impact of economic crisis on tourism in egypt

8/3/2019 Impact of Economic Crisis on Tourism in Egypt

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The Egyptian Cabinet

Information and Decision Support CenterEconomic Issues Program

Impact of Global Economic Crisis on Tourism Sector in

Egypt: A System Dynamics Approach

Prepared By

Ahmed Badr

Enas Zakareya Mohamed Saleh

[First draft, do not quote, comments are welcome]

November 2009


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Impact of Global Economic Crisis on Tourism Sector in Egypt: A System Dynamics Approach 1

Abstract

As tourism sector is very sensitive to economic uncertainty; this study aims at

investigating the likely impact of the Global Financial Crisis (GFC) on tourism sector in

Egypt. The analysis will mainly be through examining the internal structure of the

tourism sector in Egypt and the relationship between key variables based on The Travel

and Tourism Competitiveness Index (TTCI), 2009 published by the World Economic

Forum that determines the competitiveness position of the Egyptian tourism among

different countries in the world. The paper will focus on some vital TTCI sub-indexes to

analyze their effects on the Egyptian market share. The study analyzes the impacts of

the GFC through exploring the dynamic behavioral relationships between control

variables in the tourism sector. The study demonstrates the results of a policy simulation

for those effects through carrying out scenario analysis for the impact of the global

financial crisis on the tourism sector in Egypt. Finally, the study suggests some policy

recommendations in order to mitigate the negative implications of the crisis on the

tourism sector in Egypt.

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Executive Summary

This paper aims at analyzing the interactions within the tourism sector in Egypt,

testing policies to mitigate the impact of the global financial and economic crisis on the

tourism sector. A dynamic model is developed to simulate these interactions and to

analyze the effects of different scenarios. This dynamic model is used to trace the

impact over time and to include delayed effects into the model. The system dynamic

tourism model is calibrated based on the historical time series of the key variables in the

tourism sector during the period between 1995 and 2007. The model is then used to

assess the effects of the GFC and to test different mitigation policies over the period

2008-2015.

The model developed in this paper used the most recent Travel and Tourism

Competitiveness Index (TTCI) (WEF, 2009) that evaluates the ranking of the

competitive performance of 133 countries. TheTTCI is composed of 14 pillars grouped

into three groups, mainly, the travel and tourism regulatory framework, business

environment and infrastructure and human, cultural and natural resources. Each pillar is

also composed of several indicator variables. TTCI provides a comprehensive tool for

measuring the factors and policies that make the Travel and Tourism sector attractive

(WEF, 2009).


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Table of Content

Abstract ............................................................................................................................ 11. Introduction ................................................................................................................. 42. Tourism Sector in Egypt: An Overview .................................................................... 63. TTCI Description ......................................................................................................... 74. Literature Review ........................................................................................................ 85. Model Structure Overview ......................................................................................... 9

5.1 Annual Arrivals .................................................................................................... 105.2 Global Economic Crisis ........................................................................................ 105.3 Travel and Tourism Competitiveness Index ......................................................... 105.4 Annual Tourism Revenues ................................................................................... 125.5 Tourism Employment ........................................................................................... 125.6 Egypt's Hotel Rooms Supply Chain ..................................................................... 13

6. Scenario Analysis and Simulation Results ........................................................... ...146.1 Base Scenario ....................................................................................................... 146.2 Pessimistic Scenario ............................................................................................. 146.3 Mitigate Scenario .................................................................................................. 156.4 Optimistic Scenario .............................................................................................. 15

6.5 Comparative Analysis of the Scenarios for the Global Financial Crisis .............. 15

7. Conclusion and Policy Implications ......................................................................... 19Appendix ........................................................................................................................ 21References ...................................................................................................................... 35


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1. Introduction*1

The global financial crisis (GFC) presents significant challenges for worldtourism growth. GFC has also exposed weaknesses in the functioning of the globaleconomy and led to calls for the reform of the international financial architecture.Although the crisis was triggered by events in the United States housing market, it hasspread to all regions of the world with dire consequences for global trade, investmentand growth. The crisis represents a serious setback for the tourism industry because it istaking place at a time when the tourism business is making progress in economicperformance.

According to the World Tourism Organization (UNWTO), international tourist

arrivals grew at around 5% between January and April 2008, compared with the sameperiod in 2007. World tourism demand remained robust in the first months of 2008 andwitnessed a decline in the last months of 2008. According to the UNWTO WorldTourism Barometer, the negative trend in international tourism that emerged during thesecond half of 2008 intensified in 2009. International tourist arrivals have suffered asharp drop between January and April 2009 (about -8.0 percent) overall for the first fourmonths of the year. That is accounted for a drop in the international tourist arrivals toabout 247 million, between January and April, down from 269 million in 2008(UNWTO World Tourism Barometer, Jun2009). International tourism is expected todecline between -6 percent and -4 percent during 2009. Sub-Saharan Africa is the onlybright spot on the horizon with arrivals forecast to grow by 1-5 percent. For all regions,growth is projected to be negative: Asia and the Pacific (4-1%), Americas (6-3%),Europe (8-5%) and the Middle East (10-5%)2.

In the realm of the GFC, consumer demand is falling in both the business andleisure tourism sectors, according to the UNWTO. The government of Egypt (GOE)assign a high priority to the tourism sector, however, its market share of the tourismmarket worldwide is very low (1.4 percent) ranked 64 th out of 133 country (WEF,2009). As the Egyptian government aims at enhancing the TTCI, testing different policyscenarios of the impact of the GFC on tourism sector is very important for decision

*Ahmed Badr is a modeling Researcher at the Economic Issues Program (EIP) at the Information and

Decision Support Center (IDSC); Enas Zakareya is a senior economist at the Economic Issues Program(EIP) at IDSC and Mohamed Saleh is an associate professor at Decision Support and Operation ResearchDepartment, Cairo University and adjunct professor at the University of Bergen. We would like to thankMagued Osman, IDSC chairman, and Professor of Statistics at Cairo University, who gave us the supportto complete this research. We are extremely indebted to Tarek Moursi, Professor of Economics at CairoUniversity and an economic consultant at IDSC for suggesting the topic, for valuable comments and forcontinuous encouragement. We are grateful to the Economic Issues Program, at IDSC, for administrativesupport.

