What is Economic Leakage in Tourism (& How to Prevent It)

Last Updated on October 4, 2023

Regions around the world use tourism to create jobs, as well as protect the natural environment and cultural heritage. 

According to the U.N., tourism accounts for 10% of global GDP, and one in 10 people are employed in the sector. When looking at the pros and cons of tourism, this is one of the pros!

But the economic benefits of tourism don’t always trickle down to the right people. According to the U.N.’s Ocean Atlas, as little as 5$ of every 100$ spent by a tourist in a low or middle income country stays in the local economy.

This phenomenon of tourism dollars leaving the country they were spent in is called “economic leakage,” or “tourism leakage.” 

a busy beach in puerto vallarta mexico on a sunny day
Puerto Vallarta, Mexico, is known for it’s resorts.

Economic Leakage Explained

Understanding leakage in tourism is important. Knowing what it is and why it happens can help regular tourists to make more informed choices when they travel, and it can help the tourism sector address the problem.

What is economic leakage in tourism? 

Economic leakage, also known as “tourism leakage” is when revenue generated by tourism is lost to other countries’ economies. Instead, that revenue “leaks” out to other economies. Tourism leakage happens when tourist dollars go toward businesses and companies that aren’t local to the place being visited. In many countries around the world, foreign and international corporations may be the only entities that have the capital to invest in tourism facilities like hotels and resorts. 

For example, many of the resorts operated in the Caribbean are actually owned by an American company, like Apple Leisure Group. When American travelers visit these resorts, much of the money they spend goes back to the US. 

What is an example of leakage in tourism?

A simple example of tourism leakage is when a traveler books a stay in an all-inclusive resort that isn’t locally owned. Many resorts are owned by companies not based in the countries where those resorts operate. A 2022 report from the UNWTO, for example, found that “tourism leakage” amounts to an estimated 80% of all money spent by tourists in the Caribbean region. Another study found that tourism leakage in India may be around 40%

Is economic leakage in tourism bad?

Yes, economic leakage in tourism is harmful. It means that a location or country is not reaping all of the economic benefits of tourism. Instead, those benefits are going to a foreign country. This can slow the economic growth of a region, which has a trickle-down effect on that region’s people and communities.

Import Leakage Versus Export Leakage

There are two main types of tourism leakage: import leakage and export leakage. Let’s unpack how these two types of economic leakage are different.

What is import leakage?

Import leakage is when a country spends money on imported products, brands, foods, or labour to meet the demands of visiting tourists. For example, a country might make Mirinda, but not Fanta. If that country decides to import Fanta for tourists – that’s import leakage. 

What is export leakage?

Export leakage is when foreign investors or companies take tourism profits out of their operating locales, and bring those profits back to their home country. In this case, those profits benefit the home country’s economy. 

Virupaksha Temple in Hampi, India, a country that experience economic leakage in tourism
Virupaksha Temple in Hampi, India

What Causes Economic Leakage in Tourism

There are several causes for tourism leakage. 

The first, is the need to supply specific goods and services for tourists. Many countries, particularly island nations, import goods – Popular beverage brands, for example. 

Infrastructure of a country or community will also factor into tourism leakage. If that place doesn’t have the needed infrastructure, or the resources to build it, they may depend on foreign companies or investors. 

This is where multinational corporations (MNCs) come in. MNCs are large companies that operate in several countries. They are usually very powerful, and often, are based in wealthy nations like the USA. 

Hotel chains like Hilton, and fast food restaurants like McDonalds are MNCs. When spending money with an MNC, most of that money will leave the country you’re in and go back to wherever the MNC is based. 

Governments will often try to attract foreign investment (including by MNCs) as a way to kickstart tourism development. Often, tax structures are used to incentivize foreign investors. Taxes will be waived, which yes, attracts investors, but ultimately means less tax dollars for a country to benefit from. 

The last cause is related to labour. When it’s “high season” (the busiest time of year) for a tourism destination, there’s often temporary job openings that need to be filled. This attracts foreign workers who come for the season before returning to their home country. Ultimately, the dollars they earn go home with them. 

a mosque in marrakech surrounded by lush greenery and people walking
Marrakech, Morocco

Ways to Reduce Tourism Leakage

By addressing tourism leakage, we can ensure local businesses and workers get to benefit from the economic gains that tourism brings. 

To reduce tourism leakage, governments, DMOs (destination management organizations), tourism operators, travel companies, residents, and visitors need to work together.  

Let’s break down how both the tourism industry, and individual travelers can make a difference.

How to Reduce Economic Leakage in Tourism

While travelers themselves can help bring awareness to tourism leakage and travel in a way that minimizes it, the real onus for addressing it is on governments and tourism management entities. 

When a tourism region is managed well, it’s possible to maximize the economic benefits so that those benefits stay in the community. Here are some of the ways that this can be done: 

  • Tax foreign investors (including MNCs) and incentivize development by local investors. 
  • Support and promote the development of locally-owned accommodation providers.
  • Develop initiatives that favour the local workforce and local community. For example, incentivize hotels to use locally produced foods and products. 
  • Avoid overtourism through marketing, leveraging a tourist tax, and other initiatives. 
  • Promote niche tourism in order to attract specific types of travelers. 
  • Focus destination marketing on promoting businesses that are locally owned and operated. 

These are some of the solutions that can help to reduce tourism leakage. They are long-term strategic changes, and the results of them aren’t obvious right away. 

But ultimately, it’s in the interest of a tourism region to move towards a tourism model that favours keeping money in the country and community, because it will benefit that country’s economic development. 

a woman standing on a platform looking out over a forest to symbolize why sustainable tourism is important

How Can Travelers Help With Tourism Leakage?

Many travelers aren’t aware of economic leakage in tourism. In my experience traveling, it can be tough to spot and understand, because on the surface, it appears that your tourist dollars are going to the community that you visit – when in reality, much of that money is leaking out. 

Here are ways that travelers can help to reduce economic leakage in tourism. 

  • Be intentional about where you spend your tourism dollars. Whenever possible, spend your money on locally owned and operated hotels, tour operators, and businesses. 
  • Go for small-group tours that work with local communities and vendors, and include experiences that focus on cultural learning. 
  • Skip enclave tourism. This type of tourism encourages visitors to stay in one small geographic area and engage with a limited number of businesses. All-inclusive resorts (like the ones found in Puerto Vallarta) are an example of enclave tourism. 
  • Avoid traveling to tourism hotspots that are experiencing overtourism, or practice second city tourism
  • Practice responsible wildlife tourism, and be mindful of sustainable tourism practices.
  • Learn how to be a responsible tourist and follow the best practices for responsible tourism. 
  • Research and ask questions! Sometimes it isn’t clear whether or not a business, hotel, or tour operator is locally owned, which makes it difficult to figure out where your money will go. Send a quick email to find out. 

Final Thoughts: Addressing Tourism Leakage

In a perfect world, all the money that we spend when we travel will go toward that local economy. But unfortunately, this isn’t the case. 

As travelers, we can help address this issue by amplifying it. For example, I try to tell others what tourism leakage is, why they should avoid it, and how. And of course, all of us should take whatever steps we can in our own travels to reduce it too. 

Making choices that support the local economy versus tourism leakage sends a message that there is demand for this in the tourism industry. Let’s let our tourism dollars do the talking!

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