Is tourism-based development good for the poor?: A general equilibrium analysis for Thailand

Abstract

In low-income countries, the use of tax revenues to fund tourism promotions is motivated in part by the belief that tourism growth will improve income distribution by expanding demand for relatively low-skilled labor. We examine this belief for the case of Thailand, a highly tourism-intensive economy, using a new and specifically designed applied general equilibrium model. Thailand's tourism boom, fueled in part by a series of publicly funded promotional campaigns, has coincided with a period of worsening inequality. We find that growth of inbound tourism demand raises aggregate household income, but worsens its distribution. This is because tourism sectors are not especially labor-intensive in the Thai context, and because the expansion of foreign tourism demand creates general equilibrium effects that undermine profitability in tradable sectors (such as agriculture) from which the poor derive a substantial fraction of their income. These results indicate that tourism growth is not a panacea for other goals of development policy; to address inequality, additional policy instruments are required. We explore this implication with the example of a lump-sum tax imposed at different rates for rich and poor households. In addition, we examine the robustness of our main results with respect to alternative factor market assumptions relevant to the Thai economy.