Does tourism support supply-side structural reform in China?

Highlights

• An innovative approach that combines econometric and CGE models is used.

• The spillover effects of tourism on the individual non-tourism sectors are examined.

• Results suggest that tourism supports SSR in China through output reduction in overcapacity sectors.

• Tourism has a much stronger impact on reform in provinces with severer industry overcapacities.

Abstract

A supply-side structural reform (SSR) has been carried out in China since late 2015, with a view to reducing overproduction in selected products such as coal, iron and steel. This paper examines whether the development of international tourism in China could support SSR, using an multi-methods approach that combines an econometric model and a computable general equilibrium model. It finds that the development of tourism can reduce the outputs of overcapacity industries and reallocate surplus labour to tourism-related industries. The calibration of 30 provincial CGE models demonstrates that the impact of tourism on reform in provinces with severer industry overcapacities is much stronger. This study contributes to the literature on the spillover effects of tourism on non-tourism sectors through its combination of econometric and CGE models. Practical implications are also presented.

Introduction

Economic scholars have differing views on government interventions in the market, which can be summarised into three standpoints. First, market mechanisms play a more important role than interventions. According to scholars who hold this view, the market can operate efficiently with little or no government interference. This view can be found in the laissez-faire approach of economists such as Francois Quesnay and Adam Smith in the late 18th century, all the way to neoclassical economics in the mid-1970s and new classical economics in the 1980s (Kennedy, 2009; Lin, 2011; Pally, 2004). Second, government policies are crucial in stabilising economic growth. Keynesian economics in the 20th century is one clear expression of this viewpoint (Pally, 2004). However, the 2008 global financial crisis further exposed the weaknesses of the market mechanism and emphasised the importance of government intervention, resulting in further debate about the roles of the state and market (Dorn, 2012; Menon, 2012). Thus, the classical and Keynesian schools of thought have been integrated into a third viewpoint: new Keynesian economics, which models macroeconomic operations with micro foundations (Romer, 2012).

When economies undergo recession, appropriate government interventions can cope with inefficient resource allocation and inefficiencies in production while allowing the market to allocate scarce resources according to supply and demand (Legrand & Hagemann, 2017; Lin, 2011; Schumpeter, 1961). Although China has not been severely affected by the 2008 financial crisis, its economic growth rate was set back. The balance between government interventions and market mechanisms is also considered ‘the centre of any debate regarding China's future’ (Dorn, 2012).

Economic reform of China over the last three decades has mainly focussed on the demand side, which has led to dramatic increases in economic growth over the same period (Xinhua, 2015a). Facing new challenges after the 2008 financial crisis, such as severe industry overcapacity due to ‘blind expansion’ and misallocation of resources, China has turned the direction of the reform from the demand to the supply side since late 2015 (Xinhua, 2016). Supply-side structural reform (hereafter SSR) prioritises ‘cutting overcapacity’ to reduce excessive production capacity in selected industries such as coal, iron and steel (Xinhuanet, 2016). To eliminate overcapacity, the market should play a dominant role in determining supply and demand through the price mechanism and optimising labour allocation among industries. The government should play a supporting role in balancing the development of different industries through macroeconomic policies (Zhang, 2017).

From the market perspective, the development of tertiary industries such as tourism-related industries can absorb excessive employment from other industries (Liu, 2017) and crowd out their productions. This is known a ‘spillover effect’, which means that the changes in tourism demand not only directly affect tourism-related industries but also indirectly influence non-tourism industries including those reform-focussed industries through market price changes. The positive and negative spillover effects of tourism have been evaluated in the literature; however, they have not been studied at the individual industry level.

This paper investigates the role of tourism in China's SSR. More specifically, it seeks to evaluate the existence and magnitude of the industrial impacts of international tourism, with an emphasis on reform-focussed industries such as coal, iron and steel, and petroleum. These industries, which suffer from severe overcapacity and large deficits, have been chosen as the main targets for reducing excessive production (Xinhuanet, 2016). By exploring the following research questions, this study examines whether the growth of international tourism may favour supply-side structural reform.

• Could tourism support SSR through reallocating excess factor inputs, that is, labour and capital?

• Could tourism support SSR through reducing the outputs of reform-focussed industries?

• What are the similarities and differences between SSR impacts on different industries and across different provinces in China?

Numerous studies have evaluated the economic impacts of tourism at the aggregate (country or regional) level (e.g., Blake, 2005; Kadiyali & Kosová, 2013; Li & Song, 2013; Njoya & Seetaram, 2017; Pratt, 2015a). These studies have found that tourism growth leads to output and input growth in tourism-related industries (Kadiyali & Kosová, 2013), while the agriculture and manufacturing industries experience decreases. However, studies have seldom evaluated the effects of tourism on individual non-tourism industries or compared such impacts across different regions. This study fills in this gap by evaluating the effects of tourism at the industry level in the context of SSR.

This paper makes three contributions. First, it enriches the debate on how to integrate government intervention and the market mechanism effectively, which is a key challenge to economic development in China. This paper investigates the role of tourism in SSR. Second, it is also the first to evaluate the economic impacts of tourism on individual industries for all provinces in China. It is of particular importance to evaluate tourism impacts at the disaggregate (industry) level, as this step will permit the development of specific policies related to China's SSR at the provincial level. Third, a multi-methods approach is used to comprehensively evaluate the impacts of tourism at the industry level. A backward linkages analysis is used to investigate the extent to which tourism-related industries are linked with the other industries. An innovative approach that combines the econometric method and CGE model is then applied to analyse the impacts of international tourism on different industries at the national level. The advantage of this approach is that the forecasts of the econometric model, that is, the predicted international tourism receipts in China, are used as the input of the CGE model. This improves the reliability of the model outputs (Li & Song, 2013). Finally, provincial CGE models are built for 30 provinces in China to evaluate and compare the impacts of tourism on different industries across different provinces.