2 UNWTO market monitoring indicates that the plummeting results of international tourism during thelast part of 2008 have continued during the first months of 2009. International tourist arrivals are

estimated to have declined by as much as 8% in the first two months of 2009, bringing overallinternational tourism to the level of 2007.


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makers to envisage the likely effects of the crisis and hence taking the appropriateadjustment plans.

The objective of this paper is to analyze the interactions within the tourism sector inEgypt and to test policies to mitigate the impact of the global financial and economiccrisis on the tourism sector. Therefore, a dynamic model is developed to simulate theseinteractions and to analyze the effects of different scenarios. This dynamic model isused to trace the impact over time and to include delayed effects into the model. Thesystem dynamic tourism model is calibrated based on the historical time series of thekey variables in the tourism sector during the period between 1995 and 2007, Then themodel is used to assess the effects of the GFC and to test different mitigation policiesover the period 2008-2015.

The remainder of the paper proceeds as follows. Section 2 presents a brief historicaloverview that delineates the developments in the Egyptian tourism sector. Section 3describes the TTCI which represents the core foundation of the model. Section 4focuses on previous work about tourism in Egypt and how system dynamics can beuseful in representing tourism dynamics. Section 5 describes the system dynamicsmodel. Section 6 illustrates the model behavior in the different runs and presents thecomparative analysis of the selected four scenarios. Section 7 concludes and suggestssome possible future work.


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2. Tourism Sector in Egypt: An Overview

The Tourism sector in Egypt has witnessed significant developments in the last decade.A review of the evolution of the tourism sector since 1995 provides a background to theassessment of the sector's prospects in future.

Figure 1Main Tourism Indicators 1995-2007

Tourists (Overnights Visitors) Inbound Tourist Arrivals

Average length of Stay Occupancy Rate

Source: World Tourism Organization (UNWTO)

In the last thirteen years, tourism arrivals increased more than three-fold from 3.1million in 1995 to 11.1 million in 2007 recording an average annual growth about12.3%. The average duration of stay of visitors increased from 6 nights to 10 nightsover the same period. Tourism nights grew from 20.5 million to about 111.5 millionnights in 2007 at an annual rate about 17.9% on average. Concerning average roomoccupancy rate, it increased from 57% in 1995 to 63% in 2007. It is worth mentioningthat the tourist arrivals that Egypt could potentially attract accounted for 20-28% moretourists over the period 1995-2007 (Sakr et al., 2009).


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3. TTCI Description

We used the most recent Travel and Tourism Competitiveness Index (TTCI)(WEF, 2009) that evaluates the ranking of the competitive performance of 133 countriesand suggests the way forward for decision makers wishing to improve their travel andtourism sectors. TheTTCI1 is composed of 14 pillars grouped into three groups, mainly,the travel and tourism regulatory framework, business environment and infrastructureand Human, cultural and natural resources. Each pillar is also composed of severalindicator variables. For example, pillar one- policy rules and regulations- includes eightcomponents; namely, prevalence of foreign ownership, property rights, business impactof rules on FDI, visa requirement, openness of bilateral air service agreements,transparency of government policy making, time required to start a business and cost tostart a business.

TTCI provides a comprehensive tool for measuring the factors and policies thatmake the Travel and Tourism sector attractive (WEF, 2009). TTCI is quite highlycorrelated with both the number of tourists actually traveling to various countries andthe annual income generated from Travel and Tourism, with few notable outliers2. Thissupports the idea that the TTCI captures factors that are important for developing theTravel and Tourism (TandT) industry (WEF, 2009). Our model relies heavily on thedifferent pillars constituting the TTCI that can help policy makers identify the weak andstrong areas related to the competitiveness of the sector and hence identify the necessaryneeded adjustments. Analyzing the impact of the GFC can be established throughexploring the dynamic behavioral relationships between the main variables used incomputing TTCI. Figure 2 demonstrates the competitive position of Egypt relative to itscompetitors in the MENA region. Egypt occupies the 64 th position among 133 countriesaccordingto the overall TTCI. In terms of the regulatory index, it is ranked 52nd and inthe business environment and infrastructure index it is ranked 65th. Finally according tothe resources index it is ranked 73rd (WEF, 2009). The detailed description of the TTCIindex and its components are shown in table1 in the appendix.

1 More details about TTCI methodology can be found in (Appendix 1).2

For further details about the correlation between TTCI, international tourist arrivals and receipts, Seefigure 2 and 3 P.8,(WEF, 2009).


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Figure 2

Egypts TTCI Ranking among Selected Countries in Emerging Economies and MENA Region

33

44

56

62

64

75

39

31

63

107

52

64

23

49

60

63

65

78

78

56

44

18

73

83

United Arab

Emirates

Tunisia

Turkey

India

Egypt

Morroco

TTCI

Overall

Regulatory Index Infrastructure Index Resources Index

Source: WEF (2009).

