Economic leakages in tourism: A comprehensive review of theoretical and empirical perspectives

Abstract

Economic leakages in tourism are an under-researched area that requires special emphasis from the tourism academia. Leakages persist in a destination and obstruct the economic development of the region. Though mainstream literature highlighted more about the positive side of tourism development, relatively limited literature discussed about leakages. This study critically examines the existing body of knowledge on economic leakages in tourism destinations in order to ascertain the current status of the research and identify any knowledge gaps. This study thoroughly examined theoretical and empirical data on economic leakages in tourism destinations and identified directions for future research. This study further goes into detail on how crucial leakage mitigation is to establishing resilience and self-sufficiency while rebuilding tourism destinations after the pandemic. Finally, theoretical and practical implications are provided.

Keywords

Economic leakages economic development COVID-19 tourism revival self-sufficiency resilience

Introduction

Tourism is regarded as an engine of economic development, driving growth, and prosperity across the world. Tourism has historically been a catalyst of economic development throughout the world due to its minuscule requirement of investable capital, skilled labor, and high-end technology, unlike manufacturing or service industries (Terzioglu and Gokovali, 2016). According to WTTC, the global travel and tourism industry contributed 5.81 trillion U.S. dollars to the world GDP and employed over 289 million in 2021 (UNWTO, 2020; WTTC, 2022). Furthermore, the tourism industry is expected to grow enormously contributing millions of dollars to the global economy by 2050 (Meo et al., 2018).

The mainstream literature mostly highlights the positive side of tourism development such as contribution to the region’s GDP, income and employment generation, foreign exchange earnings for external payments, new business opportunities in the region, tax earnings to the governing authorities, development of local infrastructure, multiplier effect, etc. (Terzioglu and Gokovali, 2016; Boz, 2012; Harcombe, D., 1999). But very few studies have highlighted the adverse effects of tourism development in a region which include inflation, over-exploitation of economic resources, over-dependence on the tourism sector for economic development, resource mobilization from other industries to tourism, and economic leakages (Harcombe, 1999). These adverse effects unknowingly prevail in a destination and deteriorate its economic health. For instance, an empirical study on tourism-led inflation in Malaysia revealed that the expansion of the tourism industry had triggered both short- and long-run inflation in the country (Shaari et al., 2018).

Despite the fact that the tourism industry positively contributes to the destination’s economy, the destinations are not able to absorb the expected benefits mainly due to economic leakages (Mbaiwa, 2005). Economic leakages are the proportion of total tourist expenditure that does not reach or remain in the destination’s economy (Garrigós-Simon et al., 2015). They impede local economic development and prevent the local communities from reaping the economic benefits of tourism activity (Wiranatha et al., 2017). For example, an empirical study in Thailand has revealed that the vibrant tourism industry in Thailand departed around 70% of its revenue to other nations due to economic leakages (Sinha et al., 2012). Boz (2012) also contends that economic leakages have a negative impact on the destination and prevent the economic benefits from trickling down to the host communities (Boz, 2012).

Very few researchers have made an attempt to highlight the significance of leakages in deteriorating the economies of tourism destinations. Although the literature on the positive facet of tourism and economic development is vast, very limited literature has focused on examining economic leakages in tourism destinations. In this line, the present research provides a comprehensive review of the previous studies that examined economic leakages in tourist destinations. The main agenda of this study is to discuss, debate, deliberate, and contemplate agreements and disagreements regarding the empirical pieces of evidence on economic leakages in tourism destinations. This critical evaluation investigates the current state of research along with the following objectives: (a) identifying the relevant theoretical and empirical data and their substantial contributions to the body of knowledge, (b) identifying the research gap for future research, and (c) understanding the role of economic leakages in tourism destinations in the post-COVID world. This comprehensive review is the first of its kind in the selected area of research and assists academicians and policymakers to be well-versed with the empirical data and methodologies followed by the researchers.

Economic leakages in tourism

The concept of leakages has its roots in the Keynesian circular flow of income model. John Maynard Keynes described an economy as an unending flow of money between different sectors of an economy. The intricate nature of monetary flow between the economic agents of the Keynesian five-sector economic model has resulted in economic leakages and injections (Keynes, 2018). The monetary outflows from an iterative economic system are referred to as leakages, whereas injections are inflows into the circular system. J M Keynes viewed savings, taxes, and import payments as leakages in an economic system. The savings and taxes paid by households and businesses are the proportion of income that does not enter into the economic system at once reducing the stimulus impact of income in the system. The money paid for imported goods and services also departs the country in the form of foreign currencies leaving very minimal impact on the local economy (Ünlüönen et al., 2011). Thus, economic leakages are popularly emphasized as financial outflows that adversely impact the economic system of a region.

Over the decades, researchers across the world have proposed various definitions for economic leakages. Though there exists a wide variance in the definitions proposed by scholars around the world, the fundamental idea remained the same. Leakages are adverse and universally acknowledged to have a detrimental effect on the destination’s economy in numerous ways. Leakages are generally defined as the proportion of tourist expenditure that does not reach or remain in the destination’s economy (Garrigós-Simón et al., 2015). They are also defined as payments made by the tourists at the destination for imported goods and services (Boz, 2012). Sandbrook (2010) viewed leakages as “the failure of tourist spending to remain in the destination's economy.” A report by UNCTAD described leakages as “the process whereby part of the foreign exchange earnings generated by tourism, rather than reaching or remaining in tourist-receiving countries, is either retained by tourist-generating countries or other foreign firms” (UNCTAD, 2010; Terzioglu and Gokovali, 2016).

