Deconstructing the perks of tourism, Portugal’s trendiest economic sector

It has become extremely rare to walk around in Portuguese streets without the constant presence of foreign languages. The country has become more busy and overcrowded, all due to a growing phenomenon in Portugal’s economic landscape – tourism. Wide-spread tourism is a relatively recent phenomena, which sprung to existence when the newly founded middle-class began displacing itself to places other than those where they lived, for less than one year. As previously stressed, this activity has suffered a huge expansion in the last decades, not only in the world, but also in Portugal. In 2017, tourism constituted 13,7% of the Portuguese GDP.

Although presenting many opportunities for economic expansion, this sector has a very strong seasonal component in many countries and regions. Thus, the aim of this article is to evaluate the dependence of this European nation on tourism, in other words, to quantify how much of the production comes from tourism-related activities, and to assess the effects of its instability on the economy.

 

Factors: what plays into this complex equation?

There are several factors that have a positive impact on tourism. While some countries receive millions of tourists per year, you may have realized that some go unnoticed, welcoming a very reduced number of visitors. Afterall, what characteristics are tourists looking for?

One of the things that they find crucial is the safety of the country of destination. Regarding this, Portugal is very appealing because it is considered the world’s third safest country according to the Global Peace Index. The tourist’s decision is also highly affected by weather conditions, attribute which is frequently mentioned as a key-element by those who come to Portugal. The fact that a country with these characteristics sits right in Europe’s backyard makes tourism from other EU countries extremely frequent. Moreover, a country that is culturally and historically rich is preferred to another one that has no noteworthy or perhaps well-known background. Certainly, a big part of a countries’ touristic appeal stems from its monuments, museums, and overall cultural offer, which Portugal has been working hard to both restore and improve. Gastronomy also plays an important role in the tourism sector, and it is perhaps the one in which the highest impact has been felt. For example, ten years ago, there were 7 Michelin-star restaurants in Portugal. This number has more than tripled since 2009 — today, there are 26 Michelin-star restaurants spread across the country. This shows that the effect of tourism goes both ways: on the one hand, better quality restaurants were born out of the increasing affluence of consumers with higher purchasing power, and on the other, they continued to grow in number since they also had the power of attracting generously- spending, food-driven visitors. Lastly, and probably one of the most important characteristics taken into account by tourists, is the cost of living in the country they plan to visit. It is natural that countries with lower accommodation prices, for example, attract more visitors. In Europe, the countries with a lower cost of living are located in the east (Poland, Romania, etc.) and in the Iberian Peninsula. Among the countries with the highest costs of living, we can find Switzerland and Norway, which have a harder time in receiving tourists with lower purchasing power. 

In contrast, there are some factors that negatively affect tourism as well. Being a very volatile sector, it is heavily influenced by external factors. Thus, if the economic cycle is at a low point, the affluence of tourism will inevitably be harmed. If the economy is experiencing a recession or reaching a trough, the decrease in the demand for trips and tourist services will inevitably harm a receiving country’s economy. Now, suppose that this happens in Portugal, where there is an increasing threat of a great dependence on tourism: a bad economic period leads to a decrease in one of the most significant sectors of production. Since this sector contributes to such a large part of the country’s GDP, the economy will suffer disproportionately more, creating a “snowball” effect.

Also, the political environment can affect tourism. For instance, the ongoing political impasse regarding Brexit (with the possibility of a no-deal exit) may create uncertainty among British consumers/travellers, and even create barriers to entry to the country in the long-run. This is a very applicable concern in Portugal, because most visitors come from the United Kingdom (representing 20,9% of total nights from non-residents). Also, due to Brexit, the pound sterling is depreciating against the euro, which makes travelling to Portugal more expensive in comparative terms. 

In addition, natural catastrophes as well as terrorist attacks are exogenous factors that, although they can be predicted to some extent, can’t always be controlled. Recall the terrorist attack in July of 2016 (Nice, France) when a truck was deliberately driven into crowds of people, if you may. Back then, France was the world’s most-visited country and tourism accounted for 7-8% of the french economy, so as you might expect the impact on business was quite large. While in 2015 the number of international tourists was 91,6 millions, in 2017 it was 82,9 millions, so the country faced a reduction of 9,5% in this variable.

