Determinants of Tourism Demand: For Mexico

Instituto Tecnolуgico y de Estudios Superiores de Monterrey

Campus Monterrey

Determinants of Tourism Demand

For Mexico

Emilio Noй Hernбndez Kelly*

Fernando Mendoza Lуpez**

Econometrнa II

Dr. Hйctor Rodrнguez

Monterrey, Nuevo Leуn, November 29th, 2004

I. INTRODUCTION

Tourism has long been considered a viable option for growth in many less Developed nations. It has been widely accepted that tourism is a low investment, high return industry making its profitability extremely high. In Mexico, the tourism industry directly provides around 8% of the GDP, and leaves even more through spillover effects.

Mexico owns many tourist attractions of different types. For example, Mexico has world renowned beaches and resorts, such as Cancun or Los Cabos. It also has many colonial cities, which mix a classic Spanish-European type architecture with an indigenous touch. Ancient ruins of lost civilizations still persist in the central and southern areas of the country. With all this and more Mexico has much to offer for international tourists.

International tourist flows have increased amazingly since the 60's and 70's creating a market that is tremendously important on a global level. It is an industry that can be common to both developed and less developed nations. Mexico, being one of the top tourist destinations in the world has seen this growth first hand, and seemingly has also done very well in this respect.

It is interesting to remark that despite Mexico's apparent diversity and cultural heritage, its development on foreign tourism, measured in currency flows, is represented on a 54% by five destinies that are promoted by the FONATUR (National Fund of Tourism Foment) which are: Los Cabos, Cancun, Loreto, Ixtapa and Huatulco. These destinations represent a tax income of over 300 million dollars per year.

Obviously, there are many people who believe that this industry also brings many disadvantages to having a strong tourism sector .There are many negative factors to consider: first of all, there are some negative social and environmental impacts that are brought upon by foreign tourists. Also there are some distributive issues that should be assessed although none of these matters will be touched in the rest of this paper.

We focus on measuring performance so it is necessary to know what variables have some kind of explanatory properties. A logical question arises: What factors determine growth of tourism industry? In the literature found, that speak of this topic; we see estimations, basically defining the demand side of the equation. We may infer that is because of the difficulties that are represented by the development of a production function for this service oriented industry (although it is possible to estimate).

The objective of this investigation is to try to explain the behavior of the industry. We try to find the determinants of income growth in the tourism sector for Mexico.

We will explain the performance of the Mexican industry based on a time series econometric model estimated with ordinary least squares (OLS) for the 1980-2002 period.

II. A TOURISM INDUSTRY MODEL

The model used in the elaboration of this paper is a demand model, and for this reasons takes in account prices and income. The treatment of this model assumes that the measuring of foreign tourism revenues can be put into a model consistent with a model for export demand set forth in other work.

The model we are proposing is based on a typical model described by Muscatelli, Stevenson and Montagna, (1995), who establish an equation for Volume of Exports as a function of a price vector (that includes domestic and foreign prices) and a variable that captures the world demand conditions. Following the next form:

X = level of exports.

Pw = world prices.

PX = domestic prices.

Yw = world share imports of domestic products.

In this paper we define our model for foreign tourism revenues as follows:

TURISMEX = an index of foreign tourism revenues.

ERI = real exchange rate index (MXP/USD).

USGDP = United States of America GDP

It is plausible to select these variables, due to the implication of prices in the calculation of the real exchange rate (Muscatelli, Stevenson and Montagna, 1995). In the case of the second variable, the GDP for the US, we use this as a proxy for Income due to the United States' predominant position in tourist flows to Mexico. The latter justified on the fact that around the 82% of foreign tourists that visit Mexico are Americans. The variable is measured in dollars.

Indexing the revenues of tourist activity with a 1994 = 100 basis, is on the seek of dismissing problems of seasonality

So the model looks to explain tourism flows to Mexico. This variable is the amount spent by tourists (not accounting, border visits nor cruise revenues), measured in dollars. This variable was seasonally adjusted and indexed in two different ways. The data for the United States was already adjusted.

The data for Mexico, the dependent variable and the real exchange rate (pesos per dollar) were obtained from the Mexican Central Bank (Banco de Mйxico). The data for the US GDP was obtained from the Bureau of Economic Analysis for the United States Government.

An indexed real exchange rate depicts the trends of this financial indicator in order to use it as a determinant of our goal model. We expect