4. Literature Review

Most empirical studies in this regard estimate the tourism demand functionrelying on econometrics techniques. Sakr estimated a demand function for Egypt (Sakr

et al., 2009) based on Giacomelli (2006a) using panel data utilizing price and non pricedeterminants such as income, cost of living, nominal exchange rate, transport cost, ameasure of infrastructure and other factors that determine the arrivals of tourists(Crouch, 1995; Eugenio, 2002; Hellstrom, 2002). Following Eilat and Einav (2004)three-stage estimation procedure, the estimates of the tourism demand function forEgypt revealed that the rule of law tended to be the most important factor that positivelyaffects tourism demand1. The price of tourism is the most significant factor thatnegatively impacts tourist arrivals.2

Another study by Sakr and Masoud (2003) regarding the determinants ofvolatility of tourism sector in Egypt found out that not all shocks exert the same effect

on the tourism sector or last for the same period of time based on estimation of tourismdemand function for Egypt for the period (1986-2001). Tourist's responsiveness todifferent events is examined. Both tourism arrivals and receipts have a positive relationwith the GDP in the source countries, as well as with the depreciation in the realeffective exchange rate. The most important factor determining the demand for tourismin Egypt is the extent of international competitiveness as expressed by the real effectiveexchange rate. The study highlighted the importance of developing internationalcompetitiveness to broaden Egypt's tourism market. The study also revealed that the fall

1 A one percent improvement in the rule of law resulted in about 5.98 percent increase in tourist arrivals

in Egypt.2 Every one percent increase in the price is accompanied by 5.36 percent reduction in arrivals.


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in tourism flows and receipts in the aftermath of domestic shocks were more severecompared to the corresponding fall resulting from external shocks1.

The previous studies primarily focused on analyzing the historical behavior. Inthis study we aim at constructing various scenarios for the future of the sector, takinginto consideration the possible impacts of GFC. Given the complexity and dynamicnature of our objective, system dynamics is the best approach to address this problem,as it accounts for feedback loops, time delays between causes and consequences andnonlinear relationships between variables. To our knowledge, this is the first study toinvestigate the impactsof GFC on the tourism sector in Egypt, using system dynamics.

5. Model Structure Overview

The model contains twelve sub-models, eight stocks, eleven balancing and fivereinforcing feedback loops. Moreover we have attached the Powersim version as asupplementary material. This section focuses on presenting the dynamic structure of themodel. The main sub-models (briefly described below) are as follows:

1- Annual Arrivals2- Tourism Revenues3- Global Economic Crisis4- Employment5- Hotel Rooms Capacity6- Travel and Tourism Competitiveness Index7-

Security and Safety Index8- Tourism Infrastructure Index

9- Air Transport Infrastructure Index10-Ground Transport Infrastructure Index11-Health care Index12-Price Competitiveness in the Travel and Tourism Industry

1The global and regional external shocks that affected the perception of safety are mainly the September11th attacks, the Gulf war and the domestic shock that took place in 1997, namely Luxor attacks. In theaftermath of September 11th attacks, the number of arrivals dropped by 0.4 and 0.6 percent respectively,but the corresponding decrease in real tourism receipts were more striking totaling 10.6 and 5.2 percent,

respectively (WTO, 2002c; Sakr and Masoud, 2003).


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5.1 Annual Arrivals

This sub-model depicts the flow of international tourists to Egypt each year andillustrates its determinants. As Egypt receives a significant share from internationaltourists, Egypt annual arrivals (an inflow to the Egyptian stock and at the same timeoutflow of worldwide stock) are defined as the Egyptian market share of the worldwideannual arrivals. The Egyptian market share is mainly determined by the current value ofthe Egyptian TTCI. A stock of world tourists represents all international touristsworldwide. This stock is increased by the accumulation of newly attracted touristsaccording to a growth rate that assumed to be a constant (without any external effectsthat can hit the tourism sector). Tourist inter-travel period is the average durationbetween two consecutive visits for a tourist. Moreover a tourist who visits Egypt thisyear is assumed to have a probability to revisit it after a specific period (re-potential

period), a tourist who visits Egypt in 2009 will be back again to the world tourists stockand has a probability to visit Egypt again in 2011. Recent tourists that visit Egypt areaccumulated in a stock which increases by the inflow of Egypt annual arrivals anddecreases by re-potential rate.

5.2 Global Economic Crisis

The Global crisis hit the tourism sectors and has a significant effect throughdifferent variables. This sub-model describes these variables affected by the crisis. GFCis expected to have effect on world tourism growth and hence the Egyptian tourismgrowth as well. Average nights per tourist, average tourism expenditure and inter-travelperiod are also among the key variables that will be affected by GFC. To incorporatethese effects we use four multiplier values that are multiplied by the reference values.The analysis of the effects of GFC on the mentioned variables will be presented in thenext section.

5.3 Travel and Tourism Competitiveness Index

As we mentioned before, the TTCI is decomposed of 14 important pillars. Wehave focused on the most important six pillars only out of fourteen that we expect theywill change during the study period (2008 to 2015). Those basic components includeprice competitiveness index, tourism infrastructure index, security index, health index,air infrastructure index and ground infrastructure index. The remaining 8 pillars aretreated within the model as constants values. A simple average formula of the 14variables (pillars) is used to calculate the Egyptian competitiveness index (WEF, 2009).Our philosophy behind utilizing the different components of TTCI is mainly driven by alarge number of empirical studies that have investigated the determinants of a country'scompetitiveness and attractiveness to tourists (Giacomelli, 2006a). TTCI proves to besuitable for measuring and capturing most of the determinants of tourism and travelcompetitiveness.


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5.3.1 Tourism Infrastructure Index

One of the key building blocks in the tourism sector dynamics is tourisminfrastructure that represents the supply side of the model. This sub-model describestourism infrastructure index and its determinants that incorporate the effect ofoccupancy ratio, the effect of car rental companies and the effect of ATMs availabilityand accessibility. We use the elasticity concept to model the effect of occupancy ratioon the infrastructure index. Occupancy ratio represents the balance between supply(i.e. room capacity) and demand (i.e. tourism nights) through room capacity andtourism nights, respectively. Increasing the demand of tourism nights requires a higheroccupancy ratio that is considered a good indicator. On the other hand, increasingcapacity given a fixed demand is a bad indicator due to the over-supply without anyconsideration to demand.

