The promise and peril of tourism booms

What I did on my summer vacation

It’s probably true that most people overrate how much you can learn about a foreign country from visiting, but I would make a partial exception for places where the economy is heavily influenced by tourism.

For example, in Portugal, where we were last week, tourism is 15 percent of GDP. So while a tourist’s experience of Portugal isn’t representative of a typical slice of Portuguese life, just by visiting you are, in fact, witnessing one the major drivers of the Portuguese economy.

Portugal is part of a broad reversal of fortune in Europe since the pandemic, with the southern European countries that struggled so much in the wake of the Great Recession now growing faster than their richer Northern European colleagues. Just based on the fact that the Portugal-Spain-Italy-Greece bloc has lower incomes than Germany-Austria-Netherlands-Scandinavia, you might expect this to be a standard economic convergence story. But that’s not really the case. It’s not as if Portugal is suddenly developed an airplane manufacturing industry or Greek software companies are leading the AI revolution. Instead, as Tom Fairless wrote for the Wall Street Journal recently, a huge influx of tourists — many of them Americans — has lifted the economies of southern Europe.

That tourism boom is driven largely by America’s very strong but annoyingly inflationary recovery. Americans have more money than ever, but the price of some things has risen even faster than income. The price of airfare, however, has actually declined slightly since the Trump and Obama eras. It’s more affordable than ever to go on vacation in Europe, and the relative price of splurging on a European vacation versus doing things closer to home has also fallen.

At the same time, a whole host of technological innovations, from Airbnb and Uber to translation apps to the basic ability to research stuff on the internet, have made it more comfortable and more convenient to visit new places. So the American tourist experience in Lisbon is, in fact, quite relevant to understanding the current European economy — especially because the surge is controversial, with many people in the tourism belt denouncing its impact.

I think “curse” is too harsh a judgment. The tourism boom isn’t just benefitting tourism entrepreneurs. It has dramatically reduced unemployment rates throughout Southern Europe and dramatically improved Southern European countries’ fiscal positions, making it easier to meet pension costs, finance infrastructure improvements, and otherwise enjoy the fruits of economic growth. Growth is better than non-growth, and the view of tourism as actually net-negative reflects, I think, a blinkered perspective.

But it is true that tourism is an almost uniquely difficult path toward national economic development. Tourism jobs tend to pay low wages, and to a large extent these countries are “exporting” their domestic housing stocks. It would be better to have other engines of growth. That said, shutting the doors to tourists isn’t going to magically create other high-productivity industries. Instead, southern European countries need to think about how to maximize the benefits of tourism-lead growth.

What low productivity looks like

Reports from the IMF and the European Central Bank all rank Portugal’s productivity as among the lowest in Europe. It’s easy for this to conjure up images of lazy workers, and it’s true that if you pop into a bakery to get a coffee or a pastry, you’ll likely notice some cultural differences — Portuguese baristas don’t generally have the hustle of American or Nordic baristas. But that’s true of most of Europe and it doesn’t account for Portugal’s exceptionally low productivity.