Leakages occur in a destination when the destination’s economy fails to provide a reliable, continuous, competitively priced supply of goods and services of consistent quality and quantity to meet the market demand (Wiranatha et al., 2017). Jönsson (2015) asserts that when a proportion of the income generated in the region leaves the local economy in the form of leakages, the capital for investment and consumption in the local economy gets shrunk resulting in poor economic development in the region. Empirical studies also claimed that economic leakages prevent the local communities of destinations from absorbing all the benefits of tourism activity (Mtapuri et al., 2022; Wiranatha et al., 2017).

Leakages arise mainly due to the structural flaws in the economic system of a region (Ünlüönen et al., 2011). Nations with meagre economic development and poor economic diversification cannot cater to the needs of expanding tourism industry resulting in import leakages (Mtapuri et al., 2022). According to Boz (2012), developed economies benefited more from tourism activity than developing or less developed countries (LDCs) due to economic leakages. According to the UNEP study, the leakage rate in developing and LDCs is approximately 50–60% and 10–20% in developed countries and India has a tourism leakage rate of around 40 % (Sinha et al., 2012; Garrigós-Simón et al., 2015).

The extant literature has discussed both theoretical and empirical dimensions of economic leakages extensively, yet there exist research gaps in the literature. This study mainly aims to identify research gaps in the literature to pave the way for future research. Following the review, methodology is presented which is followed by research findings. The penultimate section discussed the research gaps and the role of leakages in the post-pandemic world. Finally, theoretical and practical implications for policy and industry development are presented.

Methodology

This study has critically reviewed the literature on economic leakages in tourism destinations, indexed on Scopus and Google Scholar to thoroughly understand the key concepts such as sources, factors, and mitigation strategies of economic leakages in destinations and methodological approaches followed in previous research studies. This method has been widely adopted in the tourism and hospitality discipline (Figueroa-Domecq et al., 2020; Law et al., 2022; Shiwen et al., 2022).

First, we searched for relevant published articles about leakages in tourism destinations from Scopus and Google Scholar. These two data sources are extensively used by the academic community in tourism and hospitality research, ensuring the retrieved articles' reliability and credibility. Scopus was selected because the data is indexed from academic networks, which is preferred over traditional databases. Google Scholar also provided research papers from validated journals, which helped our critical review (Cheng et al., 2023). In the current study, articles from databases were retrieved in two rounds of data search. In the first round, the Scopus database was selected and the keywords for searching the relevant literature were (“economic leakages” OR “tourism leakages”) AND (“tourism” OR “destinations”). There was no restriction on the publication time in our retrieved results. Documents only in English were included. Documents such as journal articles, conference papers, and book chapters were included in our scope of research. The second round of data collection has been conducted in Google Scholar to supplement the missing articles.

Through the keyword search, a total of 1629 documents from all academic disciplines (which include 39 from Scopus and 1590 from Google Scholar) were extracted from both data sources. The authors have extensively reviewed the documents to ensure that their topic and content were relevant and directly related to the current study and that the articles were of good quality and reliability. After a thorough examination of the abstract sections and the content of all the documents, the literature directly related to the tourism discipline and which explains the phenomenon of economic leakages in tourism destinations were only included for the review study. Irrelevant documents or the documents which are not a part of tourism discipline or doesn’t explain about tourism leakages were deleted and excluded from the scope of the study. More specifically, documents were exempted when leakage was mentioned only in references or explained another topic (Figueroa-Domecq et al., 2020; Shiwen et al., 2022). According to the above criteria, a total of 46 documents pertaining to economic leakages in tourism destinations were selected for study which included research articles, conference papers, a thesis, and book chapters. Later, the researchers have conducted a qualitative analysis of the content of the selected documents.

Appendix section displays the classification of the literature on the basis of the title, authors, Year of Publication, methodology, research methods, study area, and findings of the empirical studies for future reference.

Research findings

The results of an extensive review of 46 research studies on economic leakages in tourism are presented in this section. They render a detailed analysis of research themes on economic leakages based on sources, factors, mitigation strategies, and methodological approaches used in the literature.

Areas of tourism leakages

Over the years, economic leakages have evolved and broadened in response to the changing economic dynamics in the world. Globalization has opened up economies and facilitated the unrestricted movement of capital, goods and services, and labor (Cooper, C. and Wahab, S. eds., 2005. Tourism in the Age of Globalisation. Routledge). With the changing order in the global economy, businesses in the tourism sector also started adapting cross-border business practices, that is, the movement of capital, labor, and goods and services between nations (Cooper, C. and Wahab, S. eds., 2005. Tourism in the Age of Globalisation. Routledge; Mowforth and Munt, 2015). This phenomenon has resulted in the emergence of a new family of economic leakages in tourist destinations.

Leakages are destination specific and vary with the region depending upon the economic, cultural, geographical, social, and political conditions of the region (Lacher and Nepal, 2010; Terzioglu and Gokovali, 2016). The juxtaposition of two nations with different geographical, economic, social, cultural, and political conditions will explain the phenomenon of leakages more scrupulously.

Bhutan is often touted as an example of sustainable tourism development and has seen a significant rise in tourist footfalls over the years. Bhutan is exposed to high levels of leakage due to the region's deep cultural beliefs and geographical conditions. The Buddhist culture and principles profoundly influence Bhutan’s governance and policy-making. The practice of freedom from animal slaughtering and the steep increase in meat consumption by tourists and locals has mandated local tourism businesses and authorities to import meat from other regions. The hotels and resorts in Bhutan are found to import food and beverages accounting for around 65.6% of total expenditure, and meat imports have the lion’s share of around 24.1% in total food and beverage imports (Pratt et al., 2018). The strategies of the Bhutanese government to pursue self-sufficiency and import substitution by building a slaughterhouse have resulted in severe public outrage.

