Added Value: Industry and Tourism in a Dead Heat

'Record broken', 'bust weekend', 'influx of tourists'… Headlines containing such phrases will increasingly wash over us as the tourist season approaches, and in prime news slots, we will hear whether more or fewer tourists crossed the border over the weekend compared to the record year of 2019. Without much questioning of the actual importance of tourism, for who knows how many times we will hear statements about its significance. But is the perception of tourism greater than its actual economic benefit? Are we overstating its role? Or should we not put all our cards on this economic branch? How can its actual benefit to the economy be measured?

Most often, when assessing the importance of individual activities, the share in added value or employment is used, and, somewhat less frequently, the multiplicative effect of the activity. It is often stated in public that tourism accounts for as much as one-fifth of Croatia's GDP, but this calculation was based on the ratio of tourism revenue to GDP (data from the balance of payments), so it is not the same as the share of tourism in GDP. According to the satellite account of tourism, which serves to estimate the direct economic contribution of tourism to the economy, it is, however, significantly lower.

Others are too small

According to this calculation, states macroeconomist of the mandatory pension fund PBZ Croatia osiguranja Hrvoje Stojić, the share of direct gross added value in total GDP is around 11 percent.

– With such a share, tourism does not deviate much compared to important Mediterranean tourist destinations. And it is not a problem that tourism is large in the structure of our economy, but that other sectors are small. Moreover, tourism still has plenty of room for growth by improving the quality of accommodation and content, stronger connections in air traffic, and extending the season – said Stojić.

Nor is tourism as important according to other indicators, such as the number of employees, as it is often emphasized. There are various statistics on employment in this activity, but it is most often said to account for about ten percent of all employees. Additionally, it is known that Croatian tourism is characterized by exceptional seasonality of employment and below-average wages, so the question arises as to how broad the economic benefit of this economic branch is. Because tourism is the largest individual generator of export revenue, Goran Šaravanja, chief economist of the Croatian Chamber of Commerce, believes it would be absurd to complain about the importance of this sector in the economy.

– It is clear that tourism is important for the domestic economy, especially when you consider that emigration from Dalmatian counties has been minimal since we joined the European Union, or when you remember that in our history, Dalmatia was a permanent source of emigration. The development of tourism is one of the reasons for the relatively low emigration of people from Dalmatian counties recently. An important question is how to better connect domestic agriculture and the food processing industry with tourism to increase the share of domestic production in its largest export activity – noted Šaravanja.

However, excessive reliance of the economy on one economic branch can be a great danger to economic stability, and tourism is precisely an example of an activity that is extremely sensitive to various security threats and exogenous shocks, as was demonstrated during the corona crisis.

Export Superiority

It is a common belief that the manufacturing industry has the greatest multiplicative effects, especially in countries at lower levels of development, both through direct contributions to added value and employment, and based on the networking effects of suppliers from other sectors or spillover into other sectors.

– Just before the pandemic, Forbes presented an estimate for the U.S. economy that every dollar in the manufacturing industry brings $1.81 to the economy, and every new job in the industry opens four new ones in other sectors. The estimated multiplicative effects on employment in other sectors range from 1.2 in retail, 1.6 in accommodation and food services, 2.2 in the construction sector, to as much as 5.7 in information and communication services. When it comes to European economies, available Eurostat data shows that every euro invested in industrial activities creates an additional 2.2 euros in revenue, while in other sectors, the values of the output multiplier range from 1.4 to 1.9 – stated Stojić.

In addition to the multiplicative effect, which is significantly greater for the manufacturing industry than for service activities, the importance of this economic branch is also evident in exports, as it accounts for more than 80 percent of total goods exports in Croatia. Unfortunately, data shows that only about 15 percent of companies in Croatia export. However, these companies employ 51 percent of all employees in all companies, invest 62 percent, generate about 66 percent of total sales revenue, and invest as much as about 73 percent of total funds invested in development.

A recent study by Gorana Lukinić Čardić and Domagoj Šelebaj from the Croatian National Bank has shown a kind of superiority of exporters compared to those focused solely on the domestic market.

– Exporters have superior characteristics compared to companies focused only on the domestic market, meaning they are on average significantly more productive and profitable, pay higher wages, and operate with lower unit labor costs. Even more importantly, the differences between these groups of companies have on average further increased after entering the EU. It is possible that due to stronger competition in the single European market, Croatian exporters must be more productive to even participate in it. It is also possible that due to exposure to competition in the European market, domestic companies have learned a lot, which has contributed to further deepening the gap compared to non-exporters – noted Šelebaj and Lukinić Čardić.

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