5.3.2 Air Transport Infrastructure Index

This sub-model is inspired by the generic model described by Sterman (Sterman2000, P.264) where the stock values exhibits a goal seeking behavior to reduce the gapbetween its value and a certain desired value. Air index represents one of the mainpolicy intervention points in the model. First in the base case scenario (flags are off) theair index is constant. However during policy analysis (flags are on), the air index isassumed to exhibit a goal seeking behavior in order to reduce the gap between its valueand the desired value which is set by the policy maker. The enhancement of the indexcan be achieved via different ways for example enhancing quality of existing airports,

building new airports, spreading out international air transport network and increasingnumber of operating airlines, etc.

5.3.3 Ground Transport Infrastructure IndexSimilar to the air index we use the same sub-model for ground infrastructure

index except that the enhancement of the index will be through increasing number ofroads, spreading out ground infrastructure network and enhancing quality of roads, etc.

5.3.4 Health Care Index

Health care is one of the critical factors upon which tourists make their decisions

for visiting a specific destination. The same sub-model structure used in air and groundindexes will be customized to represent the dynamics of the health care index structure.The change will be through intervention from both public and private sector byincreasing physician density per population, facilitating access to improved drinkingwater and increasing available beds for people, etc.

5.3.5 Security and Safety index

One of the crucial factors contributing to the drivers for tourism arrivals is thesecurity and safety index. Tourists' personal safety is a function of the ability to travelwithout threats, therefore, stimulating inbound tourism is determined by touristsconfidence in Egypt as a safe and secure tourist destination. The index is simply


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decomposed of four indexes capturing the effect of crime, terrorism, road accidents andpolice services.

5.3.6 Price Competitiveness

This sub-model describes how the Tourism and Travel price been constructed.Price competitiveness is determined through five main sub-indexes, which are tickettaxes and airport charges, purchasing power parity, taxation, fuel price levels and hotelprices. Average formula of the five sub-indexes is used to calculate price index. It isworth mentioning that occupancy ratio is one of the determinants of hotel price. Hotelprice is being determined through a ratio between supply (i.e. room capacity) anddemand (i.e. tourism nights). The relevance of measures of price competitiveness isbeing recognized in studies of tourism industry. Demand studies go beyond using the

nominal exchange rate as a crude measure of price competitiveness and beyond the useof real exchange rates (nominal rates adjusted for changes in the general level of prices).Thus studies have attempted to determine exchange rate adjusted for changes in theprices that identifies tourist bundles of goods and services (Martin and Witt, 1987).However, these do not go beyond trends and do not determine whether a country ismore or less competitive than another at a particular point of time. To measure the level,as opposed to simply trends in tourism prices, cross-sectional studies using the pricespaid by tourists in different countries are needed.

5.4 Annual Tourism Revenues

Tourism receipt is one of the control variables used to judge the improvement orrecession of the tourism industry. Only foreign tourism nights are used to calculateEgypt annual tourism revenues. Foreign tourism nights are the multiplication of theaverage nights a tourist spent in Egypt and the number of international tourists that visitEgypt annually. Egypt annual tourism revenues are then calculated by multiplyingforeign tourism nights by average tourist expenditure per day.

5.5 Tourism Employment

The labor force for the tourism sector is aggregated into a single stock. Tourismemployment is capturing the labor dynamics surrounding the tourism sector that is

increased by the hiring rate and decreased by the attrition rate. Because of theseasonality of the tourism industry, the hotel managers are willing to eliminate surplus'temporary' employees when not needed and that decreases the labor stock by the firingrate (negative inflow).The attrition rate (outflow) is used to represent voluntary quitsand normal retirements and is modeled as a first-order process in which employeesremain with the tourism industry for the average duration of employment.

Desired labor is the number of employees hotel managers are willing to employto service the expected number of tourists. Labor stock is adjusted by the extraemployees needed1. Hotel managers can't adjust current labor to the desired one without

1 Difference between desired number of employees and the actual number existing in the system.


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a delay to announce vacancies, interviews and select appropriate candidates in order tofill these positions, etc. We directly used annual arrivals instead of delayed annual

arrivals because the employment sector usually responds quickly to any changes orfluctuations in the tourism sector.

5.6 Egypt's Hotel Rooms Supply Chain

This sub-model is based on a generic supply chain model (Sterman 2001,Chapters. 17 and 19) representing the hotels capacities in Egypt. Like all countries,Egypt hotels and tourism villages comprise a set of processes that are order fulfillment,requesting new hotel rooms and capacity adjusting. The full hotel rooms supply chain issimulated by the following sub-model starting with ordering a new hotel rooms2 from

suppliers that are requested by tourists.

The sub-model contains two stocks. The first stock represents the supply chaingoverning the provision of hotel rooms for the tourism sector and comprised of thestock of unfulfilled orders for new hotel rooms, i.e. orders that have been placed withmanufactures but not yet received. This stock is increased by the accumulation of yetmore orders for rooms (inflow), represented by the start construction rate and depletedinter-temporally by an outflow (finished rooms ready for service).Note that the MAXfunction is used for both start and finish construction rate to ensure the nonnegativevalues for them.

Another stock constructs of all Egypt's hotel rooms is used to represent thecapacity of them. This stock is growing by receiving new rooms from suppliers that areready for service (outflow from construction stock and inflow to capacity stock) anddiminishing by depreciated rooms that no longer available for use. This stock is alsoassumed to depreciate at a constant rate and the depreciation rate is then calculated bydividing the number of rooms by the average lifetime of room.

