reference the results from the most demand- are dropped (the real exchange rate and the per day expendi- ing specification (column 4 of table 1).6 ture of tourists). The spillover effect from tourism into Why Should Policy Makers Care about greater exports of niche or traditional goods withstands the Tourism Spillover Effects? inclusion of the year dummies. The fourth column intro- duces a set of year dummies interacted with the touristic Tourism can act as a platform to improve export performance product dummy to control for possible macro shocks that in existing traditional products and to turn traditional goods 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise Table 1. Results Exploiting Variation over Time, across Products, and across Policy makers of low-income coun- Origin/Destination tries with tourism potential should take Dependent variable: exports (1) (2) (3) (4) stock of this channel for at least two rea- sons. First, there is space for cooperation Lagged predicted log tourist 0.277 0.187 -0.254 -2.418* between efforts by the export and tourism (0.301) (0.599) (0.239) (1.237) promotion agencies. If increased tourist Lagged predicted log tourist*touristic inflows have positive effects on exports of 1.494*** 1.380** 0.713** 2.989** export products traditional products, then efforts to at- (0.252) (0.489) (0.291) (1.237) tract tourism are of interest not only to agents directly related to the tourism in- Log world imports of the same product 0.456*** 0.423*** 0.246*** 0.255*** dustry, but also to current or potential ex- porters. This means that there are gains to (0.0735) (0.0831) be realized from cooperation between Log real exchange rate -0.32*** -0.32*** tourism and export promotion agencies. (0.0864) (0.102) These efforts may include, for example, incentivizing the use and promotion of lo- Lagged log expenditure per day tourists 0.0782 cal products in hotels at the high end of the market. For example, in Mauritius, a (1.185) country that has succeeded in achieving Lagged log expenditure per day substantial gains from the tourism indus- 0.214 tourists*touristic export products try, a yearly food exhibition (Food Exhibi- (1.121) tion Mauritius) is organized to maximize (0.0779) (0.0792) trade opportunities, bringing together producers of potentially exportable local Constant -19.1*** -15.8*** -4.341 -3.179 food products, international traders, and (2.394) (3.863) (2.282) (2.580) tourists. Similarly, the Creole Festival in Year dummies No No Yes Yes the Seychelles attracts tourists from around the world and promotes local food Year dummies*touristic product dummy No No No Yes products abroad. Nepalese authorities Product—tourism origin FE Yes Yes Yes Yes could encourage and smooth the way for international hotel chains already operat- Observations 2,465 2,430 2,465 2,465 ing in the country to work with producers R-squared 0.161 0.161 0.212 0.223 and traders of traditional exportable food Number of product-origin combinations 204 204 204 204 products such as spices, tea, coffee, honey, F-test (p-value) lagged pr. log tourists and so forth to organize small-scale food   0.024 + lagged pr. log tourists*T=0 exhibitions that could help build a trade- mark for domestic products and promote Source: Authors’ calculations. Note: Robust standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1. FE = fixed effects.  them internationally through the tourism channel. that are not yet exported into exportable ones. It facilitates Given that tourism acts as an export promotion channel, learning by bringing a sample of the international market to a top priority is strengthening domestic quality standards and the local economy, where local producers can experiment, product certification systems. While efforts have been made but with lower transaction costs and risks. to improve product certification processes, particularly in ex- By providing evidence on sizable spillovers from in- port markets, it is important that these processes are also im- creased inflows of tourists on increased exports of traditional plemented domestically. For example, the “Chyangra Pash- products, the strength of a new channel through which tour- mina” logo introduced by the Association of Pashmina ism in Nepal can have economywide gains emerges. A 1 per- Exporters of Nepal is used only by Nepal’s exporters. Howev- cent increase in tourist inflows from a particular country is er, if tourist consumption of products in Nepal also promotes systematically associated with a 0.5 increase in exports of tra- exports, building the brand domestically can also help to ditional goods to that particular country one year later, on av- build it internationally. This is especially relevant for food erage, controlling for world demand for the product and prod- products, where sanitary concerns are likely to be a binding uct- and year-specific factors. constraint for tourist experimentation of domestic products. 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise About the Authors 6. These results are likely an underestimate of the spillovers of tourism on exports of these products, given that part of the José Guilherme Reis is a Country Sector Coordinator in the Pri- “exports” take place through the direct purchase of niche vate and Financial Sector Development Unit of the Europe and goods by tourists in Nepal, and therefore are not actually reg- Central Asia Region in the World Bank. Gonzalo Varela is a istered as exports, but as domestic sales. Trade Economist at the Poverty Reduction and Economic Man- agement Network of the World Bank. References Acknowledgment Cattaneo, O. 2009. “Tourism as a Strategy to Diversify Exports: Lessons from Mauritius.” In Breaking Into New Markets: Emerg- The authors acknowledge helpful comments from Gabi ing Lessons for Export Diversification, ed. Richard Newfarmer, Afram, Ana Cusolito, Thomas Farole, Bertine Kamphuis, William Shaw, and Peter Walkenhorst, 183–95. Washington, Jose Daniel Reyes, Swarnim Wagle, and Deborah Winkler. DC: World Bank. Chambers, V., and E. Angell. 1998. “Passion for Pashmina: The Notes Fabric That Makes Cashmere Feel Like Cardboard.” Newsweek 131 (19): 70. 1. “Passion for Pashmina: The Fabric That Makes Cashmere Durbarry, R. 2004. “Tourism and Economic Growth: The Case of Feel Like Cardboard” was a Newsweek headline in 1998 Mauritius.” Tourism Economics 10 (4): 389–401. Gopalakrishna, S., G. Lilien, J. Williams, and I. Sequeira. 1995. “Do (Chambers and Angell 1998). Trade Shows Pay Off?” Journal of Marketing 59 (3): 75–83. 2. This notion departs from standard neoclassical growth Hausmann, R., and D. Rodrik. 2003. “Economic Development theory, where technology is assumed common knowledge, so as Self-Discovery.” Journal of Development Economics 72 (2): no cost uncertainty exists, and hence, no costly self-discovery 603–33. processes either. Kweka, J., O. Morrissey, and A. Blake. 2003. “The Economic Poten- 3. All dollars are U.S. dollars, unless otherwise noted. tial of Tourism in Tanzania.” Journal of International Develop- ment 15: 335–51. 4. The loss of purchasing power of the dollar is measured as Lejarraga, I., and P. Walkenhorst. 2013. “Economic Policy, Tourism the GDP deflator inflation of the United States over the peri- Trade and Productive Diversification.” Working Paper 2013-07, od, which is slightly above 51 percent (source: World Devel- CEPII Research Center. opment Indicators). Rauch, James, and Joel Watson. 2001. “Entrepreneurship in Inter- 5. The choice of products is based on three criteria: the impor- national Trade.” NBER Working Paper 8708, National Bureau of Economic Research, Cambridge, MA. tance of the product in Nepal’s export basket, the identifica- Reis, J. G., and G. Varela. 2013. “Travel Channel Meets Discovery tion of the product as ”strategic” under Nepal’s Trade Integra- Channel, or How Can Tourism Encourage Better Export Perfor- tion Strategy 2010 (NTIS), and whether it is traditionally mance and Diversification in Nepal.” Policy Research Working associated with the “Nepal brand.” Paper No. 6669, International Trade Department, World Bank. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduction and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK    www.worldbank.org/economicpremise