Diversion of Tourism Flows in the Asia & Pacific Region: Lessons for COVID-19 Recovery

WP/21/224 Diversion of Tourism Flows in the Asia & Pacific Region: Lessons for COVID-19 Recovery by Vybhavi Balasundharam and Robin Koepke IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. © 2021 Internationa l Moneta ry Fund WP/21/224IMF Working Paper Asia and Pacific Department Diversion of Tourism Flows in the Asia & Pacific Region: Lessons for COVID-19 Recovery Prepared by Vybhavi Balasundharam and Robin Koepke1 Authorized for distribution by Todd Schneider August 2021 Abstract The COVID-19 pandemic prompted a collapse in international tourism, severely impacting the tourism-dependent economies in the Asia & Pacific region. Once countries start reopening, tourism diversion effects could accelerate the recovery in countries that establish themselves as more attractive travel destinations than competitors. We investigate the impact of previous shocks in tourism competitor countries on visitor inflows, with a particular focus on tourism-dependent Pacific Island Countries (PICs). We find that PICs were generally resilient to external shocks and benefitted from diversion effects for certain types of shocks. For example, the share of departures from Australia to PICs increased by 12 percent during the SARS outbreak. We then derive policy implications for the post-COVID-19 revival of inbound tourism to PICs and lessons for the future. JEL Classification Numbers: L83, N75, O53 Keywords: Tourism determinants, spillovers, COVID-19, Pacific Island Countries Author’s E-Mail Addresses: vbalasundharam@imf.org; rkoepke@imf.org1 The a uthors a re gra teful for helpful comments by Ta kuma Hisanaga, Seohyun Lee, Racha Moussa, Scott Roger, Todd Schneider, participants a t a n IMF Asia & Pa cific Department research seminar, a nd the staff of the Austra lia n Treasury and Department of Foreign Affairs a nd Tra de, a s well a s the Central Ba nk of the Philippines. Ya dian Cheng provided excellent research a ssistance; Francis La ndicho and Kristine La luces provided outstanding a dministrative and editorial support. IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2 Contents I. Introduction.................................................................................................................. 3 II. Recent Developments and Conceptual Framework .................................................... 5 A. Recent Tourism Development in PICs ........................................................................ 5 B. Conceptual Framework for Tourism Diversion ........................................................... 6 III. Data and Methodology .............................................................................................. 7 A. Model ....................................................................................................................... 7 B. Data .......................................................................................................................... 8 IV. Results...................................................................................................................... 10 V. Discussion and Policy Implications .......................................................................... 13 VI. Conclusion ............................................................................................................... 17 Figures 1. Tourism Revenue of Asian and Pacific Countries with Largest Tourism Sectors........... 5 2. International Visitor Arrivals in Pacific Island Countries Number of People ................. 5 3. Visitor to PICs by Source Country .............................................................................. 6 4. Australian Visitors to PICs ......................................................................................... 6 5. Schematic: Two Types of Tourism Diversion .............................................................. 7 6. Share of Departures from Australia ............................................................................. 9 7. Impact of Shocks on Number of Departures from Australia ....................................... 10 8. Impact of Shocks on Departures to Affected Countries .............................................. 11 9. Impact of External Shocks on Departures to PICs ...................................................... 12 10. Change in Shares of Departures during SARS Epidemic .......................................... 12 11. Change in Share of Departures to PICs during SARS.............................