Simply, hotel manager can't add rooms as much as they wish; there are moneyconstraints and delays that limit that desire. The construction of new hotels for example,requires labor, equipment and time. Hotel managers adjust the current stock every year

to meet the desired one. The desired number of rooms is determined by two mainfactors. First, they aim to represent the depreciated rooms by ordering new ones.Second, the perceived tourism nights3 and the occupancy ratio they wish to achieve.Similarly, the suppliers of hotel rooms adjust the construction of new roomsanalogously to how hotel managers adjust their room capacity taking into considerationthe construction lag between having a job order for a new room and delivering thatroom to be consumed.

1 Business Dynamics: System Thinking and Modeling for a Complex World, John D.Sterman. 20002 Hotel rooms represent all available rooms that can be used by tourists (e.g. hotels, tourism villages, etc.)3

Perceived tourism nights are the actual tourism nights delayed by a specific period of time until hotelmanagers comprehend the change in values.


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6. Scenario Analysis and Simulation Results

The impact of the GFC on the Egyptian tourism sector can be analyzed using thesystem dynamics model that basically help improving the decision maker understandingof the dynamics within the tourism sector and simulating the likely repercussions andmpacts of the GFC on the tourism sector. Different simulation runs can be implementedto test the behavior of the key tourism indicators and interactions of the variables withinthe suggested framework for achieving the objective of this study. Figure 3demonstrates four different policy scenarios for the decision maker to carry out thesimulation for the impact of GFC on tourism sector. These four scenarios are basescenario, pessimistic scenario; mitigate scenario and optimistic scenario as illustrated in

(Figure 4).The policy scenarios depend mainly on the extreme values of two majoruncertainties that are the severity of the impact of GFC from one hand and the change ofthe enabling environment from the other hand. Below we will briefly explain eachscenario then we will perform a comparative analysis of all scenarios. Each scenario isintroduced through a movement a long the scale for the severity of GFC owing to thechange in world growth rate of tourism arrivals, tourist spending in Egypt, averagetourist nights and finally the change in inter-travel period (figure 5).

Figure 4Scenario Cross Analysis

6.1 Base Scenario

In the base scenario we assume, other things being equal, the same current policies willremain in the future. Low impact and no significant change will take place. The mainpurpose of this run is to evaluate model behavior and outputs under the normal stateduring the study period (2008-2015).

6.2 Pessimistic ScenarioIn contrast to the base scenario, the pessimistic scenario, presumes a severe impact ofthe GFC owing to a sharp decline in the world growth rate of international tourists, theaverage tourist expenditure, the average length of stay and a significant increase in theinter-travel period of international tourists. Therefore, further investment or refreshmentwill be enhanced through intervening in one or more areas of tourism competitivenesssub-indexes (health, air, ground,) to mitigate the effect of GFC.


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6.3 Mitigate ScenarioA third scenario can be envisaged in the wake of GFC. The severe impact of GFCwould induce the Government of Egypt (GOE) to intervene with a set of stimulatingpolicies that could enhance the enabling environment for the tourism and travel sector.The GOE efforts may include encouraging and accelerating the investment in specificareas that could result in a major improvement in the sector. The system dynamicsmodel introduced the simulation of such policies by turning on the flags for airinfrastructure index, ground infrastructure index as well as the health care index.

6.4 Optimistic Scenario

Finally, an optimistic scenario representing a low impact of the GFC associated with a

significant intervention from the GOE will be considered. In this regard, the optimisticscenario presumes a small decline in the world growth rate of international tourists, asmall decrease in the average tourist spending, a small decrease in the average length ofdays spent in Egypt and a slight increase in the inter-travel period of internationaltourists.

Figure 5Decision Maker's Simulation for Scenario Crisis effects1

6.5 Comparative Analysis of the Scenarios for the Global Financial

Crisis

Based on the model described in the previous section, we simulate the four mainscenarios illustrated above to explore different types of tourism policies and conditionsfor the period 2008-2015 that is sufficient for the adjustments to take place given thedynamics of the tourism sector. Four main variables have been run under the fourscenarios and the results are shown in (Figures 6, 7, 8 and 9). The four variables are

1

Red and green regions represent high and low effects of crisis, respectively.


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TTCI, market share, annual arrivals and employment. Below we will describe thebehavior of each of them under the four scenarios.

According to the optimistic scenario, the travel and tourism competitive position of theEgyptian tourism sector can be dramatically increased by 15 positions to occupy aranking like 49th instead of 64th out of 133 countries. This position will make thetourism sector in Egypt more competitive than other competitors in the Middle East andNorth Africa (MENA) region such as Turkey (56) and Jordan (54).This is mainlyachieved as a matter of changing the basic blocks of the tourism dynamics to restore theenabling environment for the development of the tourism sector. While the pessimisticscenario can contribute to shifting Egypt ranking by 8 places to occupy the 56th positionas well as Turkey's. The mitigate scenario leads the base scenario in TTCI (Fig. 6) basedon our assumption that the improvement will target and enhance the Egyptian

competitiveness index during a period of five years.

Figure 6TTCI

4

4.05

4.1

4.15

4.2

4.25

4.3

4.35

2007 2008 2009 2010 2011 2012 2013 2014 2015

TTCI Score

Base Optimistic Mitigate Pess imistic

Source: Generated from the model.

With regard to the Egyptian market share of international tourists (Figure 7), theresults reveal that market share will reach an unprecedented level by 2015 according to

the optimistic scenario (1.7%)1. As per our assumption that the market share isdetermined using the Egyptian TTCI, the behavior of the market share follows thebehavior of the TTCI. It is worth noting that enhancing enabling environment in thetourism sector will increase the distance between the optimistic scenario (Low GFCeffect) or the mitigate scenario (Significant GFC effect) and the base scenario (Nosignificant change).