On the other hand, Bali has seen a sharp increase in tourist footfalls over the years yielding a wide range of benefits to Bali's economy. Bali is an island nation, and small islands are highly prone to economic leakages (Archer and Fletcher, 1996). An empirical study on Bali has shown that Bali imports food, beverages, fruits, vegetables, and many other goods and services to cater to the needs of the expanding tourism industry (Wiranatha et al., 2017). The average leakage in the hotel sector in Bali is around 19.5%, and 4- and 5-star international chain hotels have the highest leakage rate of around 55.3%. Profit transfers by 4- and 5-star chain hotels also contribute significantly to leakages in the region (Suryawardani et al., 2014). Although the tourism sectors in both nations are thriving and expanding, leakages nevertheless exist in both regions. The causes may differ in both regions but a sizable portion of tourism earnings are lost in the form of leakages.

The majority of research studies have focused on the leakages primarily occurring due to the import of goods and services, expatriation of profits by foreign owners, and recruitment of foreign employees in local tourism businesses. Empirical studies conducted in Gambia (Rid et al., 2014), Turkey (Terzioglu and Gokovali, 2016), Morocco (Leonhard, 2012), and Botswana (Rylance and Spenceley, 2017) are the pieces of evidence inclined toward leakages occurring due to import payments, expatriation of profits and foreign employees.

As the research progressed with time, researchers have also widened the scope of the study and added new dimensions of leakages to the existing body of literature. Ünlüönen et al. (2011) have summarized other sources of leakages which include (i) profits and commissions of foreign tour operators, (ii) foreign-owned transportation, (iii) foreign capital, (iv) payments made to foreigners for management contracts, royalties, patents, and transferring know-how, (v) overseas marketing and promotional expenditure, (vi) foreign exchange costs for tourism investments, (vii) commissions paid to foreign banks, credit card, and cheque agencies used by tourists, (viii) overseas education and training costs, (ix) savings of employees and businesses, and (x) taxes by the government (Ünlüönen et al., 2011).

There are many empirical evidences which substantiate the claims of previous research studies. For example, a study in Gambia has revealed that 75% of tourism income leaves the region due to repatriation of profits, overseas tour operators, imported goods and services, salary remittances by foreign employees, overseas marketing expenditure, and foreign transportation services (Rid et al., 2014). Similarly, a study carried out in China has shown that the import leakage was 14.8% of total international receipts (Yan and Wall, 2002). Another study in the villages around Kanha National Park in India has identified leakages occurring mainly due to the ownership of the resorts by outsiders and employment of locals in lower positions (Sinha et al., 2012). According to Hampton and Jeyacheya (2020), small island developing states (SIDS) are exposed to high levels of economic leakage and estimates from the World Bank report suggest that SIDS have leakage rates ranging from 55% to 80% in countries such as the Bahamas.

Moving a step further, a few scholars have made an attempt to classify economic leakages into internal and external leakages based on their nature of occurrence (Boz, 2012; Anderson, 2013). Money that initially enters into the destination in the form of tourist expenditures but departs from the destination in the form of import payments is referred to as an internal leakage (Boz, 2012; Anderson, 2013). The money that doesn't even reach the destination's economy is referred to as an external leakage such as foreign tour operator’s profits, commissions paid to travel agents, foreign airlines, etc. (Boz, 2012).

The developing and LDCs are in dire need of capital and extend a huge set of incentives to attract foreign investments. Even though foreign investment is a gateway to leakage in a region, investable capital always plays a crucial role in a region’s economic development. To foster a supportive business environment, tax exemptions are given to overseas investors. Few researchers view tax exemptions as leakages as they are income loss to the nation (Suryawardani et al., 2014; Ünlüönen et al., 2011). In 2014, the Philippines government extended tax holidays such as a 100% exemption of all taxes and customs duties on the imports of capital investment and equipment to the registered foreign businesses investing and operating in the Tourism Enterprise Zone (TEZ) (Turvill, 2014). Though this move initially led to income loss to the nation but attracted much-needed foreign investments to the country.

Factors contributing to economic leakages

Economic leakages are unavoidable in a destination, and factors contributing to economic leakages vary with each destination depending on the economic, cultural, social, and geographical conditions of the region (Wiranatha et al., 2017). For example, Bhutan, which is seen as an example for promoting sustainable tourism development, has high levels of leakage due to its deep cultural beliefs and geographical conditions (Pratt et al., 2018). In the same way, Turkey is subjected to high levels of leakage due to the unfair business practices adopted by foreign-owned tour operators (Ünlüönen et al., 2011; Terzioglu and Gokovali, 2016). In both cases, leakages exist but factors contributing to the leakages are different and distinctive based on local conditions.

In this line, this extensive review has identified a list of factors that are primarily responsible for leakages in destinations throughout the world, they are as follows: (i) lack of capital and ownership (Hampton, 1998; Sandbrook, 2010; Birinchi et al., 2013), (ii) lack of skilled labor (Sinha et al., 2012; Rid et al., 2014), (iii) lack of supply of goods and services (Hussain et al., 2012; Garrigós-Simon et al., 2015; Chirenje et al., 2013), (iv) poor economic diversification in the region (Garrigós-Simón et al., 2015; Supradist, 2004), and (v) poor linkages between the tourism sector and other sectors of the economy (Terzioglu and Gokovali, 2016; Hampton and Jeyacheya, 2020; Badar and Bahadure, 2020).

