Can The Tourism Industry Counterbalance A Possible Decline In The Garment Industry? Or “How Economists And Fortune Tellers Make A Living”

Can The Tourism Industry Counterbalance A Possible Decline In The Garment Industry? Or “How Economists And Fortune Tellers Make A Living”

Forecasting is very difficult especially if its about the future. For this reason, he who earns a living by a crystal ball learns to eat ground glass. I would like to pose a hypothetical question – ”what number of additional tourist arrivals over those recorded in 1995 would be needed in the Commonwealth to make up the revenues lost as a result of the possible departure of the garment industry?”

The question is quite complicated. In order to arrive at an estimate one must first evaluate the contribution to the economy of both the garment industry and the tourism sector. To decide which of these sectors to evaluate first is a little like trying to determine which side of a slice of bread to butter. The industry assessment is particularly difficult since the “multiplier effect” of the garment sector’s expenditures within the Commonwealth economy must be determined.

This multiplier is described below. In 1992, I made a study of the garment industry based on a questionnaire which was sent to each firm requesting their voluntary cooperation in providing data relative to expenditures in the economy. They were informed that no individual information would ever be divulged as it related to the identity of a particular firm. Only an aggregate reflecting the totals for each question would be revealed. Their combined replies provide some indication of the magnitude of this sector’s contribution to the economy. Using these 1992 data to evaluate the multiplier effect together with the most recent wage and salary information (‘94) and the most recent revenue generated by the user’s fee placed on the declared export value of garments at 3.5 percent for only a portion of FY 1995, the user fees paid by the industry totaled $13.9 million.

Additionally, it appears that approximately $110.4 million circulates through the economy, a portion of which is fugitive as “leakage”, or that amount that leaves after the first round of local expenditures has been placed in circulation by the industry as local payments for such items as: insurance premiums, bank charges, water, power and sewer charges, housing and barracks expenses, food costs for employees, land lease payments, telecommunications, sea and air freight in and out of the CNMI, fuel purchases, building maintenance costs, local employee transportation, charity contributions, and so on. The “leakage” out of the economy includes employee remittances abroad from their wages, air tickets, equipment replacement, raw material purchases, Occupational Safety and Health Administration, (OSHA), fines, etc., (more about OSHA later). It has been estimated that approximately $21.8 million in payments are made to the government in one form or another such as: the Business Gross Revenue Tax, (BGRT) on manufactured products sold within the CNMI, user’s fees, (a form of export tax), payroll taxes, immigration, hospital, vehicle registration fees, land lease payments and excise fees on imported material to mention the more significant payments.

Approximately 27,100 additional visitors should generate expenditures in the economy equal to this amount. The multiplier effect of the garment industry as it relates to only the ”first round” of their total annual expenditures within the economy is quite large. We have no way of knowing the dispersion of the “second round”, that is the expenditures in the economy by the recipients of payments for such items as: land lease expenditures, food purchases, etc., and after that – the “third round” – and so on. The recipient of each round of income presumably pays the BGRT on his or her income received. On the tourism side of the equation, the Marianas Visitors Bureau estimates that the average daily expenditure of the tourist which arrives by air is $230 per day per person with an average length of stay of 3.5 days or $805 per person per stay. This is probably conservative. It should be kept in mind that while the expenditure of $805 is taxable on the part of those businesses that receive the visitor’s money, it is not, however, tax revenue, for that we have to take 5 percent of the first round expenditure as the BGRT, or $40.25 per visitor stay. This amount ($805) also has a multiplier effect as it passes through the economy, up and down, in and out of various businesses each of which pays 5 percent BGRT on the income received as the expenditure passes from one business to another.

This can best be illustrated when a visitor rents a vehicle, the vehicle needs fuel, the service station that provides the fuel has employees to pay, the employee must purchase food, the food store must purchase power, the utility agency must purchase oil – and on and on , in and out, up and down the multiplier effect moves through the economy generating income for a variety of businesses always paying the BGRT at each level. It is very difficult to determine the actual effect of the multiplier but sooner or later the money leaves the Commonwealth as the food store orders a resupply of inventory, the utility agency reorders fuel, etc., almost all items purchased outside the Commonwealth and thus imported. At which point the imported item, if they are to be resold, starts the cycle all over again. The whole thing is like the “Generalized Iceberg Theorem” which states, “seven eighths of everything can’t be seen.” In 1994, (the most recent year for which data are available), the total reported business gross revenue for all sectors of the economy was $1.5 billion at which time imports equaled $513.7 million. Economists refer to this sometimes as “leakage.”

