Research: Economic impact of the KKNK Reply

Our Research posts are about the latest academic research being done in the School of Economics. This week:

ECONOMIC IMPACT OF THE KKNK: INVESTIGATING THE APPLICATION OF DIFFERENT MODELS

By Lukas van Wyk, Melville Saayman & Riaan Rossouw

In recent years, serious criticisms have been raised against the integrity of economic impact analyses as a number of researchers and consultants have succumbed to the temptation to adopt inappropriate procedures and assumptions in order to generate high economic impact results. This is done with the intention to portray an event more favourably in the mind of taxpayers, elected officials and politicians to sustain, or even increase, the resources that were allocated. Comments such as, “They are, in truth, the exact equivalent of an expert witness in a lawsuit who comes to testify in support of the side that is paying the expert’s bill” and, “The fees for the study are like a religious tithe paid to a priest to come and bless the endeavour”, quoted by Crompton (1999; Curtis, 1993:7), unfortunately confirm this opinion.

What is the impact on the local economy?

A thorough literature review showed that various methods of assessment have been applied in numerous international studies to determine the economic impact of events. The most prevalent models used include Input-Output (I-O), Social Accounting Matrix (SAM) and Computable General Equilibrium (CGE) models. Our article compares the SAM and CGE models as assessment tools in order to evaluate the economic impact of the South African based Klein Karoo National Arts Festival (KKNK). Since both models have advantages and disadvantages, tourism economists are confronted with the predicament of determining which model is most suitable for application to any specific event.

Data from a visitor survey conducted at the KKNK during 2010 were used in the analyses. Our findings serve as a warning to assessors that economic impact results can be misleading and therefore the application thereof should be handled with the utmost care as the results can readily be misinterpreted by stakeholders. Also, our results indicate that considerations such as the data collection or compilation, expected output, research objectives and costs involved will determine the choice of a specific modelling framework.

Firstly, our research reveals that the economic assessment by means of a SAM multiplier analysis and a CGE model generates different results. These differences became clear with regard to the results that were measured in terms of sectoral, visitors’ residence and total impact.

Secondly, the methodological application of the assessment models indicates that, despite the enhancement of SAM models with multiplier effects, certain limitations still persist during use. The identified methodological problems that may be experienced when applying SAM models are that:

  • these tables are published on a national level although the application is needed on a regional level;
  • published tables may be outdated;
  • economic assessors of events should be aware of the possible hindrance where the geographical area for which the results are reported on and that of the SAM table has no relation;
  • when applying these models, limited, if any, price movements and supply constraints are accommodated;
  • these models do not allow for any changes in the relationship between sectoral inputs and outputs;
  • no integrated economic effects are taken into account;
  • the assumption is made that the consumption preference of the host region equals that of tourists;
  • impact estimates are often overestimated due to multipliers used that include consumption effects;
  • the employment impact is often misinterpreted;
  • capital expenditure not directly attributable to tourism is often included in the analysis; and
  • value added multipliers can be applied to spending that is calibrated in output terms.

The shift from the simple SAM model to the more comprehensive CGE models is an inevitable movement, reflecting the trend in technological development. These more comprehensive models (i.e. CGE) are intended to encompass the SAM model. At the same time, the results derived in our paper demonstrate that there are substantial differences between the two models (West, 1995). Therefore, which set of results is the more reasonable? In some ways, it often comes down to personal prejudices. It becomes a question of balance between choosing a simple, easy to understand model versus a more complex, often difficult to understand and apply, model which is more theoretically appealing in some ways. It depends on the application.

The complete article is forthcoming in the Journal of Economic and Financial Sciences in 2012/13.

————–

References:

Crompton, J.L. (1999). Measuring the economic impact of visitors to sport tournaments and special events.  Ashburn, VA: National Recreation and Park Association. [On line] Available: http://www.rpts.tamu.edu/faculty/Crompton/crompton-selected-books.shtml. (Accessed 30 Nov. 2009).

Curtis, G. (1993). Waterlogged. Texas Monthly, 7 (Sept).

West, G. (1995). Comparison of Input-Output, Input-Output Econometric and Computable General Equilibrium Impact Models at the Regional Level. Economic Systems Research, 7(2), 209-227.

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