Additionally, research studies have viewed seasonality as one of the potential factors of leakage. Seasonality in a destination leads to a significant mismatch between the demand and supply of goods and services resulting in either wastage of goods or high inflation in the region (Pratt et al., 2018). Due to this demand-supply imbalance, tourism enterprises are persuaded to import the necessary goods and services from other economies, causing import leakage (Trejos and Chiang, 2009). It is argued that an inconsistent and insufficient supply of goods and services results in importing the same from other regions (Lacher and Nepal, 2010; Pratt et al., 2018).

Few research studies emphasized that enclave tourism or tourist bubble is a key factor that makes the local communities hostile to tourism activity, thus contributing scarcely to local communities in a destination (Rylance and Spenceley, 2017; Garrigós-Simón et al., 2015). According to a research study on Jamaica’s tourism industry, all-inclusive tourism packages or enclave tourism packages yielded massive revenue to the accommodation sector in the region, yet it contributed barely to the region’s economy due to import leakage and salary repatriation (Boz, 2012). Hussain et al. (2012) also argued that enclave tourism in environment-protected zones makes the local communities hostile to tourism activity further affecting their livelihood opportunities.

Finally, the size of the business also contributes significantly to economic leakages. Large and transnational companies (TNCs) usually import raw materials and other production factors from other economies resulting in higher levels of leakage (Hampton, 1998; Lacher and Nepal, 2010). For example, empirical evidences from Bali (Oka Suryawardani et al., 2014) and the Valencian region (Garrigós-Simón et al., 2015) assert that large and transnational hotels in a destination use a small proportion of locally produced agriculture products and import managerial labor from other regions. Contrarily, smaller hotels are proven to procure more from the local economy (Terzioglu and Gokovali, 2016; Ivandic N and Marusic Z, 2007).

Though mainstream literature highlights numerous factors responsible for leakages in a destination, Pratt et al. (2018) strongly affirm that the inability of local communities such as poor involvement in tourism activity, lack of expertise, and inadequate tourism infrastructure contribute majorly to economic leakages in a destination and hinder the local communities from garnering the benefits of tourism (Mbaiwa, 2005).

Methodological approaches

This review study has identified that studies in the past have followed a dualistic approach, that is, both qualitative and quantitative, to discuss, debate, deliberate, and contemplate the phenomenon of leakages and estimate economic leakage rate in a destination (Pratt et al., 2018). Among the total 46 reviewed studies, 19 studies (or 41.30%) have adopted qualitative methodology, 19 studies (or 41.30%) have followed quantitative methodology, and remaining 08 studies (or 17.40%) have adopted both qualitative and quantitative approaches to examine leakages in tourism destinations.

An issue that needs a thorough investigation was given the least importance and a dedicated research study wasn't carried out for calculating a leakage for a long time. It was either a part of an economic impact assessment study (Leontief, 1992; Archer and Fletcher, 1996; Garrigós-Simón et al., 2015) or a multiplier effect study (Fletcher and Archer, 1991). Once the importance of leakage was realized, fully dedicated studies were carried out to examine leakages in a destination. Both qualitative and quantitative methods were used to investigate the causes, sources, and mitigation strategies of economic leakages and estimate the value of leakage in a destination. Both primary and secondary data were found to have an effective role in estimating the leakage value in a destination.

Research studies which examined and explained the phenomenon of leakages descriptively or in words were considered “Qualitative” in the scope of this review study. These qualitative studies have deployed widely used qualitative research methods such as open-ended interviews, observations, focus group studies, and literature reviews for collecting the data. Later, the collected data was analyzed using different qualitative data analysis methods such as content analysis, thematic analysis, summarizing, etc., and these qualitative studies have articulated the facts and figures only in a descriptive format.

On the other hand, research studies which measured leakages in a tourism destination or a nation or a region quantitatively or numerically are considered to be quantitative studies in the scope of this review study. These studies have deployed the most widely used quantitative research methods, such as input-output tables, social accounting matrix, multiplier analysis, tourism satellite accounts, and tourism value chain analysis. Additionally, few research studies have even deployed mathematical models to measure the leakage rate in the destinations accurately, which will be discussed later. These studies have quantified the phenomenon of leakages in a region and proposed a concrete numerical leakage value for easier and better understanding. These quantitative methods are widely deployed in economics and tourism research, thus proving the validity and credibility of the research findings. Table 1

Table 1.

Methodological approaches in the literature.

Description	Results
Research methodology
Qualitative	41.30% (19 out of 46)
Quantitative	41.30% (19 out of 46)
Both (qualitative and quantitative)	17.40% (08 out of 46)
Research methods
Qualitative
Content analysis	23.91% (11 out of 46)
Thematic analysis	04.34% (02 out of 46)
Conceptual study	15.21% (07 out of 46)
Case study	04.34% (02 out of 46)

Quantitative
Input-output table	26.08% (12 out of 46)
Social accounting matrix	04.34% (02 out of 46)
Multiplier analysis	04.34% (02 out of 46)
Tourism satellite account	04.34% (02 out of 46)
Tourism value chain	04.34% (02 out of 46)
Studies adopting mathematical models	06.52% (03 out of 46)

Research studies which deployed primary data	30.43%(14 out of 46)

Research methods

The research has seen a phenomenal transformation over a period of time. Research studies which typically relied on primary data have identified the key stakeholders or respondents through preliminary surveys which mainly included tourists, households, and local tourism businesses such as accommodation service providers, tour operators, local governing authorities, local NGOs, and local tourism associations. After an extensive review, it was observed that 14 out of 46 research studies (or 30.43%) relied on primary data for measuring leakage rate in their respective regions. These studies mainly deployed in-depth interviews, observations, group discussions, and structured and semi-structured questionnaires to gather primary data from the selected sample elements (Hussain et al., 2012). Both qualitative and quantitative research studies have used primary data for examining leakages in a destination.

