Modelling tourism demand elasticities for South Africa using demand systems

Abstract

International tourism to South Africa has increased steadily from 1994 to 2008. The year 2009 saw international arrivals to South Africa decline significantly and it became evident that the worldwide recession impacted not only on tourism arrivals in other countries, but also in South Africa. This sudden drop in international tourism sparked renewed interest into the demand for South Africa as a destination. It became evident that understanding the factors that influence foreign countries’ demand for South Africa as a tourism destination is crucial to anticipating future changes and formulating policy. Of particular importance are South Africa’s main tourism markets. From an intercontinental perspective, the United Kingdom is the most important market with 15 per cent of intercontinental tourists stemming from the UK in 2009 (Government Communications of South Africa, 2012). The UK is followed by Germany with 8 per cent, with the USA taking third position with 7 per cent in terms of intercontinental arrivals. As a market that grew substantially in importance over the past decade (moving from fifth position in 1994 to third position in 2009), and due to the size of the potential market, the USA is another market that warrants investigation. An Almost Ideal Demand System (AIDS) and a Rotterdam model is used to examine tourism demand for South Africa by UK and USA tourists This is done to quantify UK and USA tourism demand for South Africa, specifically the elasticities associated with tourism demand. Five other destinations were included along with South Africa (Italy, Malaysia, New Zealand, Spain and USA in the case of UK tourists) to examine the substitute and complementary effects that a change in tourism price brings forth. For the USA case, five destinations were chosen (Italy, Spain, New Zealand, Spain and the UK). The two models are compared to establish whether one model can better explain tourism demand from the UK and the USA to South Africa than the other model. The models provide policy makers with useful information on the sensitivity of tourism demand to changes in relative prices, exchange rates, expenditure, seasonality and the global recession of 2008. Short–term elasticities, that are critical when focusing on policies regarding own–price, cross–price and expenditure elasticities, were derived from both models. iv The results for the Rotterdam model show that price competiveness is important for UK and USA demand for all the countries in the study but, in particular, the long haul destinations ? South Africa and Malaysia. This was expected as these two destinations are seen as ‘luxury’ destinations for both UK and USA tourists. In the South African case, Malaysia, Italy and the UK are seen as substitutes by US tourists and Malaysia, Spain and USA seen as complementary destinations for South Africa by UK tourists. The results for the EC–AIDS model show that, in terms of expenditure elasticities, almost all of the countries are close to unity, which can be attributed to the dynamic nature of the EC–AIDS model, in that tourists’ choices are taken in account. It was also shown that, in terms of price competiveness for the UK and the USA, demand in South Africa is relatively unimportant. This means that tourists are not discouraged from visiting South Africa when prices increase. South Africa is viewed as a substitute destination for Italy, Spain and the USA for UK tourists but as a complement to Malaysia. USA tourists view South Africa as a substitute for Italy, Malaysia and the UK but as a complement to Spain. The two models were compared using a J–test and it was found that the EC–AIDS model dominates the Rotterdam model for UK tourists in the South African case but is indifferent for USA tourists when choosing a model.