1 0.1% of international tourists equals 922000 tourist in 2008 [1]


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Figure 7Egyptian Market Share

Source: generated from the model.

Compared to the market share, tourism annual arrivals are behaving in a differentacross scenarios. However, Egypt achieve a higher market share values in the mitigatescenario (Figure 7) than the base one; annual arrivals values record a lower values in themitigate scenario than the base (Figure 8). This is due to the effect of GFC that hit thearrivals of tourists worldwide and hence the Egyptian tourist arrivals as well. Thehighest average growth rate of tourism arrivals will be 8.2 percent compared with 4.8percent in the mitigate scenario and 3.8 percent in the pessimistic scenario. Thecorresponding increase in the level of tourist arrivals from 11.1 in the base year to reach

16.9 in 2012 and 20.8 million tourists by 2015, while the lowest level of tourist arrivalswill be achieved in the pessimistic scenario to account for 14.8 million in the sameperiod. The mitigate scenario lies in between but still less than the level achieved by2012 compared with the optimistic scenario. Because of external shocks that hit tourismsectors; annual arrivals behavior in the mitigate scenario lags the base scenario of thesame period (Fig 8).

Figure 8Annual Arrivals

9.00

11.00

13.00

15.00

17.00

19.00

21.00

23.00

2007 2008 2009 2010 2011 2012 2013 2014 2015

BillionTourists

Base Optimistic Mitigate Pe ssimis tic



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TTourism employment will achieve rapid growth on average to reach 6.7 percent duringthe medium term 2008-2015 according to the optimistic scenario (Fig. 9). While theaverage growth rate of employment is modest in the mitigate scenario. The least averagegrowth rate could be achieved under the pessimistic scenario. It is worth noting thatemployment follows arrivals behavior (Figures 8,9) because tourism labor is much

correlated to the number of tourists. Finally and following the previous cycle, increasingthe Egyptian TTCI would be a matter of interest in order to enhance the tourism sector,attract more tourists, increase market share and increase the labor force.

Figure 9

Employment

2.00

2.50

3.00

3.50

4.00

4.50

5.00

5.50

2007 2008 2009 2010 2011 2012 2013 2014 2015

Billion Worker

Base Optimistic Mitigate Pess imistic



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7. Conclusion and Policy Implications

Constructing a system dynamics model to achieve the objective of this study hasmany advantages. First, regarding the competitive position of the Egyptian tourismsector, the formal model and simulation runs performed on it enhances our mentalmodel about the interactions of both supply and demand factors driving the competitiveposition of the tourism sector. Second, the model can be used to assess the impacts ofexternal shocks such as GFC as well as domestic shocks (terrorism attacks and politicalinstability), though the former is the focus of the paper and the latter is out of scope ofthis study. Third, the model provide the decision maker with a policy framework that iscapable of introducing specific interventions in the areas that are crucial to the tourismsector corresponding to the different levels of the severity of the shock (GFC). At thesame time the decision maker can easily monitor the behavior of the key indicatorvariables in the tourism sector and design targeted policies to influence the specificneeds and areas. Fourth, the results of the simulation exercise are useful in suggestingrecovery strategies to enhance the sustainability of the tourism sector as well as itscontribution to the growth and development of the economy. Finally, the modelcaptures both demand and supply determinants of tourism and travel that gives morespace for policy makers to choose which area that could be enhanced in the planning forthe future of the sector development.

Among the areas that can be influenced is the safety and security index wheresustainable efforts should be directed towards image building and restoring confidence

in Egypt as a tourist destination. Another promising area is to improve tourist healthsecurity and tourism infrastructure for both air and ground facilities. Should Egyptstrive for a significant market share of world tourism it has to exert much effort toimprove the score and ranking of TTCI among competitors especially in the MiddleEast and North Africa (MENA) region.

As a possible future research the model can be expanded to distinguish betweendomestic and foreign inbound tourism. Moreover the model can be designed todistinguish between both domestic and external shocks. Furthermore the model can beextended to include the competitors of Egypt as well as the countries of origin oftourists.


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Appendix

TTCI Methodology

This section provides the methodology of constructing the Travel and TourismCompetitiveness Index (TTCI). TTCI is composed of three subindexes: the TandTregulatory framework, the TandT business environment, and infrastructure and theTandT human, cultural, and natural resources. These subindexes forms the fourteenpillars of the TTCI described in table (1).All sub-indices include both, hard and softvariables. These variables come from two different type of sources:

A) Soft data come from the World Economic Forum "Executive Opinion Survey(EOS)". This Survey is conducted every year and asks top management businessleaders to compare their own operating environment with global standards on a wide

range of dimensions. All EOS actual questions are ranged between 1-7.B) Hard data indicators are obtained from a variety of sources such as

international organizations and leading businesses in the Travel and Tourismindustry. These data are scaled between 1 to 7 to be aligned with the soft one usingthe following formula:

Given that the sample minimum and maximum are the lowest and highest scoresof the overall samples, respectively. This formula is used only when a higher samplevalue indicated a better outcome (Available hospitals, ability to invest, etc.). On theother side, another formula has been used in case of higher value represents a worse

outcome (pollution, Road Accident,)

Each pillar is then calculated as unweighted average of included variables(softand hard). Finally the overall country TTCI calculated as an unweighted average ofthe country fourteen pillar values.