Qualitative studies have thoroughly explored the research area and developed a conceptual base for the tourism leakages. Though quantitative studies in the past have made an attempt to explain the occurrence of leakages using different quantitative techniques, they were limited to quantify the leakage value in a region and lacked to explain the key concepts of leakages descriptively. Once the qualitative studies have summarized the whole concepts and interpreted in descriptive format, the conceptual knowledge on the tourism leakages has extended across academic communities. These qualitative studies have deployed different qualitative methods such as content analysis, thematic analysis, conceptual, and case study approach to examine and evaluate the phenomenon of leakages in tourist destinations. Among them, the studies which deployed content analysis have the lion’s share with around 23.91% (or 11 out of 46). Both thematic analysis and conceptual papers have two studies each with around 4.34%. Research studies which deployed thematic analysis method to explain the phenomenon of leakages have mostly defined the whole concept of leakages based on the themes such as areas or sources of leakages, factors of leakages in a destination, and mitigation strategies of leakages. Finally, seven research studies or 15.21% have followed case study approach to explain the phenomenon of leakages in their respective study areas.

Secondary data also had a significant role in calculating economic leakages from a region. The tools deployed in the studies to collect secondary data are input-output tables (Fletcher, J. 1989, Fletcher and Archer, 1991; Reis and Rua, 2009; Surugiu, 2009; Van and November; Weisskoff and Wolff, 1977), tourism satellite accounts (Hara 2008; Ünlüönen et al., 2011; Boz, 2012), social accounting matrix (Hara, 2008; Wiranatha et al., 2017), import and income multiplier (Fletcher and Archer, 1991; Pratt et al., 2018), etc. Out of the 46 studies that were reviewed, the lion’s share of 12 quantitative studies or 26.08% of them adopted the input-output model in quantifying leakages in destinations. This was followed by tourism value chain analysis, multiplier analysis, tourism satellite account, and social accounting matrix with two quantitative studies each (or 4.34%) out of total 46 research studies. Additional and supplementary data was collected from statistical reports published by the national or regional statistical offices, tourism development authorities, destination management plans, local tourism associations, and non-government organizations.

Mathematical models to calculate leakages

The authors have identified that research studies in the past have used qualitative methods to explain the phenomenon of economic leakages mainly due to the complexity in measurement and lack of statistical data (Garrigós-Simón et al., 2015). A few researchers have made an attempt to quantify the leakages in a destination and used well-known statistical models such as the input-output model, tourism value chain analysis, social accounting matrix, etc. to estimate the leakage rate in a destination (Rinne and Saastamoinen, 2005; Sinha et al., 2012). But, Haddad et al. (2013, p. 174) have argued that “there is a great deal of variation about the magnitude of their impact,” that is, there is a huge variance in the results due to the deployment of diverse methodologies.

To overcome the ambiguity, many researchers have proposed their own mathematical models to measure the value of leakage accurately (Ünlüönen et al., 2011; Wiranatha et al., 2017). These mathematical studies which account for three empirical studies (or 06.52%) out of total 46 reviewed studies have used both secondary data obtained from input-output tables, tourism satellite accounts, social accounting matrix, income and import multipliers of the destination, and primary data gathered from various sources in the destination to estimate the leakage rate in a destination (Suryawardani et al., 2014; Ünlüönen et al., 2011; Garrigós-Simón et al., 2015). Though calculating leakage using a mathematical model was a complex exercise, the researchers have succeeded in estimating the accurate value of the leakage effect in a destination. These mathematical studies were significant and insightful to the policymakers and other stakeholders in the region and added new methodologies to existing knowledge. For example, a study conducted in the villages around Bwindi Impenetrable National Park, Uganda, has successfully adopted a new mathematical model and identified that 78.5% of the tourism revenue generated is leaked out of the region (Sandbrook, 2010). Another study carried out in Turkey has also deployed a mathematical model to measure leakage rate in the region. The study estimated that 38.6% of total tourism income departed the region largely in the form of import of goods and services (Ünlüönen et al., 2011).

Macro level to local level

Many research studies in the past have estimated the leakages at a macro level, but very few studies have focused on examining leakages at local or micro level (Sandbrook 2010; Sinha et al., 2012). Over time, the prime motive of tourism development has shifted from macro-level economic development to local-level sustainable development (Sandbrook, 2010). Globally, policymakers also regard tourism development as an engine of economic development in rural villages (World Tourism Organization (UNWTO), 2020). This shift in policy gave birth to new forms of tourism such as rural tourism, responsible tourism, community-based tourism, ecotourism, and pro-poor tourism which mainly focus on yielding economic, social, and cultural benefits to local communities in a destination (Lacher and Nepal, 2010; McAreavey and McDonagh, 2011).

Unfortunately, rural tourism destinations are also exposed to economic leakages which restrict the economic benefits to trickle down to local communities. Rural destinations across the world such as Kanha Tiger Reserve in India (Sinha et al., 2012), Bwindi National Park in Uganda (Sandbrook, 2010), Manas National Park in India (Birinchi et al., 2013), and Kasane in Botswana (Rylance and Spenceley, 2017) are exposed to leakages largely due to the import of goods and services, foreign ownership, and imported skilled labor. Few authors have argued that the ill-preparedness of rural communities to exploit economic opportunities has contributed heavily to leakages in destinations (Mbaiwa, 2005; Lacher and Nepal, 2010). Few research studies substantiate that the lack of capital, expertise, and poor involvement of local communities has resulted in leakages in rural destinations (Hussain et al., 2012; Chirenje et al., 2013).

