Revisiting the Balassa–Samuelson effect: International tourism and cultural proximity

Abstract

This article focuses on a neglected part of the well-known Balassa–Samuelson (B-S) effect in international trade, namely, the specific role of tourism in equilibrating the purchasing power parities across areas. The article aims to highlight in particular the cultural bias in destination choice by foreign tourists and its importance as a barrier for eradicating economic inequality between countries. We consider international tourism here as a mixed type of tradable service that leads to – short-time, but potentially massive – cross-border movements of people that can impact income redistribution among countries. Our claim is that this short-time movement is positively biased towards culturally closer localities. The recognition of this role of cultural proximity in the tourist choice destination can help fine-tune empirical models of international goods or services to reality. To test our hypothesis, a unique big data set for the EU28 and all the Organisation for Economic Co-operation and Development (OECD) countries (4031 observations on the shares of outbound tourists per country) is composed for the year 2014. We use data from the UN World Tourism Organization, Centre d’Etudes Prospectives et d’Informations Internationales (CEPII, Paris; especially on linguistic proximity), and the six well-known Hofstede indices of cultural dimension: individualism, power–distance relationship, masculinity, uncertainty, indulgence and long-term orientation. To fully specify our tourist destination model, we include also climate-related explanatory variables, reflecting sun, rain and wind differences between sending and recipient countries. Regression analysis with fixed effects and a hierarchical (multilevel) model both lead to consistent empirical estimates. Our results clearly demonstrate that tourism is a significant counter-balancing factor for the B-S effect that seems to be present and related to non-trade sectors and wages across the countries involved. Moreover, we find that linguistic proximity is statistically and economically the most powerful quantitative proxy for cultural factors, which determine the outbound tourists’ destination choice.