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Table (1): TTCI Description

Sub-index Pillar Variable Description

T and T

regulatory

framework

1Policy rules

and regulations1.1

Prevalence offoreign ownership

Foreign ownership of companiesin your country is (1 = rare andlimited, 7 = prevalent andencouraged)

1.2 Property rights

Property rights in your country,including over financial assets, are(1 = poorly defined and notprotected by law, 7 = clearlydefined and well protected by law)

1.3Business impact ofrules on FDI

In your country, rules governingforeign direct investment (1 =discourage foreign directinvestment, 7 = encourage foreigndirect investment)

1.4 Visa requirements

Number of countries whosecitizens are exempt from obtaininga visa (= 1) or able to obtain oneupon arrival (= 0.5) out of all UNcountries | 2008

1.5

Openness of

bilateral AirService Agreements

Index of openness of bilateral AirService Agreements | 2005

1.6Transparency ofgovernmentpolicymaking

Are firms in your country usuallyinformed clearly by thegovernment of changes in policiesand regulations affecting yourindustry? (1 = never informed, 7 =always informed)

1.7Time required tostart a business

Number of days required to start abusiness | 2008

1.8 Cost to start abusiness

Cost to start a business as a

percentage of GNI per capita |2008

2Environmental

sustainability2.1

Stringency ofenvironmentalregulation

How stringent is your countrysenvironmental regulation? (1 = laxcompared with most countries,among the worlds most stringent)

2.2Enforcement ofenvironmentalregulation

Enforcement of environmentalregulation in your country is (1 =lax, 7 = rigorous)

2.3Sustainability ofTandT industrydevelopment

Is your countrys governmenttaking the necessary steps toensure that the Travel and Tourism


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sector is being developed in asustainable way?(1 = no, development of the sectordoes not take into account issuesrelated to environmentalprotection and sustainability

2.4Carbon dioxideemissions

Carbon dioxide emissions percapita in metric tons | 2004

2.5Particulate matterconcentration

Urban populationweighted PM10micrograms per cubic meter | 2005

2.6 Threatened species

Threatened species as a percentage

of total species (mammals, birds,amphibians) | 2008

2.7Environmentaltreaty ratification

Total number of ratifiedenvironmental treaties | 2008

3Safety and

security3.1

Business costs ofterrorism

The threat of terrorism in yourcountry (1 = imposes significantcosts on businesses, 7 = does notimpose significant costs onbusinesses)

3.2

Reliability of police

services

Police services in your country (1= cannot be relied upon to enforce

law and order, 7 = can be reliedupon to enforce law and order)

3.3Business costs ofcrime and violence

The incidence of common crimeand violence in your country (1 =imposes significant costs onbusinesses, 7 = does not imposesignificant costs on businesses)

3.4Road trafficaccidents

Estimated deaths per 100,000population due to road trafficaccidents | 2002

4 Health andhygiene

4.1 Physician densityPhysician density per 1,000 people| 2006 or most recent yearavailable

4.2Access to improvedsanitation

Access to adequate sanitation as apercentage of total population |2006

4.3Access to improveddrinking water

Access to safe drinking water as apercentage of total population |2006

4.4 Hospital bedsHospital beds per 10,000population | 2006

5 Prioritization 5.1 Government The development of the Travel


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of Travel andTourism prioritization of theTandT industry and Tourism industry is a priorityfor the government of yourcountry (1 = strongly disagree, 7 =strongly agree)SOURCE: World

5.2TandT governmentexpenditure

TandT government expenditure asa percentage of total budget | 2008

5.3

Effectiveness ofmarketing and

branding to attracttourists

Does your country carry outeffective marketing and brandingto attract tourists? (1 = no, tourismmarketing is nonexistent or

completely ineffective, 7 = yes,tourism marketing is excellent,and is very effective in attractingtourists)

5.4 TandT fairattendance

Index of country presence at 13major TandT fairs, 20072008

TandT

business

environment

and1

Air transport

infrastructure1.1

Quality of airtransportinfrastructure

Passenger air transport in yourcountry is (1 = underdeveloped, 7= extensive and efficient byinternational standards)

infrastructure

1.2Available seatkilometers,domestic

Scheduled available seatkilometers per week originating incountry (in millions) | January toJuly 2008 average

1.3Available seatkilometers,international

Scheduled available seatkilometers per week originating incountry (in millions) | January toJuly 2008 average

1.4Departures per1,000 population

Number of departures per 1,000population | 2006

1.5 Airport densityNumber of airports per millionpopulation | 2007

1.6Number ofoperating airlines

Number of airlines with scheduledflights originating in country |January 2008 and July 2008average

1.6International airtransport network

Does the air transport network inyour country provide goodconnections to the overseasmarkets offering the greatest

potential to your business? (1 =


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no, not at all, 7 = yes, to all of mykey business markets)

2Ground

transport

infrastructure

2.1 Quality of roads

Roads in your country are (1 =underdeveloped, 7 = extensive andefficient by internationalstandards)

2.2Quality of railroadinfrastructure

Railroads in your country are (1 =underdeveloped, 7 = extensive andefficient by internationalstandards)

2.3Quality of port

infrastructure

Port facilities and inland

waterways in your country are (1 =underdeveloped, 7 = extensive andefficient by internationalstandards)*

2.4Quality of domestictransport network

2.5 Road densityKilometers of road per 100 squarekilometers of land | 2005 or mostrecent year available

3Tourism

infrastructure3.1 Hotel rooms

Number of hotel rooms per 100population | 2007 or most recentyear available

3.2

Presence of major

car rentalcompanies

Index of presence of major carrental companies | 2008

3.3ATMs acceptingVisa cards

Number of automated tellermachines (ATMs) accepting Visacredit cards per million population| 2007

4ICT

infrastructure4.1

Extent of businessInternet use

Companies within your countryuse the Internet extensively forbuying and selling goods, and forinteracting with customers andsuppliers (1 = strongly disagree, 7= strongly agree)

4.2 Internet usersInternet users per 100 population |2007 or most recent year available

4.3 Telephone linesTelephone lines per 100population | 2007 or most recentyear available

4.4Broadband Internetsubscribers

Broadband Internet subscribers per100 population | 2007 or mostrecent year available