Measuring leakage at local level (especially for rural destinations) allows the tourism authorities to effectively devise mitigation strategies specifically for that region (Lacher and Nepal, 2010; Sandbrook, 2010). Many rural destinations have successfully adopted mitigation strategies to alleviate the leakage effect. For example, the local-level mitigation strategies devised and implemented by local communities in rural villages in Northern Thailand have successfully retained major chunk of tourism revenue within the pockets of local communities and created numerous employment opportunities in local economy (Lacher and Nepal, 2010).

Empirical research focus

Upon analyzing the extant literature, it is evident that majority of the empirical research has given special emphasis to accommodation sector in destinations. Upon reviewing 46 studies, eight empirical studies (i.e., 17.40%) are found to have conducted dedicated research studies on hotels and accommodation in destinations and rest of the studies also highlighted accommodation sector’s role in contributing to leakages. Hotels and resorts are found to be the gateways for leakages in tourism destinations. For example, empirical studies conducted in Spain (Garrigós-Simón et al., 2015), Bhutan (Pratt et al., 2018), Finland (Rinne and Saastamoinen, 2005), Sweden (Supradist, 2004), Croatia (Ivandic and Marusic, 2007), etc., have shown that premium hotels and resorts rely largely on imports for food, beverages, machinery, sanitary, etc., followed by remittances of foreign employees and foreign ownership of the establishments. These elite establishments defend that locally produced goods and services don’t meet the quality standards and supply is inconsistent and not competitively priced (Meyer, 2013; Wiranatha et al., 2017).

Rest of 38 out of 46 research studies (or 82.60%) have explained the phenomenon of leakages in a region or a destination occurring due to profits repatriation, salary remittances, overseas marketing, foreign ownership, and other sources through the foreign-owned Airlines, tour operators, local transportation operators, and other foreign-owned tourism establishments. Table 2

Table 2.

Empirical research in the literature is here.

Description	Results
Dedicated studies on the accommodation sector	17.40% (08 out of 46)
Others	82.60% (38 out of 46)
Study area
Developing, LDCs, and SIDS	54.35% (25 out of 46)
Developed nations	13.05% (06 out of 46)
Others	32.60% (15 out of 46)

The study also identified that the lion’s share of 25 empirical studies or 54.35% of total 46 reviewed studies have extensively focused on developing, least developed states (LDCs), and small island developing states (SIDS). This is due to that fact that these regions are exposed to higher levels of leakage due to poor economic diversification, lack of availability of required goods and services to cater the needs of tourists, lack of skilled labor, incompetent financial institutions to meet capital requirements, poor innovation, and technology intervention. For example, a study by Hampton and Jeyacheya (2020) on SIDS has revealed that these states are exposed to 55 to 80% of leakage rates occurring mainly due to foreign-owned businesses, import of goods and services, and foreign labor. Another study has claimed that 76% of the revenue generated is leaked out of the Bwindi National Park region in Uganda mainly due to foreign ownership and employment of foreign labor in accommodation services (Sandbrook, 2010). On the other side, developed regions are given very minimal importance in the literature as these regions are well-equipped with goods and services, skilled labor, competent financial institutions for capital requirements, and cutting-edge technological innovations (Boz, 2012; Garrigós-Simón et al., 2015). A UNEP study claims that the leakage rate in developing and LDCs is approximately 50–60% and 10–20% in developed countries (Sinha et al., 2012; Garrigós-Simón et al., 2015).

Rest of the studies which account for around 32.60% or 15 studies out of total 46 research studies are conceptual studies or literature review studies which provided a qualitative description about the occurrence of tourism leakages in tourism destinations. These studies have not considered any country or region in specific as a study site and conducted empirical research on them. These conceptual and review studies have descriptively elaborated on the phenomenon of leakages in tourism destinations across the world and provided empirical evidences to substantiate their claims.

Mitigation strategies

After an arduous task of measuring leakage was achieved, academicians and policymakers have focused on mitigation measures to reduce the leakage effect in destinations. Many research studies have highlighted a set of measures which were successful in reducing leakages from destinations across the world (Lacher and Nepal, 2010; Rid et al., 2014). For example, a study in Botswana has found that employing local people in tourism establishments had a significant impact on reducing leakages from the region (Rylance and Spenceley, 2017). Another study carried out in the villages of northern Thailand has revealed that mitigation strategies adopted by the local communities and the tourism authorities have substantially reduced the leakages and largely benefited local communities (Lacher and Nepal, 2010). As mentioned earlier, factors influencing leakages vary with destinations and the mitigation strategies are devised based on the local conditions of the destination (Lacher and Nepal, 2010). Sandbrook (2010) also affirms that tourism authorities and policymakers must have a thorough understanding about the sources of leakage in a destination to chalk out effective mitigation strategies to alleviate them.

Majority of the studies have highlighted the procurement of locally produced goods and services by tourism businesses as an effective way to mitigate leakages and help the local communities to absorb the benefits of tourism activity (Garrigós-Simón et al., 2015; Rylance and Spenceley, 2017; Telfer and Wall, 2000). Local spending increases the multiplier effect in the local economy and paves the way for economic diversification in the region (Gollub, 2003; Boz, 2012). Hussain et al., (2012) have argued that local authorities must market locally produced goods and services effectively so that local businesses are aware of them. This would substantially reduce the money leaking out of the economic system and retain the money with the local suppliers (Hussain et al., 2012).

