Monday, October 25, 2010

Hurriyet South Weekly Editorial: The dismal science for a dismal sector

As I announced last month, I will be writing an editorial for South Monday, Hurriyet Daily News and Economic Review's weekly supplement about the Aegean and Mediterranean coasts once every four or five weeks. The most recent one, which is appearing at today's issue, is below.

I have a couple of addenda to the column:

First, although I did not want to get into this in the column (I did not have enough space, either), another side-effect of the low-cost tourism is that you end up with low-cost tourists! Although I do not have hard evidence to support it, this is probably one of the reasons revenue-per-tourist figures are on the decline- that the profile of the tourists is changing as well. When you end up with guys unlikely to ever eat outside of the hotel or shop for anything, no wonder shop, restaurant and bar owners are complaining as well (Footnote: the shops have nevertheless other problems; there are just too many of them- which convinces me even more that the invisible hand is not working perfectly here- auctioning off a limited number of permits would have been much better: this is the standard problem of negative externality and the tragedy of the commons, but I have digressed too much- maybe, this should be for next month's editorial). 
Besides, the hotels have serious problems with some of the younger tourists- all alcohol-related incidents such as fisticuffs, damage to hotel property and even an incident or two of indecent exposure. In fact, having learned American English, I had not heard of the word Lager Lout until an elderly British couple complained of being disturbed by these guys.

In sum, the low-cost tourism is having side effects other than squeezing the hotels' margins.

Second, the employer-employee relationship has turned into a vicious circle: The employers, already operating under low margins, are not willing to pay more than the bares-minimum to their  low-skilled employees. Employees are then more likely to shirk, which, when observed by the employers, makes them even less likely to go for an efficiency wage. Now, does any micro. theorist want to give modeling this a shot?

Last but definitely not the least, credit where it is due: The graphs below are compliments of my friends at Turkey Data Monitor. I am testing the v2 of their program, which should be out soon... BTW, I had already reviewed the v1 of the program, in case you are interested.
Anyway, on to the article:
I have been seeing quite a few glowing articles on the tourism sector of late. As a disciple of the dismal science, it is my duty to relay my observations from working part-time at our family-run hotel in Marmaris, using the tools of Economics where possible.

First, as I argued in my first editorial for the South Weekly, the all-inclusive system, a direct result of the unplanned expansion of the last decade, has squeezed margins to such a point that it is only possible to make ends meet via economies of scale. As a result, especially smaller hotels have no choice but to bring down expenses, resulting in a services sector without decent service.

To add insult to injury, not only is it difficult to attract decent staff at the meager wages, hotels in seasonal resort towns are usually stuck with lower-quality workers, as the skilled are picked by hotels open year-around. This is what economists call the adverse selection effect, and there is no easy fix. The simplest solution of paying higher wages to prevent workers from shirking, referred to in the economics literature as efficiency wage theory, is unfortunately not possible.

Global developments in the sector have been working against resort hotels as well. Although tour operators have always been stronger on the bargaining table than hotels, recent bankruptcies of several operators as well as mergers and acquisitions in others have turned an oligopolistic sector into one of near-monopoly.

In fact, there are now only a couple of British and Russian operators serving Marmaris. On the other side of the table are hotels operating under almost perfect competition. You don’t need an economics Ph.D. to figure out that the tour operators will be able to dictate their prices under this set-up.

Finally, macro developments have been very unfavorable of late as well. First, the global crisis hit some markets, notably Russia, hard, although lower prices did induce some to choose Turkey over the competition, causing an artificial inflation of tourist arrivals figures.
Moreover, the strong Turkish Lira has been working against the sector as well, as costs are in liras and revenues mainly in euros or pounds. As a result, although hotel costs’ were up only 6.5 percent yearly in August, once you adjust for the exchange rate, the “effective inflation” becomes 16 percent.
In this respect, Fed’s Quantitative Easing II will only make things more difficult, as a fresh round of capital inflows will keep appreciation pressures on the lira. This is definitely not good news for hotels.

I am probably the last economist in Turkey to advocate currency manipulation by the Central Bank of Turkey, or CBT. But I have also got my hands dirty enough to know that CBT President Durmuş Yılmaz’s advice to exporters of hedging against currency risk does not work for the tourism sector: Revenue flow is way too uncertain and balancing the books just too tight.

But Minister of Culture and Tourism Ertuğrul Günay is getting ready to celebrate the country hitting the 30-million-tourists mark. Surely he’d know better than me, so you might as well join the party.
* Emre Deliveli is a freelance consultant and columnist for the Hürriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at


Gul G Turkmenoglu said...

This is the story of last 20 years of the tourism in Turkey. For one reason to another hotels in the south and even in the cities have been manipulated by the tour operators, run by non financial operators and lost profits under all inclusive packages. Quantity is certainly important to keep the sector alive but we certainly need some strategies & planning for the mid and long term.

Emre Deliveli said...

Dear Gul,

Thanks a lot for the comments.

I just posted an addendum to the original article:

As I note at the end as well, your last sentence summarizes what needs to be done very well...