4.5Mobile telephone

subscribers

Mobile telephone subscribers per

100 population | 2007 or most


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recent year available

5

Price

competitiveness

in the TandT

industry

5.1Ticket taxes andairport charges

Index of relative cost of access(ticket taxes and airport charges)to international air transportservices | (0 = highest cost, 100 =lowest cost) | 2008

5.2Purchasing powerparity

Ratio of purchasing power parity(PPP) conversion factor to officialexchange rate | 2007

5.3Extent and effect oftaxation

The level of taxes in your country(1 = significantly limits the

incentives to work or invest, 7 =has little impact on the incentivesto work or invest)

5.4 Fuel price levelsRetail diesel fuel prices (US centsper liter) | 2006

5.5 Hotel price indexAverage room rates calculated forfirst-class branded hotels forcalendar year in US$ | 2007

TandT

human,

cultural, and

natural 1 Humanresources 1.1 Primary educationenrollment

resources

Net primary education enrollmentrate | 2006 or most recent yearavailable

1.2Secondaryeducationenrollment

Gross secondary educationenrollment rate | 2006 or mostrecent year available

1.3Quality of theeducational system

The educational system in yourcountry (1 = does not meet theneeds of a competitive economy, 7= meets the needs of a competitive

economy)

1.4

Local availabilityof specializedresearch andtraining services

In your country, specializedresearch and training services are(1 = not available, 7 = availablefrom world-class local institutions)

1.5Extent of stafftraining

The general approach ofcompanies in your country tohuman resources is (1 = to investlittle in training and employeedevelopment, 7 = to invest heavilyto attract, train, and retainemployees)


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1.6 Hiring and firingpractices

The hiring and firing of workers is(1 = impeded by regulations, 7 =flexibly determined by employers)

1.7Ease of hiringforeign labor

Labor regulation in your country(1 = prevents your company fromemploying foreign labor, 7 = doesnot prevent your company fromemploying foreign labor)

1.8 HIV prevalenceHIV prevalence as a percentage ofadults aged 1549 years | 2007 ormost recent year available

1.9Business impact ofHIV/AIDS

How serious do you consider theimpact of HIV/AIDS on yourcompany in the next 5 years? (1 =extremely serious, 7 = not aproblem)

Life expectancy at birth (years) |2006

1.10 Life expectancy

2Affinity for

Travel and

Tourism

2.1 Tourism openness

2.2Attitude ofpopulation towardforeign visitors

Are foreign visitors welcome inyour country (1 = totallyunwelcome, 7 = very welcome)

2.3Extension ofbusiness tripsrecommended

When senior executives visit yourcountry for the first time forbusiness purposes, how likely areyou to recommend extending theirtrip for leisure purposes? (1 = Iwould never recommend it, 7 = Iwould always recommend it)

3Natural

resources3.1

Number of WorldHeritage naturalsites

Number of World Heritage naturalsites in the country | August 2008

3.2 Protected areasProtected areas as a percentage oftotal land area | 2007

3.3Quality of thenatural environment

The natural environment in yourcountry is: (1 = among the mostpolluted in the world, 7 = as cleanas the least polluted countries inthe world)

3.4Total knownspecies

Total known species (mammals,birds, amphibians) in the country |


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2008

4Cultural

resources4.1

Number of WorldHeritage culturalsites

Number of World Heritagecultural sites and Oral andIntangible Heritage | August 2008

4.2 Sports stadiumsSports stadium capacity permillion population | 2008

4.3Number ofinternational fairsand exhibitions

Number of international fairs andexhibitions held in the countryannually | 20052007 average

4.4Creative industries

exports

Exports of creative industriesproducts as a share of world total

in such exports | 2006 or mostrecent year available

Source: (WEF, 2009).


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Model Stock and Flow Diagram


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References

-Ach, Selim and Brian Pearce, (2009), "How Well Does the Travel and TourismCompetitiveness Index Explain Differences in Travel Intensity Among Countries?"Chapter 1.4. The Travel and Tourism Competitiveness Report 2009. World EconomicForum-Crouch, G., (1995), "A Meta-Analysis Study of International tourism Demand," Annalsof Tourism Research.-Eilat, Y., and L. Einav, (2004), "Determinants of International Tourism: A ThreeDimensional Panel Data Analysis," Applied Econometrics.-ENCC (Egyptian National Competitiveness Council), May 2008, "The 5th EgyptianCompetitiveness Report".-Eugenio, J., (2002), "A Primer on Modeling International Tourism Demand withDiscrete Choice Models," University of York.-Giacomelli, A., 2006a. "Modeling International Tourism Demand," SecondInternational Conference on Tourism Economics, Spain.-Hellstrom, J., (2002), "Count Data Modeling and Tourism Demand," EconomicStudies, no. 584. Sweden, UMEA University.-Honggang, Xu and Bao. Jigang, 2000, "A system Dynamics Study of ResortDevelopment project management in tourism region: A Case Stusy of Guilin,".-John D.Sterman, (2000), "Business Dynamics: System Thinking and Modeling for aComplex World".-Sakr M., Nada Massoud and Hala Sakr, (2009), "Tourism in Egypt: An Unfinished

Business," The Egyptian Center for Economic Studies (ECES).Working Paper No. 147.-Sakr M. and Nada Massoud, (2003), "International Tourism Volatility with SpecialReference to Egypt," The Egyptian Center for Economic Studies (ECES). WorkingPaper No.83.-World Tourism Organization (UNWTO), (2009), "Tourism and Economic Stimulus-Initial Assessment," Madrid.-World Tourism Organization, (2009), "UNWTO World Tourism Barometer", Vol. 7,No. 2.

impact of economic crisis on tourism in egypt

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