Research studies have proved backpacker tourism as an effective way to reduce leakages in a destination (Sandbrook, 2010). Backpackers are usually budget and responsible travelers who prefer local transportation, small hotels, and local restaurants mostly owned by locals and purchase souvenirs in local markets, thus giving a boost to the local economy in a destination (Hampton, 1998).

As mentioned earlier, strengthening the intersectoral linkages in an economy is an effective way to reduce leakages and percolate the economic benefits to local communities (Gollub, 2003; Hussain et al., 2012; Pratt et al., 2018). Linkages between tourism and other sectors of an economy can effectively reduce the leakages and involve local supply chains in tourism activity (Telfer and Wall, 2000; Badar and Bahadure, 2020). Intersectoral Linkages is an under-researched area that needs much attention by tourism academia (Supradist, 2004; Trejos and Chiang, 2009).

Other effective mitigation measures include improvement of local supply chains and warehousing facilities (Hampton and Jeyacheya 2020) and local ownership of tourism businesses. Local ownership of tourism businesses is considered to be an effective measure to reduce leakage in a destination. Hussain et al. (2012) have highlighted that tourism authorities must extend a helping hand to local communities in the form of capital investments to establish their own businesses.

Studies also emphasize the importance of skill development initiatives jointly organized by the tourism authorities and educational institutes for the local youth to mitigate leakages in a region. For example, Gambia has come up with a private sector-led Skills Development Policy to establish a technical and vocational education and training system (TVET) in the country as a part of National Training Authority Act in 2002, to generate employment and eradicate poverty from the region (Rid et al., 2014).

To summarize, this study has identified a homogeneous pattern in the mitigation measures recommended by a diverse set of researchers. Most of the studies have emphasized “localization” as a key strategy to alleviate leakage effect in the region. Localization has been described in the studies in distinctive ways depending upon the local conditions of the region. Few studies have suggested import substitution by procuring local goods and services, while others talked about employing locally available workforce in tourism establishments and others encouraged local ownership of the establishments as ways to mitigate leakage effect. Almost all the studies have unknowingly or unknowingly highlighted the concept of localization of tourism activity to eliminate leakages in the region.

Discussion

Research gaps in the literature

Although many researchers have quantitatively measured the leakage rate in a destination, every subsequent researcher has developed and proposed their own model for measuring leakage value in their respective study area. There exists no standard measuring framework to estimate the value of leakage in a destination. A standard framework should be developed to measure the leakage rate in a destination and it must be systematically tested by tourism academia and the tourism industry for its credibility and reliability. This will be a positive step toward sound methodological research.

As highlighted by Supradist (2004), an econometric model for measuring leakages would be more effective and accurate in terms of measuring leakage rate in a destination. Developing an econometric model which can be customized based on the local economic conditions could be breakthrough in this field of research.

Research studies have predominantly focused on explaining leakages mainly occurring due to the import of goods and services, direct foreign ownership, and employment of foreign skilled staff. But the leakage occurring due to dividends (profits) repatriated through Foreign Portfolio Investments (FPIs) and Foreign Institutional Investments (FIIs) in tourism businesses in the region’s capital markets is an under-researched area and has a scope for thorough investigation.

In earlier studies, scholars have focused largely on examining tourism leakages in a destination after the tourism infrastructure is fully developed. It is necessary for researchers in the future to keep an eye on leakages during infrastructure development occurring mainly due to the import of skilled labor, raw materials, and construction infrastructure such as cement, steel, construction machinery, etc., as these activities depart huge foreign exchange to other economies.

Role of economic leakages in the post-COVID World

The COVID-19 pandemic has caused grievous economic hardship throughout the world, and it has crippled global tourism activity (Jomo and Chowdhury, 2020). According to WTTC, the contribution of the global travel and tourism sector to world output has steeply fallen from around 10.3% in 2019 to 5.3% in 2020 (WTTC, 2022). The world has witnessed massive layoffs during the pandemic, and a staggering 62 million jobs have been laid off in the tourism industry worldwide (Jain et al., 2022; WTTC, 2022). A report by UNWTO has stated that international tourist footfalls have plummeted by 56% and international tourism exports have lost around US $320 billion in the first half of 2020 (UNWTO, 2020). Vibrant destinations have turned into ghost towns and contact-intensive businesses such as hotels, airlines, restaurants, bars, pubs, etc. were completely shattered due to the pandemic (Suzumura et al., 2020). In essence, the pandemic has left global tourism in dire straits.

To tackle this crisis, the global tourism fraternity has joined hands to revive the tourism industry. UNWTO has coined a theme “RETHINKING TOURISM” on the occasion of “World tourism day, 2022” to replace age-old practices with innovative and revolutionary measures to drive the engine of tourism into the future. At this juncture, the global tourism fraternity must pay keen attention toward tourism leakages. As discussed earlier, leakages are detrimental and impede economic development in a region. Therefore, mitigation of leakages should be given importance and imbibed in the destination’s revival or rebuilding process. This move will effectively drive the destinations toward economic sustainability and self-sufficiency. Mitigation of leakages aligns with the concepts of responsible and pro-poor tourism where the destinations thrive toward localized and sustainable approaches. Therefore, these forms of tourism should be encouraged and promoted.