In short, tourism’s reliability on external, uncertain factors makes it a very unsteady pilar for an economy to lean on.

 

Impact: the highs and the lows

Indeed, tourism has a huge impact on the economy and in society. Economically speaking, this sector creates jobs; for instance, in Portugal, 30,000 to 40,000 jobs were created between 2013 and 2018, leading to an overall of 328,500 jobs in the sector. The number of people in tourist accommodations has also been increasing, as well as the investment in local accommodations, rehabilitation of buildings and public expenditure on street cleaning. In Lisbon, urban rehabilitation reached a record-breaking value of 6000 million euros last year. Also, local accommodation in Portugal has been experiencing an exponential growth since 2013. Besides experiencing its own growth, tourism is positively impacting other businesses. The supply of private transportation (Uber, Taxis, etc) has been increasing to meet the rising demand, requiring these companies to provide better services. Restaurants, pastry shops and other local stores are benefiting from this boom. New ideas, new stores keep spreading across the cities (new trendy areas, such as Príncipe Real in Lisbon, present us with new concepts and stores). Moreover, with tourism, consumption has been rising, Government revenues have been growing (mainly through VAT and the housing market), foreign investment on the real estate market has been arising and the confidence by the Portuguese people in the economy is thriving (which explains the highest level of consumption since 1960). In short, the growing relevance of tourism in the Portuguese Economy (particularly in Lisbon and Porto) over the past 6 years is undeniable.

However, we must also analyse the pitfalls of this ongoing growth. Even though tourism is positively impacting our economy and leading it to growth, it may also harm us in the long-run. 

A very well-known situation is the inflation in the housing market. Indeed, this market has experienced significant rises in prices: in Lisbon, rents have been increasing at a rate of 8% per year, which might be prejudicial to the families with a tighter budget constraint. Algarve, one of the main tourist areas during summer, comes next, being the second most expensive place to buy a house. This was caused by the “plague” of local accommodation, which had a mere 1000 houses in 2013, growing almost to 3600 in 2018. This continuous growth in prices is becoming unbearable to the average Portuguese worker (whose average wage is 943€), leading to a decrease in the standards of living (for instance, salaries are not growing at the same pace as real estate prices, resulting in a decrease in real wages). 

Also, cities are becoming overcrowded, which is increasing petty-crimes, such as pickpocketing. To fight this, some cities are already imposing an overstaying tax. However, this doesn’t stop the general local discontent, as life conditions are significantly depreciating. For instance, in Barcelona, far-left organized groups have attacked hotels, restaurants and tourist areas to show their resentment regarding tourism and it’s somewhat uncontrolled growth.

What’s more, seasonality contributes to the instability of the sector: nearly one in four trips of EU residents were made in July and August; Europeans spent one third of their tourism nights in July or August. Also, since 2010, Algarve (southern region in Portugal) is the 11th region (considering 263 regions from all 28 member states) with the highest employment in the least number of sectors (mainly tourism). Adding to this, the region presents a very low employment in industrial sectors. Hence, reliance on tourism is a reality and this dependency might be harmful, when the economy is recessing. This comes to show the possibly harmful effects on excessive reliance on the sector.

 

What can we do about it?

All in all, Portugal is quite susceptible to a fall in this sector, mainly due to its unpredictability. For this reason, Portugal should make use of the current positive economic environment in order to be prepared for an eventual reduction in tourism revenues. How could it be? Could the Government be an active part on that? The answer is yes, the economy is influenced by fiscal, social and economic measures set by the politicians. One possible measure would be to use these revenues to invest in clean energy from wind and solar sources which are certainly abundant resources. This would reduce imports of energy from foreign countries and at the same time it would lower the energy prices for portuguese consumers. Additionally, the resulting amount of this policy could be saved, so that in a period with high rates of unemployment, the savings could be used to pay unemployment subsidies, for example.

Another plausible measure would be to use tourism revenues to reduce the tax burden on private companies, enabling other economic sectors to grow and gain prominence. In turn, this would allow the Portuguese firms to invest in new technologies, innovate their products and processes and train their employees, reaching a higher level of competitiveness.

To conclude, the more the different sectors that contribute to GDP, the lower is the risk of a country being undermined by a reduction in tourism. Like all of what is good in life, tourism can have excellent benefits – in moderation.