But not all leakage is detrimental as a portion of this fugitive money has a positive effect as it is used to purchase and resupply additional inventory for sale to island consumers. Assuming in the future that the visitor’s average daily expenditure per person per day, and the average length of stay of 3.5 days, remains equal to that estimated for 1995, then 17,300 visitors (an increase of 2.7 percent of the 1995 air arrivals) will generate $13.9 million in visitor expenditures and 137,100 visitors (an increase of 21.2 percent over 1995) will generate approximately $110.4 million. This further assumes that additional hotel rooms will be available to accommodate this increase in arrivals. In 1995 the Commonwealth recorded 646,550 air arrivals and the hotel inventory consisted of 3,560 rooms.

To accommodate the additional visitors another 1,660 rooms will be required at which time the total annual visitor expenditures have been estimated at approximately $630.9 million. Assuming an average annual hotel occupancy of 80 percent we can expect an average daily tourist population of 7,500. Some may not have given it much thought, but in terms of the average daily population of the Commonwealth in 1995, the garment industry required some 5,000 employees per day and the hotel industry an equal number. The 5,000 garment workers is more or less constant, however, the hotel industry, by the very nature of the industry, generates an average of another 6,100 persons, (we call them tourists) ,on island on any given day. So, in terms of generating population, the score is; garment industry – 5,000 versus the hotel industry – 11,100. The tourist multiplier issue is further complicated by the use of coupons which are purchased in Japan in yen and later redeemed at a particular business for goods or services provided in the CNMI and then remitted back to Japan at some point. The extent to which coupons are used in the Commonwealth is unknown, (unless you are in the coupon business). The above is a cursory review of a very complex issue and is provided as being “indicative” only. It should be realized that should the garment industry ever leave the Commonwealth for whatever reason, their departure will have an adverse economic impact on certain sectors of the economy which additional tourist arrivals will not entirely alleviate since the symbiotic relationship of the garment industry to certain business sectors is not comparable to the relationship the tourist sector has with its counterparts. In other words, the relationship of the garment industry to their local suppliers is not the same as that of the tourist sector and its interlocking business relationships. For example, in terms of the garment industry, bank charges, hospital fees, land lease payments, etc., would be foregone.

The industry’s departure will result in a significant modification and restructuring of the Commonwealth’s economy. In summary, it is estimated that an additional 17,300 visitors would be required to generate the income needed to cover the $13.9 million in user fees, (total annual visitors of 663,800); another 6,300 visitors to equal the $5.1 million paid in wage and salary taxes, (total visitors – 670,150) and 137,100 additional visitors needed to generate income equal to the total estimated garment contribution to the economy of $110.4 million, (total annual visitors of 783,700 including the level of 1995 entries of 646,550). There are two scenarios for the growth of air arrivals – a low and high projection. The low projection indicates that we should reach 678,875 visitors this year (’96). By 1998 we should reach 784,100 visitors, (low proj.). The high projection indicates that we should reach 782,325 by ‘97 and 899,675 by ‘98. It therefore appears that in 1998 we should achieve the level of visitors necessary to cover any revenue deficiency resulting from the loss of the garment industry as relates to the “first round” of expenditures. And there you have it – each problem solved introduces new unsolved problems – which by their very nature – keep economist employed. Returning to the matter of “buttered bread” mentioned earlier, the story is told about the man whose bread fell and landed buttered side up. He ran straight away to an economist friend and reported this deviance from one of the basic laws of the universe which holds that the bread should have fallen buttered side down on an expensive carpet and, after much discussion, finally convinced his friend that it had actually happened. After weeks of pondering this strange event the economist reasoned that the bread must have been buttered on the wrong side. Author’s note:

A word about the term “average” which economist frequently use. It is similar to the following definition: “when you stand with your feet in a bucket of ice water with your head placed in a lighted oven – on the ‘average’ you feel fine.” With respect to the use of “assumptions” I am reminded of “Burn’s Law” which states, “ If assumptions are wrong, the conclusions aren’t likely to be very good.” This principle refers to the late comedian Robert Burns and his method for weighing hogs. He obtained a perfectly symmetrical plank and balanced it across a sawhorse. He would place the hog on one end of the plank and begin piling rocks on the other end until the plank was perfectly balanced. At this point he would guess the weight of the rocks. Economists use a similar line of reasoning sometimes.

It is a bit like the application of the “Rule of Accuracy” which states, “when working toward the solution of a problem, it is helpful if you know the answer providing, of course, you know there is a problem.” As for “estimates” none are ever complete failures since they can always be used as bad examples. After long years of meticulous study my own observation is “any theory can be made to fit any facts by means of appropriate additional assumptions.” This is because some matters are of such gravity that they must be considered in relation to all the relevant factors involved.

If an examination of these factors should show it to be desirable to take one course rather than the other, then it would perhaps be best to do so. If, on the other hand, such examination shows the better wisdom to lie in some other course, then it is possible that the other course would have to be followed. It should be one’s intention to study all pertinent factors before determining whether it should be one course, or the other, which should be followed and if at first you don’t succeed, just transform the data set. I hope the reader will remember that to err is human but to really foul up requires a computer.