Economic leakages in a destination cannot be mitigated overnight, and it needs a cooperative approach and long-term planning by all the stakeholders to achieve economic sustainability in the long run. Policy-level measures should be devised and implemented efficiently by tourism stakeholders not only to mitigate leakage in destinations but also to strengthen their local economic system, which paves the way for self-sufficiency. We are at a point where nations are shifting toward self-reliant economic systems (popularly claimed as “ATMANIRBARTHA” in India), and reducing leakages in a destination is a step toward self-sufficiency. This doesn't mean that destinations must completely shut the doors for foreign investments and external trade. Foreign investments and external trade are vital to maintaining the standards of the destination. Instead, they have to focus more on utilizing local economic resources and localizing the business operations, that is, employing locals in the tourism enterprises, procuring goods and services from local suppliers, and promoting local ownership for the welfare of local communities. These policy-level interventions make destinations more sustainable and resilient toward external pressures in the long run.

Implications

Theoretical implications

This study makes some important and insightful theoretical contributions. First, it makes a comprehensive review of existing body of knowledge on economic leakages in destinations throughout the world. This attempt is the first of its kind in the selected area of research and has successfully identified research gaps that pave the way for future research. Second, this study has performed a qualitative analysis of the literature, interpreting both theoretical and empirical data for academia. Meanwhile, we also discussed about the methodological approaches used in previous studies. Classification of the literature is carried out and findings interpreted in tabular form which makes it easier for future researchers to understand the crux of the previous research.

Finally, this study discussed the role of economic leakages in the post-COVID world and emphasized the importance of containing leakages while rebuilding tourism destinations post pandemic. More future research can be carried out on the basis of the research gaps identified in this paper. Considering the advancement of technology in academic research, advanced research methods and information technology (IT) can play a key role in developing a framework to measure leakage rate in tourist destinations and assist future research.

Practical implications

This study makes some important and insightful practical contributions. First, this study provides empirical evidences of tourism leakages and their mitigation strategies throughout the world to policymakers and industry experts. Policymakers along with other stakeholders must strive to utilize locally available economic resources to strengthen intersectoral linkages and reduce leakages in destinations. Policy-level support by tourism authorities for including local suppliers in the supply chains of tourism businesses would provide additional income opportunities and percolate economic benefits to the local communities. This would have a great impact on alleviating poverty in tourism destinations.

Second, this study suggests the policymakers and other stakeholders of least developed and developing economies to pay close attention to economic leakages in their respective regions because these regions are prone to high levels of leakages and majority of them are unavoidable. A policy-level approach to understanding the phenomenon of leakages would mitigate the leakages to a large extent and involve the local communities more in tourism activity. As in the case of Northern Thailand, a policy-level measure to involve local communities in decision-making has reduced leakages substantially (Lacher and Nepal, 2010).

Finally, this study highlighted the role of mitigating leakages in the post-COVID world. As mentioned earlier, the global tourism fraternity is striving hard to attain resilience in tourism destinations after the pandemic, reducing leakages and optimally utilizing local resources in tourism destinations would pave the way toward achieving self-sufficient and resilient tourism destinations.

Limitations

As with any other study, this study also has several limitations. Documents indexed only in Scopus and Google Scholar were included in this review study. Documents indexed in other data sources were out of the scope of the study. Mostly, statistical reports published by UNWTO and WTTC were reviewed to understand the economic impact of the COVID-19 pandemic on the global tourism industry.

Conclusion

This paper thoroughly investigated the theoretical and empirical aspects of economic leakages in tourist destinations. This extensive review has clearly outlined the length and breadth of the previous research work and opened the door for future research. To summarize, economic leakages persist in a tourist destination and they have a significant negative impact on the local economy and livelihoods of local communities. This issue is prevailing throughout the world and the empirical pieces of evidence are already discussed. Though research work in this field has seen manifold progress over a period of time, there exist research gaps in this field. This review study has identified research gaps in the literature and discovered opportunities for future researchers to conduct much-needed and dedicated research studies. Later, this study briefly discussed about the economic impact of COVID-19 on the global tourism industry and made an attempt to highlight the importance of leakages in tourist destinations in the post-COVID world. Finally, this paper has rendered theoretical contributions to the existing body of knowledge and suggestions to the policymakers and all other stakeholders to achieve self-sufficient and resilient tourism destinations. Mitigating leakages, that is, utilizing local economic resources and localizing business operations is a policy-level response aligned to the theme of “RETHINKING TOURISM” coined by UNWTO to rebuild and revive tourism destinations throughout the world.

Supplemental Material

Supplemental Material - Economic leakages in tourism: A comprehensive review of theoretical and empirical perspectives

Supplemental Material for Economic leakages in tourism: A comprehensive review of theoretical and empirical perspectives by AV Krishna Chaitanya and Sampada Kumar Swain in Tourism Economics

Footnotes

Declaration of conflicting interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

AV Krishna Chaitanya

Supplemental Material

Supplemental material for this article is available online.

Author biographies

A V Krishna Chaitanya is a research scholar in the Department of Tourism Studies at Pondicherry University, focusing mainly on Tourism economics. The research of Chaitanya is mainly centered on the economic aspects of the tourism industry, which include the economic impact of tourism, tourism demand and supply analysis, and the relationship between tourism and local economic development. By focusing on tourism economics, Chaitanya is demonstrating his dedication to this specific area of study and is continuously striving to contribute to the body of knowledge in this field.

Dr. Sampada Kumar Swain is a professor in the Department of Tourism Studies at Pondicherry University. He is specialized in Tourism and sustainability and has published numerous articles and books in the field of sustainable tourism development. Their research focuses largely on the intersection of tourism and environmental preservation, cultural preservation, and socio-economic development. Being an expert in this field, he has promoted responsible and sustainable tourism development and significantly contributed to the body of knowledge in this field.

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